You Cannot "Sell" A Change to 3PMRO to an MRO Buyer … Or Can You?
A New Broom Sweeps Clean -- Well, Not Always
An MRO Alert... Is Your MRO Where It Should Be?
Tell... Don’t Ask
Supplier Responsibility vs. Client Benefits
It's 2011, Where's Your MRO Inventory?
Are There Foxes in Your Hen House?
What's the Opposite of Lean?
You Cannot "Sell" A Change to 3PMRO to an MRO Buyer … Or Can You?
Published June 6, 2011 in MyPurchasingCenter.com
In a recent presentation for a PDM at a professional organization, the topic was, "You Can't Be Lean with a Fat MRO Storeroom." The goal was to alert the members as to the value that can be released from the MRO stores process by utilizing a 3PMRO provider.
During the networking period, a member indicated that she was the MRO buyer from a major manufacturer who consumes MRO. Oh, boy … will she be afraid that her job will go away via the 3PMRO process?
After the PDM, she raised her hand and I thought, "Uh oh … here it comes."
She said that everything I had presented about "fat" storerooms was true in her company. "Our storeroom is a mess," was her comment. She said that she has constant pressure from her management to reduce MRO costs. Her frustration arises from the refusal of users to utilize her cost reduction programs in the midst of this management pressure. The example she verbalized was a simple glove restoration and cleaning program which would reduce glove costs by 45% with a corresponding reduction in spend for the category. The glove users said, "We will only use new gloves; no way will we use reprocessed gloves." Although relatively small in the overall spend, these small things, when aggregated, can contain significant bottom-line contributions. They can be the difference in a profit or loss scenario.
The point: This MRO buyer recognizes that her company needs the benefits that an expert 3PMRO provider can achieve and is willing to be the champion to effect the change. She has now "sold" the concept to her management as her total MRO cost reduction and has received "C" level support for her program.
The glove users will now utilize all the benefits... including the use of cleaned gloves.
A New Broom Sweeps Clean
… Well, Not Always
Published May 13 in MyPurchasingCenter.com
Some time ago, I wrote about how a new broom (new management) sweeps clean (changing MRO procedures). I cited a food processor that had a 3PMRO company on site that achieved KPI goals year after year. These included requests to issue fill rates over 98%, price reductions, 45% inventory reductions and elimination of over 60,000 transactions per year. Additional benefits included inventory accuracy, kitting, warranty control and systems information visibility and compatibility.
Who would want to change that?
Well … here is the kicker – the contract called for open book, known cost information flow with a fee on top of the 3PMRO provider’s best cost of goods (not the user’s cost). A new CFO came on board, saw the fee and proclaimed that he could save this fee for his company by “doing it ourselves.”
When the existing 3PMRO provider was not renewed, and the company took the process back in house, this is what was added to the company’s burden:
- Three more people
- 70,000 transactions
- 30% more inventory
- 136 suppliers
- Plus no price savings or measurement
The new broom swept clean and claimed savings from the 3PMRO provider’s fee. However, there was no mention of the additional margin that was paid to the 136 suppliers. So … the new broom swept the real facts under his financial carpet, and the company was none the wiser.
Now, another client of that 3PMRO provider experienced similar benefits from that same 3PMRO provider. Watch out, here come new brooms in finance and purchasing; they are sweeping clean [improving processes]. Soon, they get around to looking at the 3PMRO contract and see the open book fee…“Why can’t we do it ourselves?”…SAVE THE FEE!!
With true, objective due diligence, the new purchasing director realized that “sweeping clean” was not a wise choice for the existing MRO process. He re-established new KPIs and some positive process changes with all affected operations personnel and with the existing 3PMRO provider. Increased value was presented to the new CFO and to the corporate CEO. All agreed that the 3PMRO process, especially when updated with input, was the optimum position for the company.
In this case, the new brooms updated and improved but did not have to sweep subjective decisions under anyone’s carpet.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
An MRO Alert... Is Your MRO Where It Should Be?
Published April 20 in MyPurchasingCenter.com
A recent article on MRO stated:
"MRO EXCELLENCE IS FOR THE CUSTOMER
Why do companies have MRO storerooms?
-----To service maintenance and operations?
------To support engineering?
-------To support projects?
NO! They have storerooms because it is a good investment!!
MRO storerooms are designed to manage inventory to ensure that service levels remain high and cost of goods remain low.
The objectives of storing parts are to minimize downtime at the lowest possible total cost of ownership, and balance the cost of downtime vs. inventory carrying cost to insure that life cycle costs are minimized."
Well, YES; who would argue with all that??
Now, Let's Look At the Real World of MRO Storerooms:
50% of MRO needs are found in stores; 50% are purchased directly
65% of dollars spent are found in stores; stock-out ratios are above 25%
Obsolete stocks exist
Freight is not controlled; emergencies cause higher cost of parts
Transactions are excessive; purchase order cycle costs are inconsistent with the value of the parts requisitioned
Inventory values are inaccurate with incorrect pricing and varying measuring units
Inventory turnover is less that once per year
Unauthorized stock removal without notation occurs
Uncontrolled parts with value exist through the plant as sub-stocks
Attempts at min/max inventory reordering result in overstocks and/or stock-outs
There is no mark-up/fee attached to the issue of parts to the budget holder
Disciplines have varying agendas that cause costly conflicts:
>> Finance wants less dollars in stock
>> Operations want more stock on hand
>> Budget holders keep their own safety stock of materials
>> Purchasing wants to buy more to get a better price
>> Plant manager wants an operation that does not drain profits and maintains production levels
WHAT DOES ALL THIS MEAN?
The above article avers that the store room is a good investment for the company because it provides Excellence for the Customer.
Is it still a good investment if stores operations do not meet the objectives i.e. provide lowest TCO, balance downtime vs. inventory costs, and insure minimal life cycle costs?
The answer is NO! In most cases, objectives are not met and the negativity of the investment is not recognized. The costs associated with stores operations are not recovered in the manufacturing process and are viewed as General & Accepted Principles and, therefore, cannot be avoided. Well they can be!!
WHAT IS THE ANSWER?
If you take the word "room" out of the word "Storeroom" you have "Store." A "Store" is a Home Depot or an Ace Hardware that has categories of materials that reflect their market. These same categories are found in storerooms and reflect the particular needs of the plant.
Should a plant that has a particular manufacturing core competency and competes favorably in their market be in a business where they are not competent? The answer is no. Companies do not operate their own cafeteria because they are not good cooks; they hire security companies because they are not experts in that field. The same reasoning should be applied to stores management; replace ineffective and costly operations with core competent experts.
Optimum return on investment (ROI) benefits and LEAN objectives can be realized by allowing the experts in third party MRO (3PMRO) stores operations to come on site to effect the goals and objectives that will provide the: Excellence for the Customer.
3PMRO experts have total focus to storeroom management because it is their core competency. By personalizing this expertise to the particular needs of each operation, optimum savings are achieved and all plant disciplines are satisfied. The cost of the 3PMRO operation is paid out of the measured savings that accrue while effecting TCO financial and non-financial benefits at optimum ROI levels.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
Tell... Don’t Ask
Re-Engineering the 3PMRO Selection Process
Published March 25 and April 6, 2011 in MyPurchasingCenter.com
About $150 billion in MRO materials is purchased annually in the US. There are thousands of MRO distributors competing for these dollars.
The selection process MRO consumers utilize to procure those materials varies from simplistic to the sublime... from attempts at structure to "Go Get It Yourself"... from corporate dictates and audit trails to utilization of "P" cards.
Most companies pay little attention to MRO. A major reason is that knowledge on "How to Improve" or "Why Change" is minimal. A familiar refrain: "Let’s go out on quote and show price saving comparisons that satisfy management. Besides, MRO is only 6% of our spend; let’s concentrate on the other 94%."
RFPs, RFQs, etc. often state that "Price" is not the major determinant in supplier selection; "Services" et.al. are the most important factors.
The RFQ/RFP (RF) process is extremely costly regardless of the side you sit on, supplier or requestor. Committees are formed, meetings and webinars are scheduled to establish what data should be included; the various disciplines develop and share opinions based upon how it relates to their internal functions. This affects a long, costly and arduous set of requests and responses.
As mentioned above, these meetings exist and are costly and redundant for both requestor and responder. The time required to complete the process often drags out over six months to a year in some cases. The data submitted gets old and stale leading to adjustment requests by the winning supplier after the contract is awarded. These adjustments are permitted because there is no alternative. You cannot go out and request a re-quote that only elongates the time where savings are not realized. The result is that the selected provider may or may not be the best source for your company. The truth is that the existing RF process is flawed and does not necessarily produce the "best deal."
Why is the process the way it is? "Because," managers will say, "this is the way we have always done it. There is no other way to satisfy management that we have the best deal and have them accept the results of the process as optimum…We have done our best."
What is an alternative that will achieve the best sustainable benefits and satisfy all disciplines?
Step One: Develop a scope of work and key performance indicators around a third-party MRO program (3PMRO) that will optimize your MRO storeroom operations to meet your needs and goals. The scope reflects the wish list of those involved in indirect materials – Finance, Engineering, Facilities, Purchasing, and Plant Management. Include your implementation time line schedule and implementation costs. Scope of work needs to have an accurate accounting of annual material spend to be included and for existing inventory dollars.
Step Two: Select your supplier. Typically, only a few have the capability of managing your scope of work. Pick the one best for your program and tell them what you want. Visit the supplier's CEO [no less] and obtain commitment to provide:
- Total focus on your program
- Adequate financing to sustain the process
- Experience in on-site operations
- Established implementation process
- Compatible systems capabilities
- Open book cost sharing
- Purchasing power leverage
- Willingness to perform to KPI's and productivity programs.
Step Three: Establish a price level reflecting your saving goal for the program. There should be an 8-10% price savings available to you and still have enough margin for the supplier. If not, you have the wrong supplier. The chosen supplier must be able and willing to obtain site specific pricing from their manufacturers who set the pricing structures and be willing to share all pricing data in an open book policy. Tell your supplier the price you will pay; no need to quote. The price savings would be a part of your ROI goals.
In review, many companies assign personnel to control the MRO spend and even try to control/optimize MRO inventory. The quest to find the "best" provider takes the form of the RFQ, the RFP or other RFs. The larger industrial MRO consumer utilizes these processes to its advantage, asking MRO distributors what services would be provided to achieve corporate goals in coming years.
It begs the question - if price is not a major factor, why does the market basket dominate the RFP? Why are the vagaries of the market baskets not recognized as leading to little value and wrong decisions? To this point, the approach has been to use GAP, General and Accepted Principles.
Time is long past when a process is justified by, "This is the way we have always done it."
Now is the time to recognize that you need to "Tell... Don't Ask."
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
Supplier Responsibility vs. Client Benefits
Published March 11, 2011 in MyPurchasingCenter.com
Premise: Should a distributor that supplies the majority of its client’s spend offer additional client benefits that could increase the distributor’s sales revenue but decrease net profit percent?
Here is a case study in point:
ABC Distributor is a national distributor of most categories of indirect-MRO materials. ABC has a client who buys most of their supplies via ABC’s version of Vendor Managed Inventory, more commonly known as VMI. The client is satisfied with the service and pricing. Although some SKU’s could be purchased cheaper, the overall benefit is recognized by the client. Senior management at the client is not asking for improvement, mainly because the MRO spend is relatively small and because they, and their middle management, are not aware of available improvement benefits (much less have the knowledge to institute change).
As a member of a professional organization, the client’s managers attended a professional development meeting that spoke of the benefits of 3PMRO storeroom management programs. The title of the session was, “You Can’t Be Lean with a Fat Storeroom” and it explained how outsourcing MRO to 3PMRO would operate and how the sustainable benefits could be realized.
After the session, one of the managers said to the presenter that they worked with ABC as their major supplier and offered to have them come on site. However, the client would have to tell ABC what they wanted and then ABC would tell the client how much it would cost. The client did nothing because they did not know what to do or what ABC could do.
The fact is that ABC does know what to do but did not act proactively to initiate improvements at the client location. WHY??? It is because those actions decrease the profitability that the client provides to ABC.
And the point is? The MRO supply chain is froth with duplicated costs and activities that maintain barriers and conflicts among the members of the existing process. ABC knows they could help their client by simplifying the process but they fail to act because of the need or desire to maintain high levels of profit margin. There are substantial benefits that can accrue to the MRO consumer if the supply chain members act responsibly and make contributions to cost reductions for manufacturers.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
Read more blog posts from George Krauter>>
It's 2011: Where's your MRO inventory?
Published February 12, 2011 in MyPurchasingCenter.com
It continues to amaze me that companies big and small, well known and obscure, cannot give an accurate figure of what they spend and/or of the value of their MRO inventory.
When asked what a company’s MRO spend is, estimates can vary 100%, 200% or even 300%. You will hear "It’s about $1.5 million"; "No, it’s more like $2.5 million, if we count the pallets and shrink. Wait, the spot buys are another $1 million."
This lack of information does not exist within the supply chain for production materials, capital equipment or other important areas of business, so why do companies allow it to exist for indirect-MRO materials?
I have been in the MRO business for more than 50 years and have not seen much of a change; it is baffling that this condition continues to exist especially in today’s economy when control of all costs is so critical.
This situation is further clouded by a level of obfuscation based on who is responsible for indirect-MRO, job protection, supplier preference and the like. Some personnel who want to protect against change will devalue the MRO spend to prove that change is not worth the effort or the cost of changing. To negotiate better pricing, many will increase the spend estimate in order to get the better pricing even though in practice, the spend never reaches the amount estimated.
Inventory values vary based upon who is providing the reporting and rarely includes floor and sub-stocks. Values also vary based on whether the inventory is asset or expense-based (asset more; expense less). You will hear the store’s supervisors say they have more inventory; "We are efficient, but we need more inventory to increase fill rates and guard against downtime." Chief financial officers say less inventory, unless it is an inherited asset, and then they say more. Chief purchasing officers want less inventory so they can buy more. Distributor sales people want as much as stores can hold--they are on commission so they want to sell more, not less. Manufacturers that sell through distributors want distributors to stock more; the distributor wants to stock less and get the client’s MRO storeroom to stock more. The plant CEO wants less spend, less inventory, but parts on hand when needed in order to exceed plan. Inaccurate estimates cause inaccurate measurements and erroneous conclusions.
It is rare when all are on the same page!
A clearly defined indirect-MRO analysis—one that shows a true and objective picture—can be the first step in optimizing indirect-MRO costs that will in turn contribute to corporate net profits. Do you agree? What do you think? Let us know.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
Are There Foxes in Your Hen House?
MRO stores are often like cookie jars to children or hens to foxes. No matter how high you put them or where you hide them, parts, like cookies and hens, are taken without permission.
The Challenge?
Will management invest the time and money needed to secure the “hen house”? Probably not – especially in a tough economy. So, how are you to stop the drain in an operation where your costs are not recovered in your manufacturing process?
Manufacturing plants should not be in the “hen house” business; it is not their core competency. MRO stores operations represent huge opportunity costs that they do not control and, under current conditions, cannot control.
The Answer?
Look to a third party service provider like Storeroom Solutions who is focused on MRO stores management and keep the foxes out of your hen house. These companies are in business to deliver a return on your investment. The effect: achieve control and realize measurement, reporting and significant total cost of ownership (TCO) reduction benefits. Spend your time on profitable opportunities and rely on experts for functions that are outside your core competencies.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
What’s The Opposite Of “Lean”?
The attention and efforts given to “LEAN” manufacturing today are significant and becoming universal. “LEAN” is an extension of the “critical path” analysis first introduced during the space effort in the Fifties. To be totally “LEAN” is to be totally efficient in all company functions.
Is MRO Lean or Fat?
Many companies take pride in the advances they make in effecting cost recovery, increased competitiveness and goal achievements for their companies via application of “LEAN” principles. Since the opposite of “LEAN” is “FAT” and “FAT” needs to be shed if you are to be “LEAN”, consider this:
- Indirect materials (MRO) storerooms are “FAT”.
- They contain excessive inventory, incorrect parts, bad descriptions and only provide 70% of the parts needed.
- The paper chase creates 65% of transactions processed while the MRO spend is less than 10% of the total company spend value.
What is wrong with this picture?
Is MRO Invisible?
With the great values that are affected via “LEAN”, why is the MRO storeroom operation forgotten, ignored, not recognized … why does the condition continue to exist? Generally “LEAN” engineers do not recognize how to change the process; and therefore, they do not know how to measure potential return on their investment as it relates to indirect storerooms.
Since all company disciplines seem to have opinions about MRO, the process of change becomes complicated and arduous. Actually, I have identified 55 ways a program of change can be defeated.
The “LEAN” engineer, when faced with negativity, will turn to what seems to be better and more viable opportunities. Nevertheless, you just cannot have an optimum “LEAN” operation when you continue to allow a “FAT” storeroom to exist.
Contact George Krauter with your MRO questions at george.krauter@storeroomsolutions.com.
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