procurement, the MRO buying is being done by a multitude of people in the various plants, including storeroom attendants, maintenance mechanics, plant engineers, production foremen, safety engineers, quality control technicians, office managers, buyers and, yes, even janitors. And the janitor and maintenance mechanic may be emotionally attached to their brands and suppliers of mops and drill bits, respectively.
While MRO supplies account for only 15 percent to 25 percent of total material spend, they represent, in most organizations, a highly disproportionate ratio of total procurement efforts and expenses.
MRO usually involves 75 percent to 85 percent of line items bought; man-hours expended in purchasing, receiving, storeskeeping and intra-company materials movement; purchase orders issued; invoices processed; accounts payable checks; cost and material accounting; data entry; database maintenance; bidding, sourcing and negotiating; inventory obsolescence and overstock; expediting and tracing of open orders; missed or late deliveries; errors and quality deviations.
Usually, freight and handling charges on MRO supplies are also disproportionately high.
It is a rare purchaser who has a good comprehension of the true potential improvements obtainable in the MRO arena. Moreover, even that rare individual who has evaluated his MRO expenditures has generally concentrated on invoice prices, which are less than 40 percent of the savings opportunities.
Establish Best Practices
Here is an example of how a supplier can help his customers identify and implement cost savings. (Other excerpted case studies here.):
At a national commercial baker, the supplier and chief maintenance engineer were touring the plant, and chaos broke loose. The production line stopped, the paging system came alive and the engineer raced to the site of the problem. As the engineer later explained to the supplier, each line had automatic hones, driven by a special fractional hp motor, to keep the slicing blades sharpened.
Gluten from the baked goods builds up on the blades like glue and eventually creates enough torque on the hones to freeze the system and burn out the motor. On this occasion, there were no replacement motors on hand or locally available and the engineer was desperate. The supplier was able to find the motor at the manufacturer who provided to the OEM and had it air-expressed the same day.
The vendor learned that the problem occurred repeatedly in bakeries across the company. He contacted the president and the chief design engineer at the original equipment manufacturer for their recommendations.
He was informed the problem had been solved at another bakery by installing, at no charge, a simple overload relay circuit to sense excessive resistance on the hone drive, shut down the system, activate an alarm and permit the operators to clean off the blades and resume production.
Most enterprises have no mechanism to communicate and implement best practices throughout the organization, so they keep reinventing the wheel.
However, alert and motivated suppliers can fill a crucial role in filling this gap, particularly in an indirect function such as MRO procurement and practices.
The 20/80 Solution
Why is this book titled The 20% Solution? In 1906 an Italian economist named Vilfredo Pareto observed that 20 percent of the population in Italy owned 80 percent of the country’s property. This become known as Pareto’s Principle of Maldistribution or, more famously, the 20/80 Rule.
This concept is extremely useful as an analytical tool because it enables one to concentrate efforts on a small number of items, yet achieve valid results for the entire universe being studied. You will find that the 20/80 Rule is ideally suited to analyzing and resolving the MRO problem (the 20 percent or so of total spend).
The 20% Solution, is available to MDM readers for free download at www.the20percentsolution.com. Roth has owned and operated a number of privately held companies, including 10 industrial supply distributors in the Southeast U.S. Roth now serves as a consultant, speaker, trainer and seminar-workshop leader.
E-mail him at firstname.lastname@example.org.
Case Studies: Hard Dollar Savings in MROP
Case Studies: Soft Dollar Savings in MROP
The procurement of maintenance, repair, operating and production supplies (MROP) accounts for 20 percent of total spending in an organization, but consumes about 80 percent of the time, effort and expense in purchasing, according to The 20% Solution: A Practical Guide to Dramatic Cost Reduction in MROP Procurement, a new book by industry veteran Joel Roth. This article contains excerpts and case studies from Roth’s book.
Roth says that very few organizations have analyzed and identified improvement potential in MROP procurement beyond price quotes. However, cost savings of more than 35 percent of MROP spending are possible with little investment or risk.
Many companies are faced with increased operating costs and fewer sustainable competitive advantages. Those who find new approaches to MROP procurement will achieve a sustainable competitive advantage and with that, higher profitability. MROP procurement can offer substantial untapped opportunity for improvement in cash flow, cost reduction and other key elements of operations without investment, risk or substantial work.
In his book, Roth says that distributors can serve as top-notch consultants to help customers evaluate MRO procurement activities and recommend improvements. This can strengthen relationships with customers and lead to more business. In any sizeable organization, there are hundreds of opportunities every day to identify and implement cost savings.
Almost every organization buys materials in one or more of these categories: raw materials, purchased components, capital goods, packaging materials (large volume) and supplies for MROP.
In most entities, the first four classes above represent at least 75 percent to 85 percent of total dollars spent on physical goods. MROP typically represents no more than 15 percent to 25 percent of total spend.
So why differentiate MROP procurement from other categories of purchases? Why devote an entire book to a relatively small category of spending? (Note: The U.S. market for 136 MRO industrial product groups is estimated at $450 billion to $500 billion a year, according to Industrial Market Information Inc.)
The reason is that the characteristics of MRO buying are so different from other types of goods that entirely different methods of analysis, sourcing, negotiating, stocking and tracking are required -with an entirely different cost structure.
To illustrate, imagine an appliance manufacturer that buys $50 million annually in a few grades and sizes of hot-rolled carbon steel sheet. The buyer can readily check market prices and trends in market reports. He can deal directly with the available mills, foreign and domestic. He can easily identify the handful of vendors who can supply his requirements on quality, price, availability and freight equalization.
He can negotiate a competitive price because he is able to offer an attractive volume of business. And he can easily verify the deal by contacting a few colleagues. In other words, this company can complete an effective buy on $50 million of raw material with minimal time, money or effort (probably one experienced buyer).
Now imagine the same appliance manufacturer addressing its MRO purchase requirements. It may be purchasing 15,000 different SKUs across nine different plants. One of these SKUs is a six-inch Philips screwdriver. Each plant buys a different brand, from a different vendor, with a different specification, at a different price and calls it by a different name, description or identifier. And this pattern will apply to most of the 15,000 SKUs.
Moreover, while one central buyer is probably handling the steel