“Integrated MRO Supply Management” A Three Dimensional View By Thomas Terfehr _________________________________________________________________The pressures on suppliers to help their c ustomers i mprove bus iness perfor mance areenor mous in this global economy. Business complexit y, cost pressures and e ver -increasing quality standards are at the root of these pressures. The ‘extended enterprise’supply chain model, with a focus on rapid product desi gn, lean manufacturing, a nd J ITinventories, has proven its effectiveness a s a competiti ve weapon. This is having amaj or impa ct on how direct materials (those materials and c omponents that ulti matel ybecome part of the pr oduct which is sold), are purchased a nd the ir suppliers mana ged.Inventories ha ve bee n slashed, ti me required for product design has been reduce d,quality has i mprove d, and suppliers and customers find the msel ves in ne w andunprecedented roles.Business pressures and suppl y chain ma na ge ment are causing firms to also e valuate theworld of indirect mat erials and particularly M RO ( maintenance , repair and operatingsupplies). The path to i mproved perfor mance in this arena is not, howe ver , s ostraightforward as wit h direct materials. At the core, the M RO supply chain exists tosupport plant operations. The supply s yste m is complex with ma ny, often thousands ortens of thousands , of parts, pieces, supplier s and inventor y stoc kpiles. The a mount ofannual “spend” for a typical c ompa ny is significant (15%, or more of total spe nd).Finally, there are ma ny decision-ma kers with different agendas who are often not inclose communication with each other. The net result of this c omplexit y and lac k ofcoordination is hi gher cost and ser vice gaps .Achie ving lower total cost of ownership for MRO ite ms requires t hat the following thre esupply chain di mensions be addressed. Complete success invol ves integrating all three. Strategic Sourcing/Procure ment Physical Suppl y Chain Technology Tools and Inte grationsThe most effective approach to MRO suppl y chain mana ge ment includes a methodologyto achieve inte gration of these three ele ments. It also incl udes an approach toorgani zational cha nge – which ma kes success ful i mple mentation possible. 100 Danbury Road • Suite 105 • Ridgefield, CT 06877 • Tel:203-431-0281 • Fax:203-431-3643 www.GenesisSolutions.com
Strategic Sourcing/ProcurementA ri gorous strategic sourcing process is the essential first step in MRO inte grate dsupply ma na ge me nt. In its si mplified for m, the process invol ves 7 steps: High Quadrant 3 Quadrant 4 Customized Solutions StrategicSupplyDifficulty &Complexity Non-Strategic Commodities Quadrant 1 Quadrant 2 Low Dollar Expenditures High1. Understanding the c urrent state of MRO procurement: This step invol ves compiling data to det er mine where M RO purchasing dollars are spent. From this analysis, c ommodit y groupings and classifications are made. Exhibit 1 illustrates an approach to classification. The greatest improve ment i mpact i s typicall y found in quadrant four. 2. Involve key stakehol ders in the process: Selecting a cross -func tional team of subj ect-matter experts focused on one or more commodit y groups is a preferred approach. This team, in essence, will be e mpowered to ma ke company-wide decisions. 3. Understand total cost of ow nership f or the MRO item/f amily: This is critical and will act as the foundation for subsequent commodit y tea m decisions. 4. Establish busines s requirements f or the item/f amily: These requireme nts typicall y relate to ser vice, quality, product development and collaboration. 5. Evaluate s upplier/str ategy options f or the commodity 6. Implement the sourci ng decision 7. Manage the relations hip using a supplier perf ormance management processThrough le vera ging a company’s purchas es, the strategic sourcing process willtypicall y yield sa vings of 5 – 25% of annual spend. More i mportantl y, thiscollaborative approac h builds a foundation upon which the relationship can grow, andfuture total cost reduc tions can be reali zed t hrough customer -suppl ier integration.
Physical Supply ChainThe physical suppl y c hain is the lifeline of the MRO plant suppor t effort. The MROsupply chain includes ma ny suppliers, inventor y locations and ordering/recei vingprotocols. Complexi ty, particularly uncoordinated complexit y between competingsuppliers, typicall y brings redunda nc y – in cost, time and effort. One of the essentialelements of MRO supply chain i mprove ment, and ultimatel y integration, is an analysisof the inbound distribution syste m . . . incl uding the ke y ori gin points, interme diatepoints and final destinations. FACTORY DC’s & WAREHOUSES PLANT STORES TRANSPORTATION Physical Supply ChainAddressing the inbound physical suppl y chai n invol ves the following steps: 1. Define success . . . i mprove ment tar gets, ti metable and reporting metrics 2. Incorporate s ourcing/procure ment strate gy as a ke y dri ver for desi gn 3. Define “business rules ” and internal custome r require ments 4. Baseline defined . . . usage, costs, inve ntor y levels, etc 5. Complete a n inbound distribution networ k modeling study 6. Desi gn/redesi gn the inbound s yste mThe improve ments from this acti vit y are as f ollows: Defined strate gy for t he MRO inbound supply chain Lower “total landed c ost” of MRO ite ms/fa milies vs. the bas e cas e Lower inve ntor y value and carr ying costs . . . for suppliers and customers Equi valent or i mprove d service for MRO items/fa milies
Technology Tools and IntegrationsOnl y after a strate gic sourcing and M RO operating strate gy ha ve been defined shouldorgani zations turn attention to the selection, deployme nt and full utilization of theright technology tool s. Tools that operate within the custome r firm and betwee nsupplier and customer are the final element of Inte grated MRO Supply Mana ge me nt.But, technology tools are j ust that, onl y t ools. The overriding obj ective is to usetechnology to support and enhance business operations ~ no more technology than isnecessary, and no less. There are a myriad of options and no shortage of promises. Inthe final analysis, a logical selection process based on business require ments and userneeds will lead to the right solution a nd mat ch the a vailable tools to needs.The first step is to develop an e -Business plan to support the MRO strategy de velope dabove. Some (but by no means all) ele ment s of this plan are as follows: Establish “direct” order processing interfaces with Strate gic Suppl iers Define the role of “re gional” (s maller) suppliers and supporting t echnology to be used Establish electronic catalogs and maintenanc e protocols Contract Mana ge ment approach and s upporti ng technology Define the on-line Supplier Perfor mance Ma nage ment methodologyA te mplate for guiding the for mulation of an e -Business plan is summari zed below.The goal is to have a defined approach to e mploying technology to support businessrequire ments. Pilot proj ects are a good wa y to ma ke i mprove ments in a relati vel yshort ti me, learn by doing a nd a void the ris ks of a “bi g bang” appr oach.MRO e-Business Planning Tem plate Supplier Commitment Technology Investment Linkage to Total Cost Co-training Management Quantifiable Goals Competitive Forces Savings in: Industry Trends or Standards •Unit Costs •Administrative Costs Second Mover Advantage Technology Integration •Process Costs Process Integration Executive Support Goals Common Measurements Timetable User-buy-in Available Technology Tools and Applications Software Web Based Transactions Network Infrastructure Electronic Processes Hardware Training and Education Data Mining Back-end databases Data Warehouses On-going Training Analytical Tools Dedicated Resources Procurement “Super user”
Technology support for Inte grated MRO Supply Mana ge ment is most often built upona firm’s maintenance mana ge ment s yste m (also referred to as an Enterprise AssetManage ment - EAM s ystem) . Suppliers such as MRO Soft ware (Maximo), DataStrea m(MP 7i), SAP (SAP/PM) and others ha ve a substantial installed base of comprehe nsiveand sophisticated software packa ge s that are frequently integra ted into other coresyste ms such as accounting and purcha sing. These s ystems, whe n properl yimple mented and maintained, provide a treasure -trove of infor mation on assets, usage,cycle -ti me and cost that can be used as the infor mation foundation for an Inte gratedMRO Suppl y Syste m.Other technologies provide not onl y inter nal benefits, but also enable customer -supplier integration through the use of e -Bus iness tools to streamli ne the entire “orderto pay” process for MRO ite ms. The software suppliers mentioned abov, as well ascompanies such as Ari ba and Commerce One , are maj or players in this arena. Some ofthe functionality a vailable includes: • Flexible architecture that allows for eas y int egration with bac k-off ice syste ms • Workflow technology that streamlines the purchase requisitioning process, and enforces business rule s and buying policies • Easier search and fast er processing through supplier e -catalogs • Access to pri vate net works a nd e -mar ketplac esThese features can provide reductions in transaction and product costs, reduction incycle ti mes, and reductions in inventor y carrying costs and i mproved accurac y andservice.A Typical M RO e- Bus iness Infrastructure Private Network Customer Systems Update Suppliers’ Custom EAM e-Procurement Search, Communicate Catalog System (e.g. Maximo, (e.g. Maximo, (e.g. Ariba, Datastream, Datastream , Commerce One) Sales/Order SAP/PM) Plan & RFQ & Small Orders SAP/PM) Management Transact Asset Record Asset Record Requisitioner Quotes, Acknowledgements, ASN’s Operations Parts Catalog Parts Catalog Approver Inventory Inventory Inventory Large Orders, Contracts Shipping Buyer Invoices/Pay on Receipt Work Orders Work Orders Transportation Business rules Receiving Receiving & workflow e-Marketplace Public Update Catalog Alternate ERP Supplier(s) Financial and other applications Search & (e.g. SAP, JD Edwards, PeopleSoft) Auctions Transact
Organizational ChangeIt has been said that no i mpr ove me nt is possible without cha nge. Experience hasshown that s uccessful change requires the following: A clear picture of the future state A need to change Some logical first stepsThe methodology for Inte grated MRO Supply Mana ge ment discussed above isdesigne d, and has the prove n capabilit y to provide a strategy and r oadmap for c hange.The “need” or desire to improve MRO supply mana ge ment must be present or becreated within the fir m’s and its supplier community.Inte grating MRO suppliers into business is, in the end, an issue of aligning separateinterests, cultures, infor mation s yste ms , a nd technologies. In additional, years oftraditional commerce have created a basic lack of trust, which tends to keep supplierand customer at arms -length. Overcoming these barriers to unlock the cost andservice gains possible in the MRO suppl y s yste m requires a disciplined approach tochange.Or gani zational change has two critical compone nts and each can be successfullymana ged to achie ve a desired outcome:1. Business Processe s and Methods MRO supplier inte gration will impact se vera l business processes. Compa nies must review how materials are sourced, how suppliers are evaluated, a nd how common business activities such as stoc k mana ge ment, requisitioning a nd invoicing are handled. In addition, a Total Cost reduction strategy a nd trac king mechanis m must be de veloped. Some difficult questions must be answere d. • Which ite ms should be stocke d? • Where should inventor y be located? • What are appropriate inventor y le vels based on de mand, criticality, and obsolescence? • Who is better equippe d to own and mana ge i nve ntor y? Suppliers can be a val uable resource while a ssessing processes a nd methods around MRO ite ms , and shoul d be invol ved in various stages . Genesis Solutions be gins by documenting a nd understanding curr ent internal and supplier business processes. A ke y to s uccess at this sta ge i s to include ke y individuals to gather cross -or gani zational input in order to fully understand the strengths a nd wea knes ses of current pr ocess es and acti vities. This approach also helps build the case for change by calling att ention to situations that need attention and by comparing the current situation to alternative approaches a nd methods used by other fir ms or other industries. Ultimat ely, this input will be used to redesign
ke y processes to reduce total supply-c hain cost and impr ove speed and responsive ness.2. People Inte grating the MRO s upply chain i mpacts people and how the y do their j obs. The Inte grated MRO Supply Mana ge ment strategy described above s pans many organi zational boundaries, both internal and external. Ever y aspect of the organi zation is affected and most e ver yone’s j ob is changed in some wa y. A few ke y methods a nd tools are used to help people deal with the upheaval of change. • Vision & Strategy Development - A clear , consistent and si mple vision (or picture) is needed to help ever yone underst and where mana ge me nt is headed. Strategy follows vision and provides the means by which the vi sion is to be accomplished. Some logical first steps, including a pilot project, are ver y useful to help people learn the new methods and ma ke progress at the same time . • Work Redesign - As J obs are changed, or eliminated, ne w funct ions e mer ge , the ways people wor k together change. Work redesi gn is a methodology to redefine roles and responsibilities, devel op new wor king rela tionships and support the transition. • Measures and Compensation Systems - Defining success, me asuring it and creating a reward s yst e m that reinforces the goals of the or gani za tion is also a critical element of change . Measure ment is a ke y component of the Genesis methodology and is e mbedded in all our wor k beca use it is funda mental to sustaining s uccessful change. • Interest-based Soluti ons - Ever y person and organi zation is moti vated by, a mong other things, the age -old question of “What’s in it for me?” An interest - based process is used to discover and make visible the needs , wants, and insecurities that stakeholders have re garding the changes. Obj ective standards are adopted that fairly protect e ver yone’ s interests and creative win-win solutions are de velope d.Genesis Solutions’ experience with dozens of clients across many industries hasshown that na vi gating organi zational change is critical to the success of any businessinitiative. These initiatives will naturally cause resistance, even from those who willeventuall y benefit. Senior leaders ha ve res ponsibility to set the stage for change tosucceed. The need to communicate clearly and often is well documented. Thechanges and benefits expected need to be carefully explained, a nd well understood.As with any change e ffort, early successes should be used to de monstrate proof ofconcept. This more than anything else will support the pilot tea ms and convinceothers to j oin in the effort.
A Case ExampleRecently, Genesis Sol utions consultants assisted a maj or paper-goods manufacturerwith the completion of a redesign of its MRO mana ge ment function, utilizing supplierintegration as a ke y i mprove ment compone nt.Historically, our client employed literally thousands of MRO suppliers at a dozenlocations across the continental United States. There was no central control ormana ge ment of M RO purchases, and each plant made its own s upplier and strate gydecisions. Due to an e mphasis on price and negotiation, the supply base at eachlocation was large and diffused. With several suppliers supplying the same ite ms, andpricing and supplier selection often handled on an ad-hoc bid basis, on-siteinventories were ver y high and often duplica ted by one or more of the suppliers.An analysis of historical MRO purchas es by the multiple plants produced thefollowing: Commodity Family Annual Purchases Number of (mm) Suppliers Bearings and Power $150 150 Transmission Pipe, Valves & Fittings $75 125 Electrical $80 90 Pac ka ging Supplies $90 40 Specialty Machine $40 8 Consumables Specialty Che micals $29 29 • Purchases were grouped into commodit y f a milies. Ke y M RO fa milies, and relevant infor mation i s below. • Balance of MRO purchases: $15mm s ourced from 1000 suppliers • Storeroom inve ntor y t urn rate: 1.1 ti mes/ yea rCross -functional, cross -or gani zational tea ms were asse mbled t o address sourcing,inventor y mana ge ment and order mana ge ment, for each of t he six ‘commodit yfa milies.’ Each tea m was chartered with responsibility to c raft a compa ny-widestrategy for its commodity fa mil y with a goal to reduce total cost by 10% to 20%.Multi-discipline tea m me mbers were gi ven t he assignment of ‘wearing two hats,’ onerepresenting the intere sts of their respective plant locations, the other representing theinterests of the compa ny as a whole.Through the initial phase of strategic s ourcing, the following resul ts were achie vedover an 18 month peri od: Commodity Family Total Cost Reduction Number of (mm) Suppliers Bearings and Power $25 1 Transmission Pipe, Valves & Fittings $8 1
Electrical $7 1 Pac ka ging Supplies $16 10 Specialty Machine $6 3 Consumables Specialty Che micals $.7 2Total cost reductions (as a % of purchases) were achieved a number of wa ys .Depending on the c ommodit y fa mil y, re ductions were realized in the followingmanner: Supplier reduction ~ Levera ged buying 5% - 18% Inventor y ~ Eli minate supplier -customer duplication 2% - 5% Inventor y ~ Eli minate plant -to-plant duplicat ion 2% - 4% Supplier generated cos t reduction ideas 3% - 15% Value-a dded supplier services 1% - 3% Administrati ve costs 2% - 3% Improved upti me difficult to quantifyYear over year cost r eductions ha ve continued each year in the range of 4% to 9%.Supplier perfor mance and satisfaction continues to be greatl y i mpr ove d.The technology platfor m for this initiative was a proprietary ERP syste m withintegrated Computeri zed Maintenance Manage ment Syste m (CM MS), Financials andHuma n Resources s yst e ms. A wor kflow tool for Order Processing was evaluated andimple mented as a “ bolt on” to the ERP. Re gional (s mall er) suppliers use acombination of blanket orders with verbal commit ments and auto-fax for orderprocessing. An e -mail syste m with a messa ge library and cataloging functionalit y wasselected and i mple me nted to supple ment communications a mong enterprise users andstrategic suppliers. Supplier catalogs with proprietary ite ms and pricing wer eestablished for enterprise -wide use. A data warehouse was establ ished as the enginefor data analysis, perfor mance tracking and the Supplier Performance Mana ge me ntSyste m.