Mro indirect supply dhl


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Mro indirect supply dhl

  1. 1. mro:indirect supplydriving new efficiencies in the indirect supply chainprocurement & logistics strategies for maintenance, repair and operations(mro) suppliesa white paper from the americasleader in supply chain management
  2. 2. EXECUTIVE SUMMARYIn challenging economic times, companies look for new that provide a solution offering centralized procurement,ways to control costs and improve efficiency. systems support and a single point of contact.To address these issues, manufacturers are taking Integrated outsource models provide some advantagesa hard, strategic look at Maintenance, Repair and compared with traditional MRO supply models thatOperations (MRO) supply. Commonly known as typically operate with limited resources. However,“indirect materials,” MRO supply includes a vast array of companies are finding that the integrated model’sitems that support internal operations, ranging from “bundled” service and pricing structures do not alwayssafety gloves and office supplies to spare parts for provide the visibility needed to eliminate waste andmission-critical industrial equipment and tooling. inefficiencies while improving the productivity of maintenance teams.Many companies have focused cost-cutting efforts ondirect materials and capital spending rather As a result, leading manufacturers are beginningthan MRO supplies, which have traditionally been to un-bundle outsourced services to implementviewed as low-cost items with little potential for lean processes that provide better visibility and promotesavings. However, there is growing recognition continuous improvement in every aspect of the MROthat MRO represents a substantial expense for supply chain. This enhanced outsource model leveragesU.S. manufacturers – about $125 billion annually, the expertise of an MRO Supply Chain Manager thataccording to a 2008 study by Frank Lynn & Associates. works with partner companies offering deep expertise in each area of MRO supply – strategic sourcing,For a typical manufacturer MRO expenses represent up procurement, transaction management, logistics andto 16 percent of the cost of goods – but 62 percent of others. This high-performance team leverages leantotal requisitions. MRO supply is also a complex process, principles to deliver greater value and service levelswith thousands of stock keeping units (SKUs), fluctuating through the supply base, streamline inventories anddemand and hundreds of individual suppliers, often improve administrative efficiencies.managed at a local or site level rather than corporateprocurement. Given the large volume of transactions, As shown in Figure 1, the benefits of an efficientunpredictable demand and de-centralized management, MRO supply chain are significant.the MRO supply chain has long been ripe for efficiencyand cost savings improvements. This white paper will help decision makers in a wide range of industries understand how expertise-drivenHistorically, companies have sought to streamline MRO MRO outsource models reduce cost and complexity –supply since the 1980s by outsourcing purchasing, while putting the control and ability to drive furtherinventory and other functions to integrated suppliers efficiencies back in the hands of the customer. BENEFITS OF AN EFFICIENT MRO SUPPLY CHAIN Best in class 19% 18% Average 17% 14% Laggard Best-in-class companies 9% have reduced MRO costs by 7% 8% 7% 19 percent, according to the Aberdeen Group Study. 3% 3% 2% 2% The study found a wide gap between “best-in- MRO Savings Over MRO Inventory MRO Supply Base Administrative class,”“average” and the Last 12 Months Reduction for the Reduction for the Cost Reduction “laggard” companies Past 3 Years Past 3 Years among 150 firms studied. Source: Supply Chain Management ReviewFigure 1. PAGE 2
  3. 3. CHALLENGES WITH TRADITIONAL MRO SUPPLYHistorically, MRO supply functions have operated in This traditional approach to MRO supplya silo separate from many companies’ primary creates five key problems.strategic purchasing operations. While mostpurchasing activities have moved to centralized 1. End USERS LACK A COMPLETE UndERSTAndInGprocurement professionals, indirect supplies have And TRAnSPAREnCy OF MRO COSTS.continued to be managed at a site level with littleor no system support. MRO supplies represent almost two-thirds of a company’s requisitions yet companies lackUntil recently, information management systems comprehensive tracking systems that providecould not track the large number of individual visibility into the total cost of ordering,indirect supply items required for a manufacturing warehousing, transporting, receiving, paymentfacility and, more importantly, provide visibility and other supply chain costs. These expensesinto the demand for any given product. As a result, typically represent about half the total cost of MROMRO goods are ordered in bulk and then stored in supplies (Figure 2).warehouses until they are needed by end users.This translates into an increased 2. SUPPLy CHAInS ARE FRAGMEnTEd Andcost of ownership for MRO inventories, high InEFFICIEnT.obsolescence rates and low levels of productivity for due to the wide variety of MRO materials requiredhighly skilled plant personnel who spend spent too by manufacturers, many suppliers are involved.much time looking for critical parts among Maintaining numerous business relationships addsthousands of other indirect supplies in storage at cost to the supply chain due to the labor andthe same location. systems required to order, audit, pay invoices, transport, and provide other essential tasks. TOTAL MRO COST OF OWNERSHIP Price of Materials The goal: look beyond price to analyze less obvious expenses. Price of Materials Other Costs Costs Warehousing Carrying Inventory Obsolescence Transportation Ordering Tracking Administration Duties Taxes Depreciation Source: Exel AnalysisFigure 2. PAGE 3
  4. 4. CHALLENGES WITHTRADITIONAL MRO SUPPLY (CONT.)3. MAnUFACTURERS LACK vISIbILITy The primary MRO outsourcing models are: InTO THE MRO SUPPLy CHAIn. – Integrated model, where companiesProduct and process manufacturers, alike, outsource the entire MRO supply chainmay have thousands of MRO items to manage. to a single external provider as a serviceWithout full visibility into supply and demand, bundle (procurement, logistics, inventorycompanies may over-stock items, resulting in and on-site management); andunnecessary inventory carrying costs, or find thatkey supplies are often out-of-stock, leading to – Expertise-driven model, where companiesinefficient operations or loss of productivity. outsource to a lead MRO Supply Chain Partner who unbundles the supply chain4. SKILLEd MAInTEnAnCE/EnGInEERInG functions and manages a limited number STAFF SPEnd TOO MUCH TIME ORdERInG, of best-in-breed companies with expertise FIndInG And PICKInG UP PARTS. to streamline each phase of the procure- to-pay process.Maintenance personnel work in high-intensityenvironments where uptime is critical. “Pit stop”maintenance is essential to get equipment According to a 2008 study by Frank Lynnreconditioned and back into production as quickly & Associates, these outsourcing models currentlyas possible while ensuring safety. Maintenance manage 11 percent, or $14 billionprofessionals need essential MRO materials of the $125 billion MRO marketplace spenddelivered where they need them, when they in the industrial industry alone. Technology,need them. chemical and consumer product manufacturers are also exploring new MRO supply models5. MULTIPLE SUPPLIERS EnTERInG THE in an effort to manage costs. MRO outsourcing MAnUFACTURInG SITE CREATE SAFETy is expected to continue at annual growth And SECURITy ISSUES. rates of 10 to 25 percent.Allowing multiple suppliers to make on-sitedeliveries creates a variety of risks, ranging fromaccidents and warehouse congestion to potential InTEGRATEd OUTSOURCE MOdELsecurity threats. by limiting access to trained The integrated supply model, which firstpersonnel familiar with the site, manufacturers emerged in the 1980s, represents a basicmanage risk more effectively. outsourcing model of the entire MRO supply chain to an external provider. Common stock inventory items (i.e. safety gloves and glasses)MRO OUTSOURCE MODELS are sourced from an integrator – often a large industrial distributor that has expanded its productTo address these issues, companies have recognized catalogue to include these items and developedthat the strategies that have helped them drive waste in-house transaction processingand inefficiency out of their operations can be applied and inventory systems to provide a broaderto MRO supply. While some decide to tackle these MRO range of services. This model has been usedchallenges on their own utilizing internal resources primarily by automotive, aerospace andand systems, a large number of Fortune 500 petrochemical industries, in which companies’ MROorganizations have gone outside their organizations to expenses are more than $1.5 millionseize the opportunity more quickly. per facility. PAGE 4
  5. 5. MRO OUTSOURCE MODELS (CONT.)About 39 percent of industrial distributors currently than $1.5 million in MRO supplies annually.manage integrated supply contracts, according to a However, larger companies often have manysurvey by Industrial distribution. Frank Lynn & geographically dispersed facilities with lowerAssociates defines an integrated supply program as MRO spends. A solution that delivers moreone which includes: consistent cost and service efficiencies across the network would offer significant value.– On-site management of MRO procurement and inventory; EXPERTISE-dRIvEn OUTSOURCE MOdEL– Consignment inventory; The economic downturn has exacerbated waste– Procurement process re-engineering; and efficiency gaps in the MRO supply chain.– Sourcing; and When demand is unpredictable and critical suppliers are at risk, ensuring appropriate MRO– Procurement management systems. supply inventories and response times throughoutThe integrated supply model offers fast the network is more important – and moreimplementation of turnkey IT solutions, a single challenging – than ever. Efforts to gain controlpoint of contact for the end customer and better during the short-term crisis and lay the foundationmanagement of high-volume sites, opportunities for sustainable MRO supply management over theto improve visibility and cost controls remain. long-term have created three trends that call forSupply chain management issues and waste an updated outsourcing model:may include: - Corporate procurement involvement in– Lack of transparency. MRO product categories is increasing; In this model, the customer receives a single invoice from the integrator at the end of the - End-user requirements are driving a more month for all the services and products responsive, demand-driven MRO supply chain; and provided. Significant administrative expenses, such as transportation, inventory, warehousing, - Process steps that add administrative costs disposal and others are often not detailed in this without service value are being scrutinized. consolidated invoice. While the end user understands the price, this lack of transparency According to Frank Lynn & Associates, makes it difficult to identify areas to eliminate MRO supply management at the corporate level inefficiency and reduce the total cost. is growing. More than 60 percent– Overstocking and obsolescence. of large end-users manage MRO spend at the corporate level, up from 40 percent While integrated supply gives the end user a 10 years ago. turnkey solution, the trade-off is less control over inventory levels. MRO items are ordered and distributed to the end user based on historic From sourcing strategies and supplier selection to demand and in support of new product detailed process step reviews, today’s MRO supply promotions. A push-based supply chain is slower outsourcing goals are about achieving higher to respond to changes in end user demand, levels of efficiency and control, while reducing which can result in overstocking, bottlenecks total cost. and delays, unacceptable service levels and product obsolescence. The critical elements in this enhanced model are the creation of a highly stable team of expert– Inflexibility in serving smaller facilities. suppliers, led by a strategic MRO Supply Chain The integrated supply model is cost-effective for Manager and the application of lean principles to serving single plants that typically spend more the MRO Procure-to-Pay process. (see Figure 3) PAGE 5
  6. 6. MRO OUTSOURCE MODELS (CONT.) EXPERTISE-DRIVEN MRO MODEL MRO Supply Chain Manager Strategic On-site Sourcing & Services Procurement Inventory & Transaction Product Transportation Management Application Logistics Team of Supply Chain ExpertsFigure 3.CREATInG A TEAM OF The Supply Chain Manager should offer:MRO SUPPLy CHAIn EXPERTS – Analysis tools to uncover all hidden costs and ensure accurate evaluation of total cost ofThis outsource model for the MRO Supply Chain ownership with a comprehensive supply chainoffers a single point of contact through the Supply assessment of the Procure-to-Pay process.Chain Manager, supported by a team of specialiststhat each bring best-in-class expertise. Selecting – Lean expertise to re-engineer the supply chainpartners that will collaborate with corporate and evaluate capabilities and technologies ofprocurement, the MRO Supply Chain Manager future suppliers and assemble a new supplyand, most importantly, each other, is critical to the chain team.success of this enhanced outsource model. – Transparency of costs and sourcing neutrality with key performance indicators that measure andIn deutsche Post dHL’s recent study, monitor compliance with proactive managementdelivering Tomorrow – Customer needs in 2020 of information.and beyond, experts predict that the nextdecade will commence “the Age of Cooperative – A proven track record in project implementation forEfforts.” “Cooperation will be new process, IT systems and physical infrastructurethe new buzzword. This will be especially providing at all times adequate levels of staffing.true of logistics companies.” – Existing infrastructure such as warehousing and transportation to help reduce or eliminateChoosing an expert in lean processes who has MRO up-front costs.experience as the Supply Chain Manager can play a – Relationships with relevant specialists that willcritical role in helping companies move quickly to be needed in the assessment and implementationstreamline the supply chain and implement a of a higher efficiency MRO supply chain.solution that responds to changing business needs. PAGE 6
  7. 7. IDENTIFYING AND ELIMINATING INDIRECTSUPPLY CHAIN INEFFICIENCIESThe Supply Chain Manager will first complete a driving new efficiencies in the MRO supply chaindetailed assessment of the processes, people and starts with gaining visibility into total cost bytechnologies involved in the entire MRO supply examining the Procure-to-Pay process. As shownchain. This initial evaluation will help identify, in Figure 4, this process includes three key areas:separate and manage the components of totalcost of ownership. The goal: look beyond “price” to 1. Sourcing (strategic procurement);analyze less-obvious expenses, eliminate waste and 2. Purchasing (tactical procurement); andultimately streamline the supply chain to reduce 3. Logistics (design optimization and operations).cost. PROCURE-TO-PAY PROCESS MRO Spend 1. Sourcing (strategic procurement) Sourcing, Strategy Implementation Supplier Selection & Development Technology (IT systems) Demand/ 2. Purchasing (Tactical Procurement) Supply Analysis & Requisition & Invoice, Reconciliation Optimization Delivery Purchase Order & Payment 3. Logistics (Design Optimzation & Operations) Transportation Warehousing Inventory & On-site Management Operations End userFigure 4. PAGE 7
  8. 8. IDENTIFYING AND ELIMINATING INDIRECTSUPPLY CHAIN INEFFICIENCIES (CONT.)STRATEGIC SOURCInG – A well-defined purchasing process will ensure that maintenance and requisition histories areWith a detailed analysis of the MRO spend, supply up to date to ensure availability of parts forand demand, companies can better develop a timely preventive maintenance activities.strategic sourcing plan that identifies the optimalsupplier base. The goal is to ensure reliable supply A higher efficiency indirect supply chain maywhile reducing transaction costs and ensuring involve outsourcing purchase transactionefficient management of contracts. management to companies that provide solutions for aggregating orders and streamlining invoicing,This step requires a clear understanding of what is payments, and other functions.being purchased, by whom, from which suppliers,in what quantity, how frequently, and at what TECHnOLOGycost. These insights will also help drive processimprovements, further reducing costs. Throughout the procure-to-pay process IT systems play a critical role in optimizing each function,Companies may also look to improve and manage monitoring key performance indicators andother important sourcing aspects such as: enhancing cost controls. Adequate technology will:– Standardizing materials for main MRO – Ensure reliable tracking and visibility of materials categories, which reduces the number of MRO in the supply chain. For instance, deliveries can items that must be managed; and be scanned at several points in the transport process – when it leaves the supplier’s facility, at– Streamlining the material master list to minimize the cross-dock, when it goes into off-site or SKU proliferation that helps control costs. on-site storage, and at delivery.The MRO Supply Chain Manager may tap internal – Enhance inventory management with just-in-procurement experts to bring insights into both the time (JIT) and automatic replenishment processesassessment and implementation of sourcing that link with IT systems, such as bar-codeprocesses that deliver maximum quality with scanning in open bins, tool cribs, storeroomsminimum waste. and vendor managed inventory to initiate the purchase order process.PURCHASInG – Streamline orders transmitted to MRO suppliersThe next step is to look at the tactical procurement with electronic acknowledgement, exceptionprocess, from requisition through delivery, follow management, and rapid, 24/7 response toup on open orders to invoicing and payment. The emergency orders.goal is to order the right part every time withminimum waste and maximum quality for the end MRO product manufacturers often offer productionuser. Key issues to consider are: and application support services for end-users of their products, making them an important– The procedures for online ordering, use of member the MRO supply chain specialist team. electronic catalogs, invoicing and payment. Improving invoicing and payment processes can eliminate significant costs from the overall MRO product cost. PAGE 8
  9. 9. IDENTIFYING AND ELIMINATING INDIRECTSUPPLY CHAIN INEFFICIENCIES (CONT.) CONCLUSIONLOGISTICS Once total cost is understood, companies can separate the price of MRO materials fromMoving to execution, the next step is to look at other expenses – and create a team andlogistics processes from supplier collection to strategy that will drive inefficiencies out ofdelivery of MRO materials to the point of storage the MRO supply chain.or use. The goal is ensure the right part at the rightplace to help key maintenance staff achieve The bottom line – an end-to-end approachoptimal uptime and efficiency while at the same to your MRO supply chain offers the opportunitytime reducing inventory levels. Efficiency to seize an important competitive advantage inopportunities include: today’s challenging economic climate.– Transportation solutions, including supplier Call Exel’s experts to discuss an MRO supply chain sweep runs and dedicated transportation fleets needs assessment today. that help optimize costs and reduce the carbon footprint. Effective routing strategies mitigate premium freight and ensure two-way moves are utilized for returns, repairs, samples or outbound shipments.– Warehousing strategies that include use of cross docks – integration points where orders from suppliers can be consolidated to reduce the number of deliveries. Off-site and on-site storage may also be considered with the focus on plant safety and security to ensure a minimum number of qualified staff enters the premises.– On-site logistics, an activity-based cost analysis using lean tools for warehousing, tool crib, stores and transportation will ensure the right people are doing the right tasks and will reveal areas for cost savings or opportunities to re-deploy people to more high-value operations.Inventory management and transportationlogistics are critical links between all partnersin the expertise-driven MRO outsource model.Third-party logistics providers that offer a fullrange of supply chain services and demonstratedexpertise in leveraging lean processes forcontinuous improvement can serve as both aspecialist and MRO Supply Chain Manager. PAGE 9
  10. 10. raising expectations.©2009 dhl supply chain. all rights reservedthroughout the world. trademarks or registeredtrademarks are property of their respectiveowners.while every precaution has been taken toensure accuracy and completeness in thisliterature, dhl supply chain assumes noresponsibility, and disclaims all liability fordamages resulting from use of this informationor for any errors or omissions. Specificationssubject to change without notice.for more information:web site: