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To outsource or not to outsource? SSI’s George Krauter debated that question in a live debate at MyPurchasingCenter.com. George discussed the advantages of outsourcing MRO industrial supply to drive down costs and drive up quality and performance. Watch a recording of the debate at MyPurchasingCenter.com (registration required).
Susan Avery of MyPurchasingCenter.com discussed industrial supply with Storeroom Solutions Vice President George Krauter at the 96th Annual International Supply Management Conference and Educational Exhibit in Orlando, Fla.
SSI's George Krauter authored this article for Supply & Demand Chain Executive magazine.
Recognize the value of better control over MRO. Be prepared for push back and non-compliance. Consider a third-party service provider for onsite storeroom management.
By George Krauter
Companies big and small have this one thing in common: They do not sufficiently control their maintenance, repair and operations (MRO) expenses. Consider that only 50 percent of the MRO parts requirements are found in the storeroom, amounting to 65-70 percent of the spend. The rest are purchased as spot buys, causing costly transactions and squirreled away sub-stocks. ("If I need three, I must buy 12 and put nine on a shelf somewhere.") Storeroom inventory generally turns less than once a year, and the request-to-fill rate is commonly less that 80 percent.
An analysis of transaction costs by Aberdeen shows that purchase order processing costs about $57 each for U.S. industrial organizations. MRO in manufacturing accounts for just 6-10 percent of the total spend but creates 80 percent of the company's paper processing costs. Each $1.0 million in MRO spend creates approximately 3,500 purchase order cycles (issues, receipts, POs, invoices) relating to MRO. At a cost of $57 each, the paper burden is $200,000, or 20 percent of each $1 million spent on MRO, plus the cost of dealing with hundreds of suppliers.
Imagine a big box home improvement store with a negative inventory turn, 50 percent of the customer's needs not there, stockouts occurring 20 percent of the time and the store making no markup on material sold. Such a store would not survive. And yet this is how most MRO storerooms operate: Storeroom requisitions to plant budget holders are issued at the purchase price without a fee (markup), and the operation loses money that is not recovered in the manufacturing process. The effect is a drain on the net profit of each facility.
Good intentions from corporate efforts to rein in MRO spending frequently fall short due to lack of plant compliance ("I can get it cheaper from my local guy"), the inherent flaws in the RFQ-market basket process (bad descriptions, brand questions, etc.), and a clouded understanding as to who owns the MRO responsibility.
Why do these conditions continue to exist? Do any of the following sound familiar:
And let's not forget the myriad of cross-functional conflicts that arise over MRO.
What to do? Approaches vary. Some organizations focus on consolidating indirect materials inventories in one central location per facility, using a computerized system to manage and control storeroom inventories, professionalizing storeroom staff, and asking suppliers to manage inventories of their parts and/or provide consigned inventories. The benefits of this approach can include greater efficiency, improved performance, increased supplier involvement and better control. But there are also disadvantages, including higher expenses for personnel and systems, and the need to monitor and manage employees and/or inventories from multiple suppliers as well as related information security issues. More important, this approach and similar strategies often fail because the put the burden of recovering MRO costs on the shoulders of plant personnel. Ultimately, costs do not get reduced because of the ingrained belief that the storeroom will always be an unrecoverable cost, and therefore plant management is unwilling to invest in controlling those costs.
An alternative approach is to look to a personalized third-party MRO scope of work that reflects world-class storeroom principles. Since your core competency is not stores operations, why continue to do it? Get out of the storeroom business and let the experts do it by bringing in a firm that specializes in onsite storeroom management. These firms understand how to implement effective indirect materials programs, they know the bumps along the way and how to avoid them, and they can bring systematic, time-tested strategies to the table. Often they can also bring supplier discounts because they are able to aggregate spend across multiple clients. And they must be able to achieve not only immediate-term results but long-term continuous improvement in order to retain their customer relationships.
Regardless of how you take on your MRO spend, the most important step is recognizing that you can make progress in reducing these costs. And the first requirement is your own willingness to take on this last bastion of uncontrolled expenses.
Purchasing magazine Editor Susan Avery visited Storeroom Solutions and profiled the company for the April issue.
By Susan Avery -- Purchasing, 4/8/2010 12:00:00 AM
During the recession, manufacturers took a long hard look at operating expenses. Given the attention supply operations now pay to spend analysis and management, it isn’t hard to examine data on purchasing—even MRO purchasing.
It would not be a stretch to say that most companies don’t like what they see.
While there are purchasing pros who successfully source the category—David Stockwell, MRO category manager at Saint-Gobain Containers in Muncie, Ind., comes to mind—others still find managing processes related to MRO a challenge.
Managing MRO, or maintenance, repair and operations, for most manufacturers, is not a core competency. Nor should it be. For every company that takes the tack that Saint-Gobain has, there are those that don’t want to be in the business of managing the category. Instead, purchasing professionals at these companies manage agreements with providers of integrated supply or MRO outsourcing services.
(Under integrated supply arrangements, buyer and supplier companies share some systems.)
“On the face of it, MRO appears easy,” says Carlos Tellez, president and CEO at Storeroom Solutions, a provider of indirect materials management services in Radnor, Pa. “It’s light bulbs and bearings. But it’s very hard to do correctly. It takes attention to detail.”
Storeroom Solutions got its start 18 years ago and for much of the time since has provided its services to newspaper publishing companies. It’s now diversified. Its mantra on maintaining plant uptime “you can’t publish today’s news tomorrow,” is equally applicable to companies in the pharmaceutical, food processing and other industry sectors.
In an interview with Purchasing recently, Tellez and his team talked about his company’s business which is growing, despite the recession. Other providers of integrated supply and outsourced MRO services also report demand picking up in the past two years.
As the dust settles after companies reduced expenses internally during the recession they start to look outward for help from suppliers with jobs that still need to get done like manning an MRO storeroom, Tellez explains. Downtime is not an option. His team consists of Mike Weinberg, senior vice president, sales and marketing; Diane Caldwell, director, marketing and sales operations and George Krauter, vice president.
Tellez spoke of his business concerns (possible price inflation in coming months and a shortage of skilled labor in coming years) and of trends in MRO sourcing (there’s interest in sustainability: “it’s not just about being green, but reducing costs as well”). From their experience, and his team offer tips for purchasing pros managing agreements with providers of integrated supply and outsourced procurement services. The sentiments hold for purchasers managing categories of MRO spending on their own as well:
Use a cross-functional team. It goes without saying that attempting to manage any category of indirect spending (perhaps MRO especially) without input of key personnel who have some connection to the category is not a good idea. “In our more successful engagements, a cross-functional team supports the initiative,” Weinberg says. “Getting them together is an important part of the process.”
Consider total cost, not price. Cross-functional teams understand total cost. “Collectively, they get TCO,” says Tellez. Even if a company still measures performance of its purchasing professionals based on their skill at negotiating price, management evaluates other employees using different metrics. Together the performance criteria help provide a clearer picture of total cost.
Implementation drives success. Whether introducing outsourcing or an agreement with a new supplier to a plant, it’s tough to get people to change, says Krauter. “To get off on the right foot, purchasing needs to make sure that the new agreement is implemented properly. We’re sensitive to hand offs and involve operations early on in our presentation.”
Manage sourcing of the category as a project with clear expectations. “So there’s no confusion later, make sure all stakeholders understand what’s expected,” Tellez says. “Set up communication lines so there’s feedback. You cannot over communicate.”
Be flexible. The arrangements Storeroom Solutions has with its customers “are not one size fits all,” says Weinberg. “We have an open-book philosophy and are willing to make adjustments to the operating model. Everything’s transparent. We have nothing to hide.”
CASE STUDY “Our customers are satisfied with the job we’re doing, managing inventory and controlling spending and they ask, 'What else can you do to help me control costs?’” says Tellez. One located nearby in Philadelphia, H.P. Hood, has outsourced its MRO materials management to Storeroom Solutions.
Ron Nelson, plant manager, says having Storeroom Solutions manage MRO inventory at the milk processing facility not only has helped reduce costs 12% in year one and 13% in year two of its agreement with the provider, it also makes it easier for employees to do their jobs.
Rather than focus on managing the storeroom, “we can concentrate on the important things like quality and safety,” Nelson says. Now, he looks to Storeroom Solutions for help with reverse engineering. The provider recently offered up substitutes for repair parts on a robot that helps the plant further reduce costs. John Dowds, site manager, Storeroom Solutions, manages the storeroom at the plant.
Best-practice business publication U.S. Business Review says Storeroom Solutions is a leading innovator in the MRO world by streaming operations, significantly reducing cost, while dramatically increasing quality.
When Radnor, Pa.-based Storeroom Solutions Inc. (SSI) was founded in 1987, it proposed a deal that most clients could not refuse: to procure, stock, monitor and staff their storerooms so the customers could focus all of their energy on their core competencies. This would, in turn, “help companies reduce indirect material procurement costs, streamline operations in plant storerooms and standardize managerial practices across divisions,” SSI says.
After it became a Day & Zimmermann subsidiary in 1989, SSI broadened its client base and developed Storeroom On Site software, a “core component” of its MRO software suite. Then, in 1996, a group of former former Day & Zimmermann executives acquired the company’s assets.
“Today, SSI manages storerooms in-person and virtually … moreover, becoming a leading force in the MRO management area,” the company says. It has more than 100 locations, and purchases more than a million storeroom products annually, which are supplied to clients and managed through customized on-site procedures. It operates in the United States and Canada and plans to open a site in Puerto Rico within the first quarter of 2008. “We go where our clients ask us to go,” says Robert DePaolo, senior vice president of business development.
The integrated supply industry has come a long way from its early ’70s inception, DePaolo says. “The advancements in the systems capabilities from then to now are astronomical,” he declares. “When it first started, you had little three-by-five index cards. You would take something off the shelf and write it on the card. When the box is empty, you throw the card in the box and somebody would order more. That’s it in its purest form.
“Today, we have systems that calculate how much inventory you need, how fast it’s turning and your lead time,” he continues. “Technology will give you a history of every time you used that item, what machine you used it on and what work order it goes to. We pride ourselves on our ability to manage inventory and product availability at an unbelievably high level. But there are still companies who use the three-by-five card theory. Our version of integrated supply is not as widespread as we’d like it to be; it’s still gaining momentum, and I don’t know if it’s been any better than it is right now.”
Ironically, he adds, the industry seems to do well when other industries struggle financially. “We’re almost in a reverse cycle,” DePaolo notes. “When times get hard and people need to save money, they must look for optimum cost reductions. Clients are looking at places they never thought to look at before because it was too hard to manage at the time. Now, companies are wringing every penny that they possibly can out of the process, and there are people like us who know how to make it easy for them.
“And, when times are prosperous and everybody is wildly profitable, then they don’t want to entertain our services quite as much. It’s a challenge to convince them to implement a new program and change management. But we’re not there to show people what they can do better; we’re there to show them different tools, educate them and help them understand that we’re the next step in the evolution of indirect materials management.”
SSI serves industries ranging from automobile parts manufacturers and newspapers to chemical materials producers and pharmaceutical companies.
The company points to several cases where it helped to educate potential clients about the benefits of outsourcing direct materials management. In one instance, a well-known Pennsylvania newspaper merged into a substantial media group in the early 1990s and was placed in a division that included other newspapers of a comparable size.
Due to a “soft economic climate and consolidation among major advertisers,” the company says, revenue decreased 9 percent from 2004 to 2006. “In the same way the newspaper industry has moved toward consolidation, Storeroom Solutions determined that consolidation was the best methodology for managing plant storerooms for our client,” SSI says. “Storeroom Solutions centralized procurement for nine facilities, lowering purchasing costs by 18 percent.”
“Don’t be too proud to outsource,” DePaolo advises other companies. “There are people like us who are experts; we do what we do, and it’s all that we do… we know how to produce value from efficient on-site MRO operations. [Companies] should understand that distributing MRO parts internally is not their business; it is a cost that is not recoverable in their manufacturing process and should be eliminated. [Firms] that find their way out of the parts distribution business also find considerable contributions to their bottom line and end up being very successful.”
Executive Leaders Radio is dedicated to featuring executive managers who have built strong, integrity-centered businesses through hard work, commitment and dedication. Listen to their radio interview with SSI CEO Carlos Tellez » http://www.executiveleadersradio.com/tellez-carlos-1473.aspx