The business case for outsourcing

Posted on 1 Mar 2010 by The Manufacturer

The purchasing and management of spares for the daily operation, maintenance and repair of production and manufacturing equipment is often a complex, time and resource consuming issue for most organisations. It is, however, critical to maintaining continuity of production and avoiding costly downtime, says Brammer UK’s managing director, Ian Ritchie

Such complexity often means that internal purchasing and engineering maintenance teams find the bulk of their time is taken up dealing with the immediate requirements to keep production lines running. This has a significant impact on productivity and effectiveness, meaning that time to focus on proactive and strategic projects to improve their MRO procurement, or to maximise their production output and efficiency, can be scarce.

However, taking a proactive approach to optimising maintenance spares management will often deliver significant operational and financial benefits for manufacturing companies. Recognition of the complexity and opportunity for improvements is leading an increasing number of companies to outsource this function.

MRO spares management is often characterised by a number of factors which make managing this area of inventory especially challenging. For example, a manufacturing plant’s spares requirement will normally involve many thousands of stock keeping units (SKUs), most of which are technically complex and only used on specific plant equipment. These SKUs also vary greatly in volume and value, meaning an organisation must be able to economically order, receive, handle and store components that cost from a few pounds to thousands of pounds. Most MRO items have an erratic demand pattern, with only around one-third of spares consumption repeating in consecutive years. In many cases, the items come from a wide range of individual companies, meaning that rarely does the organisation enjoy any purchasing leverage.

The dangers of shopping around
Another key issue here is the relative roles of buyers and stores personnel. At worst, “promiscuous buyers” court multiple quotes for an item from different suppliers to get the best deal on the day — failing to leverage the potential of focusing on one or two key sources, while also building excess transactional costs and overhead inefficiencies into the purchase ledger function. Similarly, “stores squirrels” acquire greater quantities of an item than necessary, to obtain a volume discount — ending up with piles of non-moving stock which tie up cash and, ultimately, become obsolete and written off.

This issue is often compounded by a “just in case” mentality where, to avoid costly downtime, parts are held in unnecessary quantities as insurance against a possible delay in sourcing a key component.

Focusing on lowest price per item is rarely the best policy for engineering components; in fact, in almost all cases total cost of ownership is at least as important as initial purchase price. The risk of production downtime from a disparate and poorly organised MRO supply chain and stores environment is thus entirely avoidable.

Best practice is geared around both optimising inventory held at site, which should be routinely profiled to ensure accuracy and alignment with consumption of key components, and a focus on standardisation of key products and technologies throughout the plant. Leading-edge manufacturing companies harness the independent advice available from professional MRO distributors in both of these areas. Whether it is identifying the best product for a particular application that can deliver efficiency benefits — such as extended life, faster changeover, reduced maintenance intervals or reduced energy consumption — or providing real time analysis of spares demand patterns to enable stockholding to be optimised and ‘bad actors’ to be identified on the shop floor, the role of the professional MRO distributor can add serious value in this key operational area.

With the ever-present need to minimise business costs, it has to be questioned how much time it is worth spending on making phone calls or sending emails to save a couple of pounds here and there.

Not only will introducing additional suppliers ramp up business costs further, but an approach based solely on lowest price may result in companies unwittingly choosing unauthorised distributors to supply their requirements — meaning the products received may not be to the latest specification, may have been incorrectly stored or handled, and may even be counterfeit.

Outsourcing the entire process can remove all these issues, but once the decision is made to outsource spares management, how should it be implemented? One proven solution, developed by Brammer, involves establishing a dedicated site-based service (or ‘Insite’) at the customer’s premises — geared entirely to meeting the customers’ needs in terms of spare parts inventory management and the expertise and technical support provided. Total component acquisition costs are significantly reduced as the company is now dealing with only one supplier for all its MRO requirements, and real business benefits are delivered from the process improvements, stock management systems and technical support that are provided through this partnership approach.

This frees up in-house procurement, engineering and maintenance teams to focus on other more valuable activities, while allowing the company to access impartial advice and added-value services which can impact strongly on operational performance and profitability.

The reliable management reporting available will track component usage, which creates greater transparency and provides the basis for stock profiling, redundant stock analysis and targeted reductions in inventory and purchasing costs. Stock profiling, combined with vendor-managed inventory, will result in product and brand rationalisation, meaning a reduced spares stock holding and reduced working capital.

Meanwhile, technical consultancy and application advice that can identify process improvements, improve energy efficiency and provide products with a lower total cost of ownership are further examples of how an Insite can help ensure downtime is minimised and plant operational efficiency optimised.

Outsourcing MRO spares management to an authorised, professional distributor represents far more than just a way to deliver short-term savings through reduced administration and supplier liaison: it ensures continuity of supply and allows the professional MRO partner to enhance the customer’s cashflow and reduce working capital through optimising spares inventory. Perhaps most importantly of all, though, it delivers an environment where the customer and supplier can engage in a proactive way, collaborating to deliver a combination of operational performance and profitability improvements to manufacturing operations whilst eliminating risk.