What’s in store for MRO outsourcing?

Outsourcing maintenance, repair and overhaul (MRO) can offer real business benefits in terms of stock management, process improvement and technical support, reports Brian Davis.

Nuts & Bolts – Outsourcing MRO spares
management offers the following key benefits:

● 25-30% inventory reduction
● Reduced inventory costs with reduced working capital
● Reduced time spent on stores management and personnel costs
● Electronic catalogues for fast access to competitively priced spares
● Improved stock management data and transparency
● Standardised buying patterns
● Reduced downtime
● Better planning for scheduled maintenance and breakdowns

Manufacturing plants often carry considerable surplus spares and consumables as insurance for planned maintenance and breakdown, involving thousands of stock keeping units (SKUs) which vary in volume and value.

Demand patterns for MRO items tend to be erratic and some companies inevitably hold unnecessary volumes of spares to avoid potential downtime.

Increasingly, larger companies are outsourcing their MRO spares management to specialist distributors who are geared to optimising inventory held on site. Routine inventory profiling, often using specialist software, ensures better alignment with consumption patterns for key components and consumables. With the benefit of more accurate inventory data, key products and components can also be standardised throughout plants.

Jeremy Salisbury, head of marketing at Brammer, a leading supplier of MRO products and services, insists: “Outsourcing MRO is not simply a matter of cutting the price of spares. The risk of production downtime from a disparate and poorly organised MRO supply chain and stores environment is entirely avoidable.” Brammer offers a dedicated in-site service geared to meeting individual customers’ demands in terms of maintenance spares management. “Total component acquisition costs can be significantly reduced as the company is only dealing with one supplier for all its MRO requirements, maximising the benefits of supply chain consolidation.” Salisbury argues that the cost of the product accounts for only part of the cost of an MRO operation. “Many companies hold too much inventory in terms of engineering spares and consumables and don’t have good data on usage patterns, which impacts on maintenance management. Detailed management reporting creates greater transparency and provides the basis for stock profiling, redundant stock analysis and targeted reductions in inventory and purchasing costs. Improved stock management data, combined with technical and application advice, can help engineers standardise their spares strategy, delivering cost savings through product and brand standardisation and lower total cost of ownership, while reducing spares stock holding and working capital.” Brammer has been in the MRO supply business for more than 80 years but introduced the in-site service around 10 years ago. “We also provide application advice and condition monitoring, to help optimise production efficiency and minimise downtime,” he says. Brammer services larger production sites across a range of industrial sectors including automotive, food and drink (including Heineken, Coca Cola and Cadbury), metals (Alcoa and Alcan), packaging (Rexam and Crown Packaging) and pharmaceuticals (Johnson & Johnson).

“Some think outsourcing to a third party is simply a matter of getting lower prices, but that’s only part of the story. While our buying power enables us to offer highly competitive pricing, we also add a lot more value in reducing working capital and optimising production efficiency, helping companies identify operational cost savings and opportunities for continuous improvement.” The results speak for themselves. Since 2005, Brammer has delivered £90 million worth of operational cost savings to over 2000 customers in the UK.

An integrated approach
Integrated Engineering Stores Associates (IESA) is also delivering major cost savings and improvements in management information for big league players in the UK and abroad. The company has come a long way from first manufacturing shovels and spades in 1760, to providing a streamlined, integrated order process management service to manufacturers in food and drink (including Premier Foods, Northern Foods, Bakkavor, Carlsberg Brewing), automotive (Cummins Engines), pharmaceuticals (Astra Zeneca), packaging (SCA and SAICA Packaging) and FMCG (Proctor & Gamble and Kodak).

Ben Caldwell, IESA chief executive is the great, great grandson of the original founder, and claims he pioneered the idea of offering an integrated supply solution in the early-1990s. “I realised that the main cost was not simply carrying excess inventory but the cost of procurement and supplies management itself. There’s a process cost, people cost and inventory cost. Consequently I went to British Nuclear Fuels and suggested that the total cost of acquisition outweighed the cost of the goods, and offered a more integrated solution where we would handle suppliers direct.

Consequently BNFL gave us a £1.5 million contract, boosting our turnover by 50% at a stroke, and within 18 months we received similar contracts from GlaxoWellcome (now GSK), then Siemens Power Generation.” Today IESA is particularly strong in the food sector, and recently signed a 10-year supply chain management agreement with Premier Foods, the largest UK food producer, to manage engineering stores at 10 of the company’s UK sites along with procurement services at all other locations. “We are managing all the engineering stores within Premier Foods’ grocery division, including a portal of engineering catalogues covering their entire MRO requirements.” Centralised stock control and invoice management offer significant benefits. “Instead of processing 150,000 invoices a year, Premier Foods now only process 12 annually electronically. We’ve combined their total spend with our total spend, so we have significant leverage in the MRO market and are now working on commodity strategies to ensure that they get best of breed for the full spectrum of supplies,” says Caldwell.

“Often we find that up to half of MRO inventory at a new client’s site is for insurance spares, and is unlikely to be used for 5-10 years! Typically we reduce total inventory by 20%.” Supplies data is shared openly across all the sites. IESA currently manages 93 stores in the UK and Ireland, managing about 600,000 stock lines, and places 11,500 purchase orders a day.

As a rule of thumb, companies seek double-digit savings on MRO procurement, consistent pricing, a reduction in administrative workload, and dramatic reduction in the time wasted by engineers collecting MRO tools and materials. IESA will often purchase into a company’s existing stock, providing the client with a significant cash injection to the balance sheet.

Stock items are then managed via an IESA stores facility on site.

There are two models for MRO supplies management. IESA either employs its own people on client sites or provides software so clients can continue to use their own personnel on site. Either way proves to be an attractive financial proposition for clients. “Generally, we take over their existing overhead and reduce it by 15-20% in terms of their current costs,” remarks Caldwell.

IESA runs their supply operation on SAP in concert with custom-designed software to run the stores and catalogues. “No two clients are the same, so we have about 150 bespoke packages to serve clients. We mostly serve companies with spend exceeding £500,000. However, we have developed Internet catalogue portals which allow smaller firms to benefit from our leveraged prices.” IESA is an entirely independent operator.

“Unlike some of our competitors, we solely provide integrated supplies management and operate an open book with clients and suppliers, so our margin is understood and accepted.”

No on cost
Some manufacturers are wary of outsourcing following bad experience in other areas like IT services. To the contrary, Paul Lynch, sales director of the Integrated Solutions Division of Eriks, maintains: “Outsourcing MRO procurement and stores management shouldn’t cost you any more for a vastly improved service. Manufacturers should focus on their core competencies, whilst treating the engineering store as a support service.” Eriks offers a team of people onsite within a client’s engineering stores either utilising the customer’s ERP system or installing a bespoke barcoded stores management system. “Our solutions are tailored to meet individual company needs,” says Lynch.

Eriks currently operates a 12-person, 24/7 MRO supplies and management operation at a major food manufacturer, which has benefited from significant inventory reduction, product standardisation, improved service levels and reduced downtime.

Eriks also operates in a number of large paper mills, analysing consumption patterns to ensure that the right spares are available at the right time.

Eriks aims to ensure that the stores function dovetails into a company’s continuous improvement activities. For example, at a number of sites they provide a spares kitting service for predictive maintenance purposes. Furthermore, as a manufacturer of seals, hose assemblies and gaskets, Eriks can offer customised solutions from its own manufacturing facilities when problems occur.

According to Lynch inventory reduction is likely to be of the order of 25-30%, along with double digit reduction in total acquisition costs. “There is no question on cost, because essentially all our contracts produce savings for the customer, so the customer’s costs can only shrink.” Generally clients use a mix of Eriks personnel and TUPE (Transfer of Undertakings Protection of Employment) transferred customer staff for MRO stores management. Eriks has an electronic catalogue with over 250,000 items that clients can access, and claims to be the largest MRO industrial services provider in Europe, serving a broad spectrum, from food, paper, print and packaging, to pharmaceuticals and automotive. Their Integrated Solutions division now runs over 100 full time managed operations in the UK.

Though outsourcing MRO supplies management is a growing trend, why is it not more common? Lynch says: “There are still many companies which have large amounts of money tied up in engineering spares inventory. They are dealing with hundreds of suppliers, have a non-standardised approach, and spend an enormous amount of time and effort on non-core business functions. Because that’s the way they operate.” In those situations, outsourcing MRO supply management would evidently be a step in the right direction.