The ImporTance of ToTal cost of ownership In mro a focus on maintenance spares procurement white paper

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1 The Importance Of Total Cost Of Ownership In MRO A FOCUS ON Maintenance Spares Procurement White Paper

2 TCO White Paper Winter 2012 Executive summary When looking to reduce costs, many manufacturing companies will choose to buy maintenance, repair and overhaul (MRO) spares, such as bearings, motors, gearboxes and power transmission products based solely on lowest initial purchase price, only to discover that the direct and indirect costs throughout that product s lifecycle, in terms of acquisition, operating maintenance and production costs, far outweigh any initial savings. In this White Paper, Ian Ritchie Managing Director of Brammer, the UK s leading supplier of MRO products and services explains that while a reduction in price may offer an immediate, short-term gain, this is far outweighed by the financial and operational benefits of purchasing based on total cost of ownership. 01

3 TCO White Paper Winter 2012 The pressure to reduce costs In today s challenging economic climate, the need to reduce costs is as important as ever. A recent report from the Aberdeen Group a leading business intelligence and market research consultancy revealed that identifying cost savings was the top pressure that chief procurement officers face on a daily basis. Indirect purchasing spend is one key area where many manufacturing companies seek to make cost savings and the acquisition of maintenance and engineering spares often represents a significant proportion of that indirect spend. A simplistic approach is often taken to reduce costs in this area, purchasing the lowest price product that will do the job, with little or no thought given to the costs that may result down the line from that decision. However, for many maintenance and engineering components the initial outlay is only a fraction of the total operating expense. 02

4 TCO White Paper Winter 2012 The dangers of purchasing decisions based solely on price While some procurement departments may believe they are fulfilling their duties to the best of their abilities by delivering savings based on purchase price alone, many leading organisations recognise that optimising costs is a function of operations, maintenance and purchasing working towards the common goal of lowering total costs. The benefits of this approach are clear, particularly when considering that initial cost can account for as little as 10% of the total cost of ownership. The total cost of the product can include factors such as: > Cost of acquisition includes the cost of engineering, procurement, equipment cost, inspections and documentation > Cost of commissioning installation, testing, training and technical support > Cost of operation including energy costs, operating personnel, facility costs. Specifying the right equipment for the right application is critical to operating efficiently which lowers the energy, operation and maintenance expenses > Cost of maintenance includes maintenance personnel, maintenance facility costs, maintenance support and spares > Cost of production includes production downtime and losses, quality and environmental costs > Removal and disposal cost A policy based on simply looking for the lowest unit price product may also tempt some companies into shopping around, an approach which can result in choosing an unauthorised distributor to supply their requirements. This introduces risk into the supply chain as products from an unauthorised source are often not to the latest specification and may have been incorrectly stored and handled. It is also not uncommon for companies to acquire far more of a product than they actually need to get a bulk discount and so an even lower unit price. This can tie up cash in spares which may only be infrequently needed and may end up becoming obsolete. Put simply, while making a decision based on initial unit price might appear to bring savings at first, purchasing the cheapest product available is almost never the best policy when it comes to MRO spares. 03

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7 TCO White Paper Winter 2012 The advantages of total cost of ownership An increasing number of leading manufacturing companies are beginning to realise the many advantages of implementing a wellconsidered total cost of ownership approach to their MRO procurement strategy. The process has become more sophisticated with leading companies now seeking to work with a supplier partner who can offer the best total solution, as well as other value-added benefits. Significant cost savings are achievable when the total cost of ownership of each component is carefully monitored and measured, with this information then able to be used to inform future purchasing decisions. To demonstrate real value, total cost of ownership needs to be measured accurately. For example, say a company generates 100m a year in sales with a net profit margin of 10 per cent, or 10m. Meanwhile, an MRO supplier can demonstrate that it can save that company 100,000 in variable costs through reduced maintenance costs, energy savings and optimised performance. While this may not appear at first glance to be a substantial cost saving, it would require a 1 per cent increase in gross sales or 1m to achieve the same bottom line gain. An approach based on total cost of ownership looks at all of the additional costs that may arise throughout a product s lifespan everything from downtime for installation and commissioning, ongoing routine maintenance, servicing, repair and required consumables to eventual replacement and disposal. The supplier should be able to understand how products and services impact on a customer s operations and offer advice and recommendations for improvement. Best practice in this area therefore builds a strategy around finding the bestperforming, lowest maintenance and most energy-efficient solution, and factoring in anticipated maintenance costs after purchase. Only once this information has been ascertained will unit purchase price be considered. 06

8 TCO White Paper Winter 2012 The importance of technical expertise Another important factor, which may be harder to quantify and is often not considered by companies, is the support available should a technical or performance issue arise. This area is one of increasing importance, given the need to extract maximum life and value from MRO components, and is one where the availability of independent expert technical support and advice can prove invaluable. For example, once engineering staff are trained on how to maintain bearings properly, this will help optimise performance in this area of operations in future, ensuring best practice in maintenance procedures and maximising service life. This principle extends across all product areas, with expert advice able to deliver increased value moving forward. Each time a supplier solves a regular problem or identifies an improvement in processes, it should be documented. This is rarely undertaken, however, and because a company may be unaware that an improvement has been made, there is no way of measuring the enhancement in any kind of meaningful way. However, these improvements are a key factor in accurately measuring the success of a total cost of ownership strategy. The sooner these measurements are added into the equation, the sooner a company can determine the value of the service they are receiving. An authorised distributor, providing a comprehensive range of engineering spares and related services, will be able to review each application and then recommend and offer the best and most efficient solution from a full range of products from an extensive supplier portfolio. From its experience, this type of distributor will also be familiar with the issues with individual components that may be encountered and action that can be taken to mitigate against these. The distributor can also offer advice on maintenance and servicing strategy to maximise maintenance intervals minimising downtime and freeing up maintenance engineers to concentrate on other value-adding projects. Meanwhile, working with a trusted and authorised distributor guarantees quality assurance, consistent part numbering, instant confirmation of availability, total product traceability and a full manufacturer s warranty. 07

9 TCO White Paper Winter 2012 A long-term, sustainable strategy Perhaps even more importantly, total cost of ownership allows a long-term strategy to be established that will provide competitive advantages in years to come. An annual 5 per cent total cost reduction strategy is more than twice as valuable as a 5 per cent price reduction over a five year period. Why? Because a special offer is a onetime benefit. Conversely, a total cost of ownership strategy is an ongoing, incremental and sustainable plan, capable of continuously driving best practice throughout manufacturing operations. Factors beyond simply the quality and design of a unit can have a significant influence on performance. The maintenance a product receives, the environment it operates in and even how it is installed can all have a significant impact on how efficiently it runs. In order to implement best practice in operations, previous experience and technical expertise will play an important role in determining the most suitable supplier. 08

10 TCO White Paper Winter 2012 A collaborative partnership with Brammer Working with Brammer to manage MRO spares purchasing on a total cost of ownership basis is delivering real value for many customers, with significant impact on operational performance and profitability. An authorised distributor for many of the leading MRO spares manufacturers, Brammer can offer customers the benefit of a one-stop environment for all of their MRO product needs, alongside guaranteed availability and competitive pricing. Reducing the number of suppliers also helps streamline business processes, consolidates expenditure and eliminates expensive duplicated administration costs. Through technical expertise and experience, Brammer can analyse component performance and recommend the best solution available considering indirect maintenance and repair costs. This will ensure the customer is using the most suitable part for the job, delivering the advantage of high quality and costefficiency in the long-run. Brammer can also provide a range of services to help customers manage spares availability and reduce associated spares procurement and inventory management costs. At an increasing number of customer facilities across the UK, Brammer has established a part-time or full-time facility known as an Insite TM effectively an on-site Brammer branch which, as well as sourcing and supplying components, can deliver added value by managing parts inventories, standardising and rationalising MRO products and suppliers. For any facility requiring large numbers of spares, establishing an Insite TM can open up significant cost saving and productivity benefits, through a single source of supply. Technical help is also immediately available, enabling the Brammer team to quickly react to any unplanned downtime which may occur, as well as offer advice and expertise on a regular basis from an easily accessible facility. This feature also ensures that personnel time is not wasted, with the Brammer team freeing up valuable employee time for other important jobs. These partnerships are adding real value to customers by reducing acquisition costs, maximising plant uptime, reducing energy usage and reducing working capital, all impacting positively on overall competitiveness and profitability. Since 2007, Brammer has delivered more than 120 million worth of operational cost savings to customers across a range of manufacturing sectors in the UK, and a significant proportion of this has been achieved by taking a more strategic approach to total cost of ownership. Brammer s experience in identifying issues and assessing the most effective solution available means implementing an efficient and sustainable total cost of ownership strategy in partnership with an authorised distributor is now possible. 09

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12 If you would like to find out more about how Brammer can help you reduce your total cost of ownership please contact us: Brammer UK Ltd T:

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