MRO on the move Transformation towards integrated industrial MRO services in Europe

Transcription

1 MRO on the move Transformation towards integrated industrial MRO services in Europe Industrial manufacturing companies continue to implement integrated MRO service concepts with the objective to improve service level and product quality for critical manufacturing operations and to realize cost savings for other operations. The European markets for external MRO services for industrial production will grow by approximately 2% per annum to 60 bn in 2014 whereas internal MRO services will decline by approximately 3% per annum. This is a structural change with extensive implications. A recent MRO study conducted by A.T. Kearney identifies recent market developments on the MRO supply and demand side in Europe. Af ter the economic crisis in 2008 and 2009 and its severe manufacturing output reduction, the transformation trend towards outsourced MRO services continues, driven by both the supply and demand side. On the supply side, large MRO service providers optimize their business model to better manage costs and to improve customer need fulfillment for outsourced MRO services across plants and geographies. On the demand side, industrial manufacturing companies continue to optimize their MRO services spend. During the economic crisis, lower utilization of manufacturing plants and higher pressure on overall manufacturing cost reduction lowered overall implementation barriers for advanced concepts such as integrated MRO services. MRO service providers: Mastering complexity of industrial production services MRO service providers offer a specific part and service category or multiple categories within the large spectrum of industrial service and supply in production-related maintenance, repair and operations for their customers. The role of MRO service providers varies significantly from pure parts delivery and execution of services to the entire planning and coordination of multiple parts and service categories with high level P&L and equipment performance responsibility. MRO service providers with planning and coordination responsibilities are defined as integrated MRO service providers. Such high integration of MRO services The structure of industrial maintenance, repair and operations service (MRO) in Europe is changing.

2 FIGURE 1: MRO service providers and key categories Example Automotive Segmentation of MRO service providers Key MRO categories: Parts and Services European National Geographic Scope Focus on Parts MRO Offering Focus on Services Maintenance and repair - Mechanical - Electrical - Operating material - Oil and grease - Safety clothes - Equipment cleaning - Water - Chemical - Equipment installation and assembly - Production line installation - Scaffolding - often requires transfer of inventory ownership to the service providers, takeover of existing management and operations personnel, and implementation of specific IT-solutions to monitor the flow of MRO products and services. Full service contracts often target an agreed to equipment availability or agreed to total cost reduction in processes and purchasing part costs. As a result, integrated MRO service providers must master the overall service and part complexity for their manufacturing customers. European MRO service providers can be differentiated according to their geographic and service category coverage. Geographic coverage is mostly either national or European. In few cases, MRO service providers may be classified as a regional, but this is typically for low skilled service categories like equipment cleaning where regional salary differences do not justify long travel distances. Service categories include maintenance and repair, operating material, equipment cleaning, equipment installation and assembly (see figure 1). European MRO markets: Strong growth of outsourced MRO services Overall MRO volume consists of two elements, the internal volume generated by internal MRO employees and the external volume purchased from external MRO providers. In 2009, total MRO volume of EU-27 was approximately 87 billion, equivalent to approximately 5% of gross value added of manufacturing industries. We expect an annual growth of approximately 0.5% with the total MRO volume reaching approximately 89 billion through It is lower than the growth of the value added of manufacturing industries, which is estimated at approximately 1.4% per annum through This is driven mainly by scale effects and efficiency improvements in internal MRO services with an expected volume decline by approximately 2.6% per annum through External, outsourced MRO services will grow above average with approximately Integrated MRO service providers master overall service and part complexity for their manufacturing customers. 2

3 2.1% per annum to 60 bn in Within the four main MRO service types, equipment installation and assembly will have the highest market growth rate of approximately 5.6% through Operating material will have the lowest market growth rate but still remains the largest external MRO service type (see figure 2). Assessing the degree of outsourcing maturity and the level of integration of MRO services across countries, a clear slope can be observed from North to South and West to East. Highest levels of maturity and integration can be found in UK, Nordic, Germany, and Netherlands. Southern European and Eastern European countries like Spain, Italy and Czech Republic show lower levels of outsourcing market maturity and integration. This can be explained in part by the production plants in Eastern and Southern countries having a different focus on preventive maintenance and metrics based optimization. In these countries, local workman and smaller companies play an important role in providing MRO services. In addition, many large MRO service providers do not have service hubs established in these regions and the contract volume in these regions has yet to achieve the volume necessary to invest into new service hubs. MRO supply: Crisis triggered an optimization of de-central business models Large European MRO service providers typically rely on one of two key business models to grow: centralized or de-centralized model. The centralized business model aims to achieve organic growth with a high-level of process integration and control mechanisms for established operating units or subsidiaries. Only a few of the large MRO service providers currently follow this business model. A higher number of large MRO service providers use a de-centralized business model. In the de-centralized model, growth across geography and service offerings is initiated by acquiring competitors and positioning them as a new unit or subsidiary with local management and operations. Management of subsidiaries operate independently, as long as revenue and profit targets are met. The overall integration level for processes and controlling mechanisms between headquarter and subsidiary is low. In periods of strong FIGURE 2: European market for MRO services Overall MRO volume: Internal vs. external ( bn, %) (38%) 0.5% -2.6% (33%) Internal External market volume per service type ( bn) (21%) 2.1% 4.4% (23%) Maintenance and repair 32 (60%) 0.6% 33 (55%) Operating material 54 (62%) 2.1% 60 (67%) External (market) 4 (8%) 6 (11%) 1.8% 5.6% 5 (8%) 8 (13%) Equipment cleaning Equipment installation and assembly CAGR

4 industrial output growth, this business model was ideal to grow quickly and to achieve above average returns. There are both advantages and disadvantages to a de-centralized business model for large MRO service providers (see figure 3). However, during the industrial crisis in 2008 and 2009 key disadvantages of the de-centralized business model became evident. For example, the independent operations structure that allowed companies to outperform during periods of industrial output growth resulted in an inability to execute enterprise-wide liquidity improvement efforts and cost reduction initiatives. The lack of integrated processes and control mechanisms between headquarters and local units turned out to be a barrier to implement these types of belt-tightening measures. The de-centralized business model also limited the successful future growth with large customers who expect integrated service delivery for multiple manufacturing plants across several geographies. Service delivery across geographies requires solid key account and delivery processes within the entire group. To address these disadvantages, several large MRO service providers started integration programs to improve process alignments and enhance control mechanisms between headquarter and subsidiaries to better manage liquidity and costs. At the same time, several integrated MRO service providers also improved their key account management process to improve customer need fulfillment for outsourced MRO services across customer plants and geographies. MRO demand: Transformation programs for integrated MRO services The overall trend towards outsourcing of MRO services varies significantly between industries. The trend towards implementation of integrated MRO service provider con- FIGURE 3: De-central business model of MRO service providers Headquarter Supplier and service partner Subsidiary 1 Subsidiary 2 Subsidiary n Customer Advantagesg High level of independence for acquired subsidiaries leads to motivated local management Fast growth across geographies possible Subsidiaries with knowledge about local situation and local customer requirements Fast decision-making in local subsidiaries concerning operational issues Key responsibility Disadvantagesg High barriers and lack of local support to implement cost reduction initiatives, e.g. by purchase volume bundling, supplier harmonization, process alignment, warehouse network optimization etc. Difficult coordination of sales activities and operations across countries (e.g. key account management for global customers, harmonized goto-market approaches for organic growth initiatives, improved service resource utilization etc.) 4

5 FIGURE 4: Transformation program for integrated MRO services Step 1 Conduct MRO 2 Define 3 health check MRO concept Implement MRO concept Activities Identify existing MRO concept and processes on plant level Check availability and transparency level of MRO data of IT-systems, e.g. spare part and service descriptions Identify MRO cost base for parts, services, processes Check fulfillment of prerequisites for an integrated MRO concept, e.g. preventive maintenance concept Define MRO concept on plant level based on findings of health check, e.g. integrated concept Prepare action plan to achieve all necessary prerequisites for concept implementation, e.g. sufficient data transparency Segment MRO services according to level of manufacturing criticality and external/internal added value Set-up implementation plan Assign responsibilities and define operational targets for implementation Kick-off implementation with senior management attention Set-up program office function to continuously monitor implementation progress and to quickly resolve barriers Measure cost savings Results MRO health check conducted MRO concept defined MRO concept implemented cepts continues in many asset-intense industries, e.g. chemical (basis, specialty, petrochemical), steel, pulp and paper. These industrial customers aim to increase cost flexibility as a lesson learned from the 2008 and 2009 world economic crisis. Within the chemical industry, for example, independent chemical park operators compete against integrated MRO service providers which are often owned by the chemical companies for whom they provide services. Other industries prefer to use predominantly internal MRO service resources combined with selective use of external MRO service providers for complex production equipment. These industries (e.g. automotive) typically use specific and non-standardized production technologies with a high share of specific production equipment. In recent client engagements, we have seen several successful transformations towards integrated MRO service provider concepts each following a three-step approach (see figure 4). First, a MRO health check is conducted to identify the existing MRO concept and processes used on a plant level. It is important for every transformation towards integrated MRO services that all prerequisites such as availability of preventive maintenance concepts are fulfilled. During step 2, the overall MRO concept is defined considering the requirements of manufacturing, maintenance, purchasing and other functions that were identified in the MRO health check. By the end of step 2, a detailed implementation plan has been developed. The final phase of the transformation is implementation. In this phase, responsi bilities are assigned and implementation targets are agreed to. Incorporating a program management office to monitor and track implementation progress and the resulting cost savings is critical for the success of the concept. In several cases, cash effective MRO cost savings of up to 15% for parts, services and processes have been implemented in a 12 months period. 5

6 FIGURE 5: Segmentation of MRO service categories Example Automotive Segmentation of MRO service categories MRO customer requirements Critical operations Objective: Fulfill core MRO services quick and flexible General maintenance of wear and tear parts General repair of bottleneck production equipment... Objective: Fulfill OEM specific services Maintenance of robots OEM equipment, e.g. presses Spare part management of production equipment... Superior service level and product quality Objective: Utilize available internal resources Objective: Leverage volume effects of suppliers Non-critical operations Purchasing of general operations material Optimization of general production systems... Cleaning of machines Maintenance of forklifts... Cost savings Value add internally Value add externally In several cases, MRO cost savings of up to 15% for parts, services and processes have been implemented in a 12 months period through this transformation. When defining the MRO concept, one key success factor is a stringent classification of MRO services into critical and non-critical manufacturing operations and differentiating between internal and external services according to their added value (see figure 5). This classification ensures availability and quality of services for critical manufacturing operations and cost savings for noncritical operations. This classification also helps to overcome implementation barriers from manufacturing plants. Fulfillment of OEM specifications and OEM warranties, a general risk avoidance attitude of internal maintenance departments, long-standing supplier relations and a fear of supplier dependency are the most prominent barriers which we identified during our assignments. Risk avoidance of maintenance departments is lowered by implementing improved MRO services for critical operations, e.g. bottleneck production. Resistance for supplier switches can be overcome by implementing purchase cost reductions and reducing the total number of suppliers to be managed. With a higher level and maturity of integrated MRO service provider concepts in North America, it is worth to look on the key strategies of these North American market players to derive first conclusions for the European market. North America: One step ahead when it comes to integrated MRO service provider concepts After the 2008 and 2009 economic crisis, the North American MRO marketplace continues to be a highly competitive and cost sensitive industry with intense competition for high volume manufacturing customers who are relying on the services of integrated MRO service providers. The 6

7 Successful North American MRO service providers improve the process, cost and delivery capabilities of their business model on an international level and thus, could be a role model for integrated MRO service providers in Europe. recent economic downturn has intensified the competition as MRO suppliers aggressively price to gain and retain business. Many integrated MRO service providers are increasing their focus to source standard parts and operating material from low cost countries. North American MRO suppliers are moving towards increased geographic scope, product breadth and service offerings in an effort to better fulfill customer requirements. Increasingly, manufacturing companies are looking for MRO suppliers to become integrators and provide the sourcing, procurement, logistics, reporting, invoicing and payment for all MRO parts and services. Successful North American integrated MRO service providers focus on strategies to strengthen their key capabilities for integrated MRO service offerings (See box on next page). Integrated MRO service providers manage their customer s manufacturing complexity for entire plants inside but also outside of North America. Successful MRO service providers improve the process, cost and delivery capabilities of their business model on an international level and thus, could be a role model for integrated MRO service providers in Europe. Integrated MRO service providers in Europe: Fulfillment of customer requirements Sales and key account teams of integrated MRO service providers should tailor their service offerings to key customer requirements. It is critical that each service and delivery FIGURE 6: Strategic questions of customers to evaluate integrated MRO services Customer requirements Cost Quality Delivery Strategic questions of customers For which MRO categories and processes does the integrated MRO service provider demonstrate capabilities to generate cost savings? How does the integrated MRO service provider achieve purchasing, delivery and process cost savings? Which levers are used by the integrated MRO service provider to improve quality of MRO services especially for bottleneck production areas? How does the integrated MRO service provider ensure appropriate spare part and service quality? How can integrated MRO service providers improve overall internal and external logistics including warehousing? Which levers are used to improve the availability of critical spare parts and the delivery of critical MRO services? Global reach Can the integrated MRO service provider serve the plants cross-regionally with common standards? How are processes standardized and supply bases aligned globally? 7

8 proposal offers answers to customers strategic questions (see figure 6). European MRO service providers will successfully achieve above average growth with an integrated service concept if they manage to answer these questions and demonstrate the capability to deliver an integrated MRO service offering to their target customers. Industrial MRO and A.T. Kearney A.T. Kearney has extensive knowhow in defining and implementing integrated MRO service provider concepts for industrial companies across various industries in a joint initiative with purchasing and maintenance departments. These projects address a broad range of MRO relevant areas from MRO purchasing strategy to organizational alignment in maintenance and purchasing, supplier relationship management, MRO performance management and Key strategies of North American MRO service providers Key account management: Successful integrators build strong key account management capabilities to serve their customers in North America and increasingly outside of North America. Relationships with local suppliers: Successful integrators leverage the pricing and availability of local suppliers and build a solid supply chain solution and develop it. This is a key strategy to improve and expand coverage across plants and geographies. Manufacturing/technical expertise: Successful integrators have close relationships with broad number of manufacturers and can leverage their technical expertise when needed. Systems capability: Successful integrators have enhanced capabilities to make interactions with ERP/procurement systems (e.g. SAP and Ariba) and technologies (XML, EDI, etc.) seamless. These companies are also spending more time and resources to enhance connectivity with their customers through their websites. Access to low cost country sources: Successful integrators have developed supply sources from low cost countries to address costumer demand for material cost savings for standardized parts and operating materials. Spend management and inventory management capabilities: Successful integrators quickly gain transparency over the MRO spend and leverage tools to optimize inventory. other relevant areas. Our methodology uses a total-cost-of-ownership analysis to achieve a com pany optimum instead of local solutions in maintenance, purchasing or logistics. Authors: Dr. Martin Haubensak is based in the Duesseldorf office and can be reached at martin.haubensak@atkearney.com Dr. Peter Wessmann is based in the Duesseldorf office and can be reached at peter.wessmann@atkearney.com David Lamb is based in the Southfield office and can be reached at david.lamb@atkearney.com Stephen Mickelson is based in the Southfield office and can be reached at stephen.mickelson@atkearney.com Andreas Graef is based in the Munich office and can be reached at andreas.graef@atkearney.com A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO agenda issues to the world s leading corporations across all major industries. A.T. Kearney s offices are located in major business centers in 37 countries. For more information please contact A.T. Kearney GmbH Marketing & Communications Kaistraße 16A Düsseldorf Tel.: +49-(0) marcom@atkearney.com Copyright 2010, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney is a registered mark of A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer