MRO on the Move. Outsourcing maintenance, repair and operations

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1 MRO on the Move Outsourcing maintenance, repair and operations

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3 To improve quality in certain critical operations and reduce costs in others, many industrial manufacturing companies are turning to integrated maintenance, repair and operations (MRO) service concepts. While internal MRO services for industrial production are projected to decline by 3 percent per year over the next three years, the European market for external MRO services is expected to grow by 2 percent a year to about 60 billion ($82 billion) over the same period. With MRO on the move, and more external providers coming on scene, what does this mean for manufacturers? A.T. Kearney s recent study of MRO service concepts in Europe finds that the financial crisis spurred a trend toward MRO outsourcing as companies sought to cut costs. Our study shows that the trend continues and is both supply- and demand-driven. On the supply side, large MRO service providers are focusing on meeting customers needs by providing quality services at affordable prices. On the demand side, pressure on manufacturers to reduce costs has increased the attractiveness of and lowered the barriers to advanced concepts in integrated MRO services. MRO Service Providers: Managing Complexity MRO service providers offer a wide range of services from pure parts delivery and execution of services to comprehensive planning and coordination. These latter services are performed by integrated MRO providers that often take on additional responsibilities such as coordinating multiple parts and services categories and assuming responsibility for equipment performance. Providers of such highly integrated MRO services take on responsibility for manufacturers inventory, existing management and operations personnel, and implement IT solutions to monitor the flow of MRO products and services. In addition, full-service contracts often include meeting agreed-to equipment availability and agreed-to total cost reductions in processes and purchased parts. Essentially, integrated MRO service providers must master the complexity of their clients overall service and parts requirements. In Europe, MRO providers are differentiated according to their geographic and service-category coverage. Generally, geographic coverage is either national or European. (A few regional providers exist, but they typically deal in low-level service categories such as equipment cleaning, where salary levels do not justify long travel distances.) Service categories include maintenance and repair, operating material, equipment cleaning, equipment installation and assembly. mro on the move A.T. Kearney 1

4 Tracking Growth of European MRO Outsourcing Overall, MRO volumes consist of two elements: internal, generated by in-house MRO employees, and external, purchased from MRO providers. In 2009, total MRO volume in Europe was approximately 87 billion ($119 billion), or about 5 percent of the gross value-added of manufacturing industries. We expect an annual growth of approximately 0.5 percent through 2014 to about 89 billion ($122 billion). This is lower than the growth of the value-added of manufacturing industries, which we estimate will be 1.4 percent per annum through The lower growth for MRO is driven by the expected 2.6 annual decline through 2014 due to the scale effects and efficiency improvements in internal MRO services. We see outsourced MRO services growing 2.1 percent annually, to 60 billion ($82 billion), by Within the four main MRO service types, equipment installation and assembly will have the highest growth rate (5.6 percent) through 2014, while operating material will have the lowest growth rate but will remain the largest external MRO service type (see figure 1). In assessing the degree of outsourcing maturity and the level of integration of MRO services across countries, we found clear geographic differences. The highest levels of maturity and integration are in the United Kingdom, Scandinavia, Germany and the Netherlands. Southern and Eastern European countries, such as Spain, Italy and the Czech Republic, are not as mature or integrated. This is partly because production plants in Eastern and Southern Europe rely more on local workers and smaller companies to provide MRO services. Thus many large MRO service providers have not established service hubs in these regions because the demand does not justify the investment. Figure 1 European market for MRO services Overall MRO market volume: internal versus external ( bn, %) 0.5% (38%) -2.6% 29 (33%) Internal External MRO market volume by service type ( bn) 2.1% Maintenance % (23%) and repair (21%) 54 (62%) 2.1% 60 (67%) External 32 (60%) 4 (8%) 6 (11%) 0.6% 1.8% 5.6% 56% 33 (55%) 5 (8%) 8 (13%) Operating materials Equipment and cleaning Equipment installation and assembly e e Compound annual growth rate Source: A.T. Kearney analysis 2 mro on the move A.T. Kearney

5 Crisis Exposed, Decentralization s Disadvantages Growth for large European MRO service providers has come through either a centralized or decentralized business model. The centralized model, employed by only a few of Europe s large MRO providers, aims to achieve growth through comprehensive process integration and control mechanisms. Most providers, though, have relied on the decentralized model, which aims to acquire competitors and position them as local subsidiaries. These subsidiaries operate independently as long as revenue and profit targets are met. In periods of strong industrial output growth, this business model has proved to be ideal. However, the decentralized business model has its disadvantages (see figure 2). These became evident in , when the global financial crisis was at its worst. The independently operating structure that worked so well when industrial output was strong made enterprise-wide liquidity improvement efforts and cost-reduction initiatives difficult when the economy faltered. In other words, the lack of integrated processes and control mechanisms between headquarters and subsidiaries was a barrier to belt-tightening. The decentralized model also limited future growth with large customers that expected integrated service delivery for multiple manufacturing plants across several geographic regions, as such service delivery requires solid key account and delivery processes within the entire group, not just the local units. To address these disadvantages, several large MRO providers started integration programs to Figure 2 Decentralized business model Headquarters Purchasing Logistics Service delivery Sales and marketing IT Human resources Finance and controlling Management Supplier and service partner Subsidiary 1 Subsidiary 2 Customer Subsidiary 3 Subsidiary 4 Advantages Smoother integration and motivated local management Faster growth across geographies More knowledge of local issues and customer requirements Quicker decision-making regarding operational issues More barriers Disadvantages Less local support to implement cost reduction initiatives Little coordination of sales activities and operations across countries Key responsibility Source: A.T. Kearney analysis mro on the move A.T. Kearney 3

6 improve process alignment and control mechanisms between headquarters and subsidiaries. At the same time, several integrated providers streamlined their key account management processes in an effort to improve their methods for fulfilling customers needs for outsourced MRO services across geographies. We have observed several successful transformations to integrated MRO service provider concepts. Each followed a three-step approach (see figure 3). First, a health check is performed, which includes identifying existing MRO concepts and processes employed at the plant level. The MRO Demand: Transformation Programs for Integrated Services The trend toward outsourcing MRO services varies widely among industries. For example, many assetintensive industries such as chemicals, steel and paper continue to bring MRO service providers into their businesses. Their aim is to become more cost flexible, a lesson learned from the economic crisis. Other industries prefer to use predominantly internal MRO services combined with selective use of external MRO service providers for complex production equipment. These industries automotive is a prime example typically use nonstandardized production technologies. Pressure on manufacturers to reduce costs has increased the attractiveness of and lowered the barriers to advanced concepts in integrated MRO services. check also ensures the availability and transparency of MRO data in IT systems (for example, spare parts and services descriptions), identifies the MRO cost base for parts, services and processes, and makes sure that all prerequisites, such as availability of preventive maintenance, are being fulfilled. Figure 3 Integrated MRO services: a three-step process Perform MRO health check Define MRO concept Implement MRO concept Identify existing MRO concept and processes at plant level Check IT systems availability and transparency of MRO data Identify MRO cost base for parts, services, processes Determine prerequisites for an integrated MRO concept Define MRO concept at plant level Prepare action plan Prioritize MRO services Create implementation plan Assign responsibilities and define operational targets Launch implementation plan Set up program office Measure cost savings Source: A.T. Kearney analysis 4 mro on the move A.T. Kearney

7 Figure 4 Segment MRO services by operations and value-add Example: Automotive Critical operations Fulfill core MRO services quickly and easily Perform general maintenance of wear and tear parts Repair bottleneck production equipment Fulfill OEM-specific services Maintain robots Maintain OEM equipment Manage spare part production equipment Provide superior quality and service Capitalize on available internal resources Leverage volume effects of suppliers Non-critical operations Purchase general operations materials Optimize general production systems Clean machines Maintain forklifts Focus on cost savings Internal value-add External value-add Source: A.T. Kearney analysis Next, the overall MRO concept is defined, taking into consideration all the requirements of manufacturing, maintenance, purchasing and other functions identified in the MRO health check. At the same time, an action plan is prepared, outlining how to achieve all the prerequisites for implementing the integrated MRO concept. When defining the action plan, it is essential to classify MRO services into critical and non-critical manufacturing operations, and to differentiate between internal and external services according to their value-add (see figure 4). This ensures availability and quality of services for critical operations, and cost-savings for non-critical operations. Step three is implementation, where responsibilities are assigned and operational targets are agreed upon. Here a program-management office is essential to success, with senior management oversight to monitor and track implementation progress, measure cost savings and quickly resolve barriers. Some of the most common barriers to overcome include an inability to fulfill OEM specifications and warranties, excessive dependency on key suppliers, resistance to switching suppliers (after spending years building supplier relationships it is difficult to break them), and a general fear-of-risk inherent in many internal maintenance departments. For the latter two barriers, resistance to new suppliers can be alleviated through purchase-cost reductions and reducing the total number of suppliers to be managed; mollifying the risk averse can be accomplished by improving MRO services for critical operations. In the end, getting past these barriers is well worth mro on the move A.T. Kearney 5

8 the effort companies have reduced MRO costs by up to 15 percent per year for parts, services and processes using this transformation model. North America: A Step Ahead Integrated MRO service provider concepts are more mature in North America than in European markets. The North America industry has always We think the top providers in North America are excellent examples of what European integrated MRO providers could become. been more competitive and cost-sensitive; the economic downturn intensified their aggressive pricing strategies to gain (and retain) business. Many integrated MRO service providers are getting parts and operating materials from lowercost countries, and some are expanding into new products and services. Manufacturers are contracting with these suppliers for various capabilities, including sourcing, procurement, logistics, reporting, invoicing and payment for all parts and services. Integrated MRO providers in North America manage their customers manufacturing complexity for plants both within and outside their borders improving their processes, cost savings and delivery capabilities on an international level. We think the top providers in North America are excellent examples of what European integrated MRO providers could become. What sets these North America leaders apart? They: Have strong account management capabilities, which are used to better serve their customers in North America and, increasingly, outside North America. Leverage pricing and availability of local suppliers, then develop a solid supply chain to expand coverage across plants and geographic regions. Build close relationships with a large number of manufacturers and are nimble enough to leverage their technical expertise as necessary. Make seamless interactions with enterprise resource planning (ERP) and procurement systems and invest time and resources to connect online with their customers. Develop strong relationships with low-cost country supply sources, thus addressing customers demands for less expensive standardized parts and operating materials. Provide transparency into their MRO spend and use all relevant tools to optimize inventories. Delivering on Customers Requirements What do customers want? In which areas do MRO service providers need to do their homework and come up with correct answers? Cost savings, of course. Customers want to know in which MRO categories and processes the integrated MRO service provider can help them cut costs. They want assurance that quality and delivery are key capabilities and that their plants can be served on a global scale with common standards. With MRO on the move, those that offer the right answers in all areas costs, quality, delivery and global reach will be in the best position for success. 6 mro on the move A.T. Kearney

9 Authors Martin Haubensak is a partner in the automotive practice. Based in the Dusseldorf office, he can be reached at martin.haubensak@atkearney.com. Peter Wessmann is a partner in the operations practice. Based in the Dusseldorf office, he can be reached at peter.wessmann@atkearney.com. David Lamb is a principal in the automotive practice. Based in the Detroit office, he can be reached at david.lamb@atkearney.com. Stephen Mickelson is a principal in the automotive practice. Based in the Detroit office, he can be reached at stephen.mickelson@atkearney.com. Andreas Graef is a consultant in the Munich office. He can be reached at andreas.graef@atkearney.com. mro on the move A.T. Kearney 7

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