Staying a Step Ahead by Comprehensive Industrial MRO Outsourcing

Transcription

1 . Staying a Step Ahead by Comprehensive Industrial MRO Outsourcing By Anup Varghese

2 Staying a Step Ahead by Comprehensive Industrial MRO Outsourcing Sourcing Maintenance, Repair and Operation (MRO) industrial spares has never been easier in select regions and is extremely difficult in other regions. Large buyers with MRO spends above USD 20 Million for a particular geography are able to partially outsource procurement and inventory management to integrators or aggregators. These integrators help consolidate spend across various MRO categories such as electrical, mechanical, PVF, power transmission, fluid power and much more. But are integrators present in all geographies? The answer is no. The United States, Canada and parts of Western Europe have a number of integrators that buyers can choose from. But what about regions such as Africa, Australia, the Nordic regions or the Middle East? Here, few or no integrators offer such services that buyers can avail. So the ease of outsourcing MRO functions depends on the availability of third part providers or integrators who are willing to take up the function. This whitepaper will address the various sourcing opportunities that buyers can avail in regions that are considered mature and emerging in terms of industrial MRO market supply. Sourcing Opportunities with Top Distributors in the Industry Most of the top MRO distributors such as W.W Grainger are present in regions such as Asia, Eastern Europe, Australia and Latin America (the emerging regions). As discussed, very few integrators are present in parts of Asia and the Nordic regions; however, Australia and Latin America rely heavily on distributors for large scale supply. Here we will discuss how a buyer can effectively engage with a wellestablished distributor for their MRO supply. However there are few questions to consider before we are able to negotiate or leverage the presence of a top distributor in your region. What is your MRO spend for the region? For a particular region spend more than USD million is considered an attractive account for the distributor. The more attractive your account is the more bargaining power you will have. Does your company have a procurement intelligence team? In order to know what price or product to negotiation on, you would need prior knowledge on the market and industry supply chain. Knowing what to leverage is the first step in strategy building. The same goes for knowing how to leverage your existing core supplier base. Buyers have the bargaining power in the MRO industry, hence buyers with significant spend can approach distributors for custom contracts that can enable cost saving in a 3-5 year period. So in order to stay ahead of the curve, buyers should approach their core distributors to address specific avenues for cost saving. These custom contracts should involve strategic Service Level Agreements (SLA s) that work in the interest of both the buyer and the suppliers.

3 The more attractive your account, the more bargaining power you have A fortune 500 buyer can adopt the following approach while engaging with a top distributor: Above: Engagement practice with top distributors Service Level Agreements (SLA s) that can be considered by buyers: 1. Criticality Based Service Level Agreements Agreement: The Buyer is willing to pay a premium for products that are critical, provided the supplier is willing to reduce the price for non-critical spares for the buyer. This could be revised year on year. As a buyer, what would you need to know? The buyer would need to be able to classify their supplies and products under critical and noncritical spares. This may include a simple part criticality analysis, which takes into consideration the important of the spare, the required lead time and the frequency of failure. It helps understand which products would require quick and timely replacements. Consider the following as a general outline to identify a critical spare in your factory: Products that can affect the output of the plant and cause downtime. Key products that have the highest lead time for supply. Products that are not stocked in inventory but affect the output of the plant. Highly customized parts that are not available locally but are sourced from an OEM. Step 1: Identify percentage parts that are critical and non-critical in your organization for certain spend pool or spend geography. Left: Percentage critical in a factory Step 2: Set service level agreements for the products that fall in the criticality buckets.

4 Above: Sample SLA that can be incorporated Advantage to the Buyer The buyer pays a lower price when critical and non-critical parts are paid together. This would require bundling the critical and non-critical parts to the same distributor. Advantage to the Supplier - Supplier knows which products to stock as critical. - Suppliers can avoid stocking non-critical products and ensure better warehouse inventory planning. 2 Demand Forecasting Benefit Agreements. Agreement: The Buyer is willing to pay a premium for products that are critical, provided the supplier is willing to reduce the price for non-critical spares for the buyer. This could be revised year on year. As a buyer, what would you need to know? The buyer would need to know which products and spares would be required in the factory on a continuous basis. This is to forecast the demand for a particular product or group of products (say, for the next three years). These products would include those that have high rate of replacement and cannot be replaced those that have had steady demand in the last three years. Advantage to the Buyer The buyer pays a lower price for products with high demand from distributors, and has significant saving over a 3 or 5 year period. Advantage to the Supplier - Suppliers have assurance of demand for the next 3 years and as continued business with the buyer for the product of high-demand. - Suppliers can plan their supply chain better. 3 Training Agreements Agreement: The buyer pays the distributor to train their in house maintenance team about critical part maintenance in the factory on a yearly basis. This will be followed up with free phone consult with the distributor for technical phone support. This will be revised on a yearly basis. Owning a well-trained staff on your MRO shop floor can help identify potential failures in critical parts in machines well before it reached the point of failure. It enables timely servicing of machines and proactive maintenance for parts that the distributor provides.

5 Agreements on training are useful when: - Buyers require a well-trained in house maintenance team on engineers for trouble shooting and machine servicing. - Buyers need to focus on proactive maintenance in order to reduce equipment downtime. - Buyers engage with acting integrators (large distributors who offer value added services). Advantage to the Buyer - The buyer has a better trained in house maintenance e team for proactive maintenance. - The buyer can maintain critical parts and machines without having to pay management fees to service providers (acting integrators) to come and repair/ service a machine. Advantage to the Supplier - Suppliers get to provide training (for a week) with a fee. - Suppliers reduce their demand for personal on site, in situations that require technical support from them. Buyers with high requirement for maintenance services at a plant level can transfers some of the in house maintenance functions to the supplier, which will involve the provider having a full time employee at the shop floor. This would also depend on the capability of the supplier to provide this service. Penalties also play an important role while engaging with strategic service agreements. If the supplier fails to meet any part of the contract, a compensation plan must be enforced. Hence, it is as important to document the penalties, which creating and establishing service agreements with suppliers. Outsourcing Opportunities with Top Integrators in the Industry Engaging with a third party MRO integrator such as Wolseley Industrial Group or Brammer has been a common trend for more than 10 years. Most fortune 500 companies operating in the Consumer Product Goods (CPG), food and beverage and pharmaceutical end user industries, outsource part of their procurement and warehouse operations to such integrators. This includes logistics, purchase order handling and invoice consolidation. In fact, around 40% of the saving an integrator can bring a buyer comes directly from invoice consolidation operations alone. The figure on the right depicts that North America alone accounts for 68% of the MRO outsourced market. The mature regions account for more than 90% of the outsourced market due to the availability of third party vendors who provide a variety of MRO services.

6 Right: MRO Outsourced Market by Geography In this section we will analyse these services to understand which services provides the maximum return and pose the least risk to a buyer. This will help buyers who are looking to select a limited number of services, to shortlist those with the most cost saving potential. Above: Exhaustive List of Key Value Added Services The table above provides details on each service that can be provided by top integrators. Here, we can understand the saving potential that each service providers to the buyer (which is indicative of the savings generated year-on-year), and the level of cooperation that is required by the buyer, in order to aid the integrator implement the service. The top three services that are known to provide maximum savings with the least risk are: Procurement outsourcing, Vendor Managed Inventory, and warehouse management. These 3 services combined provide around 80% of the savings that the integrator can generate and hence are of paramount value to the buyer. Most fortune 500 buyers have already outsourced their procurement and warehouse functions to third party vendors/ integrators.

7 Companies also consider in-housing all the warehouse functions instead outsourcing. This would be recommended for small spend level across few categories. However, large companies, such as fortune 500 firms, would need to undertake a vast array of functions and responsibilities in order to incorporate the best in class warehouse and inventory optimization operations in-house. Integrators have been perfecting the process or warehouse optimization for more than 1555 years, and any buyer attempting to in-house (or carry by themselves ) all these function, will be competing with a mature market that has been running for years. Thus, staying ahead with innovative optimization strategies may be something that takes years to achieve in an in-house strategy. Companies must choose strategies that are suiting to their spend level and geographies, whether it be integrators or distributors, a need for improving sourcing strategies is key to surviving in the current competitive market. For more information visit or write to anup.varghese@beroe-inc.com