7 Key insights
every CPO should know
These 7 MRO Insights cover fundamental strategies to help your company navigate the complexities of this category. The MRO market is estimated at $1.7 trillion annually - $200 billion of which is in the industrial segment – make sure you’re optimizing MRO for your company now and for years to come.
THE 7 INSIGHTS
EVERY CPO SHOULD KNOW
Introduction: What is MRO and why is it important?
MRO stands for “Maintenance, Repair, and Operations.” It includes all of the goods and services required to keep a company running. While there is a difference in what is covered by this category of spend by company and industry, all companies have some form of MRO spend.
Defining the MRO category is often the first step to strategically managing the associated spend and supplier relationships – in other words, how does it differ from indirect spend? Does it include uniforms? How about the gasses used by maintenance? There is no right answer to any of the above questions, but having clear answers to them is a critical starting point for defining the category and the scope of the sourcing project.
The Real Cost of MRO
MRO is the category of spend “everybody loves to hate,” or, at the very least, the category everyone would prefer just to leave alone, which is a shame – because MRO spend represents a significant sourcing opportunity.
The MRO market is estimated at $1.7 Trillion annually – $200 Billion of which is in the industrial segment. MRO often represents as much as one third of a manufacturing company’s spend, divided between parts costs (roughly 1/3) and the processes associated with supporting and utilizing those parts (roughly 2/3).
An Undeniable Opportunity
Because MRO goods and services do not usually come into direct contact with the customer, it is often considered non-strategic and often receives a lower management priority from procurement. As a result, distributed purchasing decisions are made on a local or plant level, leading to a high level of information complexity and close working relationships between the buyer and their local vendor(s).
The item level cost of individual MRO parts tends to be low, and although these purchases quickly add up, they are likely to be overlooked during spend analysis and opportunity assessments. In the moment of need, there is no amount a part could cost that would prevent it from being purchased if it is able to keep the operations running. At the same time, there is rarely an expectation that MRO spend will be formally managed, perhaps because of the lack of category expertise on both the shop floor and in the boardroom.
A holistic approach to strategically sourcing MRO offers the promise of significant value because it incorporates both parts costs and process costs. With an achievable savings target of 10-15% category-wide, the opportunity is hard to deny.
In this eBook, we outline the seven key insights every CPO should know about the MRO spend category based on input from Tenzing’s experienced subject matter experts.
Insight 1: Production is King
The golden rule of operations is that production must continue – no matter what. Any threat to production, whether real or theoretical, has to be eliminated. The risk of downtime is ever-present, and all decisions that bring operational stability into question are viewed with understandable suspicion.
Because of this highly risk-averse mindset, working with new, unproven suppliers is often deemed too risky, even in a “non-strategic” category like MRO.
Different parts of the company deal with their fear of downtime in different ways. The CFO may monitor metrics that track production downtime on a per-hour basis, while inventory managers hold more stock than is necessary based on gut feel rather than historical demand data.
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Don’t Let Fear Get in the Way
Over time, this persistent fear of downtime leads to extremely loyal, long-term relationships between production facilities and their MRO supply partners. It is not unusual to find contracts in this category that extend back as many as 20 years, even when significant operational or demand changes have taken place over that time.
Unfortunately, a fear-driven management style does little to improve efficiency or optimize supplier capabilities. The only time many plant managers focus on MRO is when there is a problem. Then, regardless of the cost of the part, they tend to take whatever course of action will reduce friction and pain for the production team the quickest. This reactive, supplier-beholden approach to MRO may conceal a 10-15% savings opportunity, causing the company to overpay and under-receive year after year.
Insight 2: The 33/3 of Bits & Pieces
Frequently Asked Questions
What is MRO?
Essentially, MRO is everything needed to run a factory or production facility. Officially is stands for Maintenance, Repair and Operations and includes a wide range of parts and services needed to keep the production line live such as bearing, belts, fluids, tools gauges. It can also include items such as personal protective equipment (PPE) which fall outside the category of spare parts. What items are categorized as MRO varies from facility to facility – even within the same corporation. It is the catch-all category for all things related to manufacturing that aren’t direct materials, yet are essential to making sure your products are built in a timely, high-quality and cost-effective manner.