THE 7 INSIGHTS
EVERY CPO SHOULD KNOW
Insight 2: The 33/3 of Bits and Pieces
Although there are some differences, approximately 25-50% of MRO category spend is consistent across companies. The most common examples include valves, fittings, personal protection equipment (PPE), paint, vehicle maintenance, and complicated service relationships. With the right MRO provider relationships, it becomes possible – and effective – to identify the critical spare parts that should be stocked onsite and then partner to receive deliveries for the others.
An MRO Success Story — Avoiding the Single-Supplier MRO Trap
Following a merger of two first tier automotive companies, the new enterprise needed to rationalize $400 M of annual MRO spend across sixty global production facilities while ensuring continuity of operations. This initiative required an integration effort of unprecedented size and complexity for the team.
Implementing an Optimal Two-Tier MRO Supply Base
At the outset, there were over 100 MRO suppliers: 10% of the total supply base. This was the result of long-standing, autonomous purchasing at the plant level. Distributed buyers had been given free rein to purchase what they needed when they needed it, and to select the supplier(s) they wanted to buy it from. Historical spend was only available internally at the aggregate level, and while it was ‘directionally accurate’, item level detail had to be collected from suppliers and then combined and cleansed before sourcing could begin.
The project objectives were:
- Standardize and combine the two MRO supply chains
- Maximize savings
- Complete the project as quickly as possible
A new enterprise needed to rationalize $400 M of annual MRO spend across sixty global production facilities while ensuring continuity of operations. Together we generated over $30M in annual savings.
Of critical importance is building credibility at the plant level on MRO issues. When the plant managers and production leads have confidence in the MRO supplier selection process, they will use the suppliers selected. Trust also helps facilitate knowledge transfer and company-wide adoption of best practices and process improvement approaches.
The team laid a foundation for long-term success by connecting leadership teams of strategic MRO suppliers with the company’s executive leaders. With improved dialog, everyone had a stake in the success of the MRO strategy.
The MRO team achieved success by doing the following:
Included team members with insight into providing perspective on how the extensive list of MRO spend subcategories could be consolidated, keeping in mind the needs of distributed buyers and centralized procurement.
Assumed full responsibility for the MRO sourcing effort, including project management, internal communications, and transfer of responsibility as the client team reached full scale. Key stakeholders remained actively involved in the decision making so they felt a sense of ownership.
Planned for long-term sustainability of MRO. Set strategic (corporate) and tactical (plant-level) action plans in motion while establishing a clear set of expectations for the MRO suppliers awarded the majority of the spend.
Sustainable Results Now and for the Future
The CPO was able to secure an actionable mandate and organization-wide support from the CEO and head of operations. This plus, proactive budget reductions, incented all teams to engage in the sourcing effort, ultimately generating over $30M in annual savings.
There were preconceived notions—about some of the largest players in the industrial supply industry. These assumptions needed to be addressed and overcome as part of the sourcing and supplier evaluation process. Several large suppliers played a critical role in achieving the intended scale and impact in the MRO category.
A Triple Win — Better Supplier Performance, Lower Costs, Easier to Manage
Many companies attempt to consolidate MRO into one or two strategic suppliers. This often results in those suppliers operating well outside their “sweet spot”—the suppliers are thereby overcommitted and often under-deliver.
Key to success is finding outside experts’ with know-how and insights into the MRO market and individual suppliers’ capabilities, and avoid the single-supplier trap and find a more optimal solution.
The existing supply base of several hundred suppliers was rationalized to 5 strategic suppliers, each playing to their strengths and about 20 specialty suppliers with capabilities in critical niches. The new supply base is performing better at lower costs while being easier to manage—a triple win.
Above and Beyond
The team successfully bridged the interests and cultures of the company’s centralized, corporate procurement and its distributed plant-level buyers.