In heavy manufacturing, the amount spent on MRO (Maintenance, Repair, and Operating Materials) can be 3 to 5% of total spending. Optimizing the value of MRO can also be done with SMRP (Society of Maintenance and Reliability Professionals) metric 1.4 Stocked MRO Inventory Value as a Percentage of Replacement Asset Value (RAV). This metric references a target of less than 1.5% to be considered world-class. Regardless of the industry, you want to have the right part, in the right condition, and at the right time. You want this total package, but you also want it with a lower cash commitment.
Examples of reducing your MRO
To reduce the commitment of cash tied up within your spares without sacrificing the availability of spares, you can apply algorithms to control MRO (e.g. OpEmpathy, ReliabilePlant). Optimizing the size of your MRO could also be done with alternative ways to manage refurbished spares or incorporating error-proofing tools into your MRO. Indeed, these approaches could improve inventory levels, yet they do not address consolidation or the benefits of consolidating vendors.
In a perfect world, a manufacturing company would not have any spares on-site or cash tied up in spares. Instead, each spare would be immediately available and at a cost that is below the current market’s price. Sounds almost dreamy! Of course, this is not a reality. Instead, we must manage spares with the proper strategies and through the inventory transaction processes. To make these transactions as simple as possible, a consolidation of vendors would be optimum. But how do you measure and improve in vendor consolidations?
Measuring MRO Consolidation
When an organization commits to a holistic effort that consolidates the vendors that replenish MRO inventories, the company will recognize benefits in price, rebates, timeliness of delivery, training, and inventory value. There are a variety of blogs and articles that detail these benefits, but I have found zero that show you how to trend this consolidation journey. Following the rules of DMAIC, one can not improve if one cannot analyze. Additionally, one cannot analyze what they do not measure.
We must look at consolidation under two lenses and enhance the granularity based on the commodities. With the targets that I am proposing, each commodity may have different targets due to complexity or the criticality of supplier redundancy.
Supplier Roster Contribution - Leveraging the benefits of the 80/20 rule, trend over time, preferably by month, what percentage of your vendors receive purchase orders that consume 80% of your MRO cost. Consider starting with a target that 20% of your vendors should be 80% of your cost.
Count of distinct vendors - Especially important by commodity, a stacked bar chart, trended over time, to show how many vendors are within each commodity. The stacked bar chart should strive to decrease the size of companies within a commodity.
Long tail - Count how many vendors are in the bottom 20% of your cost. This should be trended over time to ensure that there are strategic partners for unique MRO spares and routinely confirmed that absorption by another vendor cannot be achieved.
A consolidation strategy in MRO allows you to establish strategic partnerships with vendors to streamline your procurement processes. These strategies set the stage for negotiating better pricing terms and potentially incorporating volume discounts. Getting this right in MRO will translate into a significant reduction in time and cost within the operations.