Progressive Distributor - Beyond Year Three

Beyond Year Three

Do you have what it takes to truly optimize the MRO supply chain?

by Rich MacInnes and Jim Mulhearn

Our authors share their thoughts on the MRO supply world. One author worked for a large petrochemical company, the other worked for a large industrial PVF distributor. Today, as industry consultants, they share strategies for driving improvement in the MRO supply chain beyond Year Three.

The customer’s view . . .
Like many business professionals, we followed the Total Quality Management path to developing supplier alliances. Clearly, the expectation was to develop a strategic relationship with a handful of key suppliers.

Strategic had a nice sound to it. But what it often meant was identifying who we spent a lot of money with and how we could spend less in the future. As a capital-intensive business, MRO items represented a substantial percentage of our plant’s operating budget.

Three years later, we understand our purchasing advantage, but are we buying the right stuff the right way? Hard-dollar savings opportunities are no longer easy to identify; moreover, our distributors want to raise prices (something about providing services that they are not compensated for).

What do we do next?

The distributor’s view . . .
Our customers began their journey with the belief that MRO integrated supply had all the ingredients of success. Our task was to consolidate our customer’s purchases, leverage volume and deliver lower prices. We could capture the entire business if we expertly tracked and managed their inventory and delivered just-in-time to in-plant storerooms and point-of-use free bins. We wrestled with pricing arrangements that left the customer feeling like they were getting the best deal.

Three years later, our costs are still going up. We’re doing things we had never envisioned and now the customer wants to switch to Intranet-based e-commerce. We just now have our systems talking to each other. It’s clear that we took on something we had not bargained for. How do we get out of the trend where we spend more and our customer spends less?

The consultant’s view . . .
Much has changed since we engaged in high-level discussions to bring our two companies together in a strategic alliance. We have explored many more models of success, including lean manufacturing techniques, total productive maintenance, e-commerce-enabled supply chain management practices. Most importantly, we admit how poorly we understood the value proposition of participants in the MRO supply chain.

“Been there, done that, have a T-shirt to prove it” was a common statement we made during our customer-distributor alliance meetings. Looking back, had we really been there and done that? We certainly had our fair share of T-shirts. If we knew then what we know now, how our approach would have changed! In this article, we attempt to provide insights on how to drive MRO supply chain improvements beyond Year Three.

Why the Year Three bogey? This is when customers and distributors have exhausted all of the inventory management and purchasing clean-up activities. Management is no longer fascinated with the novelty of partnerships. Team members have come and gone, ideas have been tested, some even implemented. Grand expectations for cost savings have been vigorously challenged: is it hard-dollar or soft-dollar savings? Now we sit in meetings (if we can get people together) wondering if there are new ideas for improvement. If so, how much will it cost vs. save us?

Now is the time to step back and rethink the integrated supply model. Let’s begin by understanding waste in the MRO supply chain.

MRO supply chain waste
The goal of the supply chain optimization model is to reduce lead time and cost by eliminating waste in the MRO channel.

Perhaps the greatest breakthrough in thinking occurs when you study consumer response to value. At what point does a loaf of bread have value? When it is made? When it is stocked at the store? When you buy it from a store? When it is consumed? The consumer would say that bread has no value until it is consumed. Similarly, massive amounts of inventory at manufacturers, distributors and customer locations have no value until it is consumed.

Dieticians challenge our thinking about what we consume. Similarly, we must challenge the MRO supply chain. We have become so accepting of the need for inventory that it’s not a “necessary evil,” it’s simply “necessary.” Thus, the first three years of integrated supply activities to clean up, buy back and reshuffle inventory are a waste of effort, unless the goal is eliminating inventory through reducing lead time from demand to fulfillment.

As one begins to study the MRO supply chain, denial begins to creep in, and we hear the belief that you cannot get rid of distributors.

“Our customers and our manufacturers need us to hold inventory, given the uncertainty of demand in the channel.”

We caution distributors who are faint of heart to cover your ears, because the world of small batch production, build-to-order, e-commerce, instantaneous communication of demand to all resources in the production material supply chain has arrived. The future will see Web-based technology delivering orders real-time to manufacturers to direct ship to manufacturing end-users. Thus, the MRO supply channel looks like a browser, a box and a plane-truck freight combination.

For students of lean manufacturing, this model looks similar to the just-in-time, one-piece flow models currently enabling manufacturers like Toyota Motor Company to realistically expect to ship a vehicle within two hours of a customer order. If they can do it with a car, can it be done with a valve or a PLC? Right now, the MRO channel is not built to deliver this effectively or efficiently.

MRO supply chain optimization model
To begin the process of realistically identifying and eliminating waste, Net Results Inc. developed a four-phase MRO Supply Chain Optimization Model (Page 32) to guide improvement efforts and revitalize integrated supply efforts.

This model focuses primarily on the MR (maintenance and repair) components of MRO, the parts that can shut down a plant. This model integrates electronic commerce technology to optimize the flow of demand information through funds transfer upon order fulfillment. The model creates a road map for reducing total cost of ownership as supply chain partners focus on creating an agile, responsive and low-cost channel.

Let us briefly review each phase.

Phase 1: Stable Asset Management
During this phase, MRO channel partners begin to understand the magnitude of their opportunity. This phase is typical of start-up activities in an integrated supply agreement.

Inventory item descriptions are filtered and standardized to begin understanding the nature of past purchases. Inventory items are sorted, tagged, disposed of, moved back through the sales channel or put back into inventory.

Maintenance and construction activities are reviewed to understand demand drivers such as failure rates, preventive maintenance work orders and capital project schedules.

Technology is assessed for its ability to accurately capture usage, work activities, and to plan future work.

Phase 2: Smart Asset Utilization
During this phase, MRO channel partners begin to add intelligence to the channel design.

Purchasing tends to become decentralized through the introduction of work management rules. Inventory ownership shifts back through the channel. Payment is triggered by consumption. Process analysis and activity-based costing improves the MRO channel knowledge of what it takes to complete the order fulfillment cycle within demand requirements. Channel members become aware of cost-shifting activities.

Failure analysis (MTBF, mean time between failure) drives product standardization and redesign activities. Critical spare logic is introduced to optimize inventory sourcing and on-hand quantities of high-dollar, slow-moving inventory. Value stream mapping activities identify lead-time reduction activities.

Technology streamlines sourcing and fulfillment activities. Technology that is connected to both maintenance and storeroom functions has the best chance for identifying opportunities beyond Year Three.

Phase 3: Quick Asset Velocity
During this phase, MRO channel partners begin shifting to a variable pricing model such as Return on Sales and Return on Assets, based on results of activity costing analyses. Maintenance practices are redesigned to improve response time and overall equipment effectiveness.

Kitting by work order is introduced into cross-docking activities of distributors or logistics providers. Freight analyses are done to streamline delivery routes and costs using 3PL (third-party logistics) and 4PL (3PL with the addition of value-added kitting, sub-assembly, etc.) providers.

Vendor city models are reviewed for collocation of distributors and potential on-site location of distributor branches. Technology is leveraged to rapidly locate inventory, production and shipping information.

Phase 4: Agile Asset Flow
During this phase, MRO channel partners discover the financial incentives of lead-time reduction for order fulfillment and order payment. Payment technology facilitates ROA pricing and instantaneous transfer of funds based on consumption. Inventory-sharing networks are introduced within and between customer operations as well as a participating first-tier supply base. MRO manufacturers pursue one-piece flow, small-batch, quick-changeover, build-to-order strategies that reduce lead times to distributors, third-party integrators, logistics providers or the end-user customer. Logistics providers find ways to combine freight practices for both direct and indirect materials.

Maintenance operations begin to focus on modular maintenance practices, while routine maintenance activities are performed by operators (including ordering materials).

Technology enables MRO channel members to simulate future demand opportunities, create alternative distribution channels, move inventories between alternate and non-traditional stocking locations, and create instantaneous channels of communication necessary to coordinate demand-supply activities.

New thinking required
It is entertaining to suggest that a manufacturer does not understand distributor operations, and conversely, that a distributor does not understand a manufacturer’s operation. Sometimes the truth can be funny. However, this basic truth is an obstacle to true MRO supply chain optimization efforts.

If the goal is to move excess inventory back through the sales channel, consolidate purchases to capture volume discount, and to single-source items to reduce in-house purchasing staffs, then the “what do we do next” quandary sets in around Year Three.

What we do next is begin understanding the sources of demand. Why does equipment fail and how can we keep that from happening? Why is it so difficult to uninstall and reinstall equipment components to the detriment of equipment availability? How can we leverage technology to reduce lead-time in the order fulfillment process?

In essence, distributors or integrators need to increase their operational knowledge of the customer, and conversely, customers must clearly understand the MRO logistics process. Only through this knowledge can we significantly reduce the total channel lead time and costs while improving operational capabilities of all MRO channel members.

Customer demands have changed from, “This is what I want, sell it to me cheaper than your competition,” to “Tell me what I need, make sure it lasts longer, costs less to maintain, helps my maintenance people remove and install it faster, and keeps me out of the inventory ownership business, and I only want to pay for service, not products.”

Fortune 1000 companies are driving these new sets of challenges worldwide. Ironically it is often easier to go outside of the United States to initiate and implement this kind of breakthrough thinking.

New MRO supply chain models and competitors are now entering the integrated supply market. Who are these new players?

They’re engineering and construction firms providing operations and maintenance services. They understand the maintenance demand requirements the best.

They’re also international telecommunications and technology firms that buy large quantities of MRO materials and provide e-commerce solutions.

They’re third-party logistics providers that reduce lead time and cost for production material in a just-in-time environment. Third-party integrators do not own inventory, but provide the technology for integrated sourcing, delivery and invoicing.

They’re distributors that have spun-off separate integrated supply services business, enabling them to capture revenue for previously “provided free” services.

Lastly, MRO component manufacturers are using Web-enabled technology and logistics relationships to ship direct all over the world.

Do you have what it takes to truly optimize the MRO supply chain? The solution provider must be able to do more than own, sort and move inventory. Remember, value occurs at consumption.

The beyond Year Three winners must act like MRO dieticians to reduce lead times and costs and eliminate waste in the MRO supply chain.

Rich MacInnes and Jim Mulhearn of Net Results can be reached at (502) 228-5519.