Without Maintenance, Repair, and Operating Supplies (MRO), any manufacturing business would grind to a halt. MRO usually refers to any product or service that is used to support production. Examples are:
- industrial spares and repairs - valves, compressors, pumps
- plant maintenance supplies - lubricants, gaskets, repair tools
- consumables - cleaning, laboratory, and office supplies, protective equipment (PPE)
MRO usually accounts for 5-10% of a company’s Cost of Goods Sold (COGS). However, it accounts for 70% - 80% of all transactions and causes about half of the emergencies affecting plant reliability.
The Big Challenge in MRO Sourcing
There is continual pressure in any business to reduce costs. It may be finance or procurement that is driving the purchasing process because their goals are to spend as little as possible. Procurement teams often struggle with managing MRO because of the demands from operations to use certain suppliers or to hold excess or buffer stocks. Procurement, finance and operations have different priorities. Competing stakeholders are among the major reasons why MRO costs are not better contained.
A manufacturing organization often ends up buying MRO goods or services based solely on the lowest initial purchase price. So how do manufacturers get a grip on MRO costs? They need to understand the true cost of an item or service over its whole lifespan.
What is Total Cost of Ownership (TCO)?
MRO costs are not limited only to the purchase price of the item or service required. The total cost of ownership (TCO) is much more than that. We need to add
- sunk costs - research and development, testing and evaluation
- overheads - sourcing costs, administration, storage and inventory management
- cost of operations - installation, inspection, labor, spares, maintenance
- downtime, systems support
The iceberg example is the best way to explain TCO. 15% -20% of the total cost of a product is the original purchase price. TCO includes all the costs to acquire and maintain a product during the entire period of ownership. Up to 80% of the cost over its entire lifecycle are hidden from view. The lowest-price supplier is not the lowest-cost provider.
Direct and indirect costs incurred throughout a product’s lifecycle far outweigh any initial savings. A 5% saving on an initial purchase price is much more expensive than an annual 5% total cost reduction on that purchase over five years.
The Oil-and-Gas Control Valve Example
Experience has shown that only 10–30% of the total costs of control valve ownership is related to the valve purchase price. 70–90% is attributed to maintenance, repairs and operational costs over useful life. A small savings in purchasing cost upfront at the expense of device quality and its durability can cause much larger expenses later. Consider the financial impact of this device failure on lost production.
Applying Best Practices
The aim is to find the best performing, lowest maintenance and most overall affordable solution for each MRO requirement. Analyzing the TCO for a product or service involves looking at all the additional costs that may arise during a product’s lifetime. This includes the cost of downtime for installation and commissioning, routine maintenance and servicing, repairs and final disposal.
A large portion of a product’s TCO is storage costs. Many companies overlook the cost of carrying obsolete, slow-moving and excessive MRO inventory. Poorly managed inventory takes up costly warehouse space to store items that would be better managed through a vendor-managed inventory solution. The inefficiencies will only compound over time.
By working with a group purchasing organization all stakeholders, competing priorities or not, can be satisfied. A GPO solves any unique needs by addressing MRO spend holistically – savings, quality, delivery, supply and industry-leading suppliers operations wants to work with. That is why your GPO can help reduce your overall cost and TCO.
OMNIA Partners provides members with solutions to strategically manage MRO sourcing and inventory management. Our knowledge of cost drivers keeps us one step ahead of the market. The result is a fine-tuned program that delivers meaningful savings and quality, while preventing the undetected “price creep” commonly associated with unmanaged programs.