The purpose of this article is to outline the answers to the question so we are all prepared when we are asked: Why Can't We Do It Ourselves?
The industrial MRO consumer is not positioned in the MRO supply chain to realize functional discounts.
- Manufacturers who sell products via distribution will not, except for rare occasions, sell around their distributors to the users.
- Selling directly (manufacturer to user) does not eliminate the existing cost of distribution. Either the user or the manufacturer shoulders the cost; the costs do not go away.
- Manufacturers have distributors because it is not economical for them to process orders and ship to all potential clients, let alone exercise sales and marketing programs.
- The nature of MRO orders carries a wide diversity of products spread out over many categories. The average MRO order is $150; the number of transactions for the manufacturer would increase prohibitively as would the transactions for the user if all supplies were purchased directly.
The concept of bringing the distributor on-site so the user is out of the internal distribution business is designed to reduce costs for the user.
- Optimum cost reduction comes from eliminating an existing step in the MRO supply chain. If the user "did it ourselves," there is no step elimination and optimum cost reductions are not realized.
- The "integrators" are an offshoot of traditional distributors. These distributors maintain warehouses, local stocks and all the costs associated with MRO distribution. When the "integrator" obtains a client, there is cost reduction for the user, however, there is no elimination of a "cost step" in the chain. The integrated supply program will eventually fail because it cannot deliver year-after-year savings.
- Traditional distributors who operate/incorporate programs called "integrated supply" do so from a defensive position. Traditional distributors make more profit with traditional purchase orders than they do with "integrated supply" scenarios.
- Profitability considerations of the distributor dictate that the integrated function utilizes the inventories and assumes a proportionate share of corporate overhead. These considerations are manifest in the financial proposals to the industrial consumer. The effect is an improvement, but the optimum cost position is not achieved. In addition, the distributor/integrator will supply authorized brands only; this denies the cost saving opportunities available from alternate sourcing.
By definition, users will continue to own inventory if they "do it ourselves." If they utilize "vendor stocking," there would be multiple suppliers to audit with multiple invoicing variations creating higher administrative costs (add more people). In addition, users do not have the computer capabilities to control multiple inventory ownership, inventory controls, reporting and visibility of usage.
- If suppliers would agree to own inventory on site when the user is "doing it ourselves," the suppliers would charge higher prices because they have duplicated inventory costs. Distributors make money on price markups and multiple inventory turns on markups. Inventories that exist for one customer alone cannot be used for others, which effects lower inventory turns (revenue) for the supplier, ergo higher prices for the user. In addition, the unpredictable nature of MRO usage causes stock units to vacillate between repetitive and "just in case" usage. Inventory control and burden for the supplier would be unacceptable.
- One time, non-stock buys constitute 25% to 30% of the MRO buy. If the user elects to "do it ourselves," the burden of the one-timers remains with little control of prices and little recognition of repetitiveness.
Companies are not willing to invest the dollars necessary to convert existing stores into world-class operations or they would have done so. Dollars are invested in capital and production projects; the 6% to 10% MRO spend has little consideration.
In most companies, the MRO buyer passes transactions and does little sourcing because there is little time available. The inefficiencies of stores create rushes and out-of-stock situations that consume purchasing time. It becomes a "catch-22" and there is no time to stop and correct the situation. The function of searching, sourcing and (frequently) pricing is accomplished by the requisitioners, taking time from more productive duties.
Consider companies that have decided to do "IT" themselves; they exist in three categories:
- Those that have tried third parties and/or "integrated supply" and failed.
- Those that have a strong corporate indirect materials (MRO) purchasing department and have invested heavily in SAP-type computer systems.
- Those where a new senior manager comes on board and wants to show change.
In number one, the user has been burned and is reluctant to try again. This is a result of "integrators" who think coming on-site is a simple task and do not understand the commitment necessary for success. They do not understand the additional costs they incur until they realize that returns are inadequate. The opportunity costs become excessive.
In number two, it is us (corporate purchasing) versus them (the plant) or vice versa. Corporate price agreements are reached with national suppliers who exist as a result of the flawed market basket procedure. Pricing from the suppliers is based upon estimated (mostly overestimated) dollar consumption for the corporation. Plant personnel invariably can beat the corporate price (especially on any given day) to the detriment of the corporate agreement. Compliance is always a question, the level of which is directly proportionate to the strength of corporate purchasing. If a given site within the corporation recognizes the financial and non-financial benefits of hiring 3PMRO to operate its MRO stores, it is conceived by some in corporate purchasing as a threat to their department and a sapping of usage volume from the commitment to the selected suppliers. Corporate fights 3PMRO, stating that if one plant goes with 3PMRO and does not/cannot use the corporate supplier, the prices will go up to the other non-3PMRO sites. Nothing could be farther from the truth; the corporate suppliers will recognize competition and either offer 3PMRO a discount or reduce their corporate price. At the very least, they will not raise prices; what purchasing person would let them? Remember, corporate and the supply base cannot obtain compliance if the local plants decide to use their preferred supply base. If forced, the locals can slow down, show lower production, prove out-of-stock situations and beat the price.
In number three, the new manager looks at the existing financial program of the integrator and assumes the company can buy as well as the current supplier. There is little consideration that the company cannot buy properly, that it will add many suppliers and that it will increase transactions substantially. The manager does not realize the company will increase its costs by adding personnel, additional computer systems, increased inventory and a huge increase in their supplier base. Any price advantage would be temporary and would not be measured. The additional costs would obscure any perceived price reduction that may or may not be recognized. In addition, one-time spot buys would increase in price without control because they can.
With a strong corporate dictate, companies can deny the site the benefits of 3PMRO by saying to the site manager, "We have given you direction to the best suppliers and invested millions of dollars in SAP, et al; use the tools we have given you to 'do IT yourselves'." In these cases, site managers say phooey on it and turn to other site activities. The effect is the site continues with negative inventory turns, high levels of transactions, out-of-stock situations and little ability to reduce price - let alone measure it!
The graphs below show existing situations by comparing MRO (hammer) to production (steel). Note Figures 1 and 2. The administrative cost to process purchase orders is equal, re: steel versus hammers, however, look at the upside-down discrepancies considering the number of purchase orders, suppliers, emergencies, controls, history, dollar value and expertise.
Figure 3 shows the savings potential of MRO representing the largest percentage of opportunity for cost reduction.
Figure 4 shows the liability of an insignificant spend (MRO) at 8% while generating 80% of all transactions; this is another case for 3PMRO.
The conclusion is that no manufacturer should operate its own MRO stores. Management will not spend the dollars necessary to establish a state-of-the-art storeroom because MRO is generally considered an unrecoverable expense. As the saying goes, "It is what it is ... live with it."
If "doing it ourselves" is the best situation, why do companies continue the same process and incur the same avoidable costs year after year?
How Does Pure 3PMRO Differ?
- The cost of reengineering, installing, loading and implementing 3PMRO is paid by the user out of the savings the provider achieves as a result of the provider's position in the supply chain.
- The expertise and computer system indigenous to MRO must be already in place with the 3PMRO. The user simply replaces the current scenario with the 3PMRO model and reaps the benefits.
- Since a pure 3PMRO provider has no "traditional distributor" business, all assets and expertise is directed to goal achievement.
- This 3PMRO provider's financial model is not burdened with duplicated supply chain costs; therefore, the economic effects for the client provide optimum total cost of ownership benefits.
As the originator of the concept that became known as integrated supply, George Krauter currently serves as Vice President for Storeroom Solutions, Inc. Mr. Krauter's career began in Philadelphia and carried him through management capacities in all disciplines of the indirect materials supply chain, making him an authority on innovative methods in distribution and MRO outsourcing. www.storeroomsolutions.com.
James Rogers is Director, Southeast USA, Storeroom Solutions, Inc. James' career experiences include "mega projects on a global scale" from his start with engineering and construction as owner and operator of a South Carolina-based plant services company. He has dedicated his career to reliable plant performance. www.storeroomsolutions.com.