Managing MRO Consumables With Distributor Partnerships

Author(s):

Lawrence M. Brandt
Lawrence M. Brandt, Senior Supervisor Bethlehem Steel Corp., Chesterton, In 46304, 219/787/2454

81st Annual International Conference Proceedings - 1996 - Chicago, IL

The Issues. Purchasing is under more pressure to add value to the company's bottom line. Unfortunately, in MRO, the most visible purchasing activity is more clerical that substantive, and can be viewed as no more than a waste of personnel resources. We owe it all to MRO consumables and the inordinate amount of time we spend trying to buy the vast array of products and items in a timely fashion. The search is on to find a better way of purchasing these nickel and dime items while also making greater contributions to the corporate efforts. One way is to rethink the world of distribution and harness the tremendous resources it represents to satisfy the internal clients and raise the level of purchasing from transaction execution to commodity and process management.

The Challenge. Companies that spend 5-10% of their purchases on MRO consumables usually discover that these low priority items eat up about 80% of their procurement and material management resources. This alone translates into a potential 35-50% total cost premium related to acquisition, possession and disbursement of these low value materials.

Even more significant is the impact on maintenance by not having these parts available when needed. Maintenance people are forced to spend large amounts of time "looking" for parts with extra effort in "identifying" if it is the right part. Having failed to find the part in their own shop or work area, the intrepid maintenance people then spend time roaming the facility, looking for what is needed anywhere and everywhere. In desperation the search may include a trip to the Storehouse where the odds of getting the right part are seldom very good. Ultimately a request is turned in to a formal requisition and purchase order, phone calls are made, and eventually a distributor's truck pulls up with the right part, most of the time.

If time does not allow for all these activities, the intrepid maintenance person will use whatever is available and "make it work". Delays are not allowed to be caused by lack of material. This would be the death knell for maintenance management who invariably has the responsibility for managing parts in the shop or work area.

Over the years maintenance has tried several things to get "control" of parts: tool rooms, attendants, tub files, bins, shelves, more people, computer programs, tags, more people, bigger Storehouses, more shelves, bigger bins, more inventory, and the ever popular - more people. With limited success, most of these efforts have not only failed, they have made it worse. And of course, not having parts when needed results in poorer maintenance execution, lousy planning, excess stocks of the wrong stuff, a housekeeping nightmare, and lots and lots of extra cash being spent for rushes, bins, shelves, computers, people, wasted search time and higher parts prices. In the end the equipment doesn't run exactly the way it is supposed to, it has to be "tweaked" constantly, breakdowns are more frequent than desired, and ultimately the product that comes off the line is not as good as would have liked. All because parts management is cumbersome, difficult, expensive and generally ineffective.

There is hope.
The Situation. The first step is to recognize that there are two types of spare parts, consumables and engineered products:

  • Consumables
    • high turnover
    • low value
    • (Stores type stuff)
  • Spare Parts
    • low turnover
    • high value
    • engineered (usually have a drawing)

While the breakdown between the two in terms of numbers may differ widely between industries and companies, the statistics for our steel plant are probably quite representative of a manufacturing operation:

Consumables (circa 1984)

  • 200,000+ items
  • 5-8,000,000 pieces
  • $17,000,000 "value"
  • 1.5 turns per year (9 mos.+ supply)
  • 200+ "known" storage locations
  • real time computer management system

Spare Parts(circa always)

  • 2,000,000 pieces
  • $160,000,000 "value"
  • 1 turns per year
  • 100+ storage locations
  • 1.4 million sq. ft. (1.2 million outside)
  • real time computer management system

Mission. The second step is to separate the management strategies used to control and make available the different parts:

Consumables

  • focus on availability
    • easy access
    • parts identification
    • storage conditions
    • reliable replenishment
  • primary resources
    • point of use storage (open stock)
    • distributor resources/efforts
    • distributor computer system

Spare Parts

  • focus on accuracy of data
    • identification/tagging
    • storage location
    • quantity on hand
  • primary resources
    • storage buildings (both on and off site)
    • computer data management
    • labor to record receipts/disbursements/audits

The general strategy is for maintenance to direct their energies to control and manage the "engineered" spare parts and let the distributor supply base address availability of the "consumable" spare parts. The purpose of this presentation is using the "Systems Contract" approach in letting the distributor manage the consumable supply chain.

Perhaps a digression is in order. Let's more clearly define "consumables":

MRO Consumables - Examples

  • cable, slings and wire rope
  • pipe, valves and fittings
  • power transmission equipment
  • office supplies
  • cleaners and solvents
  • hose and hose fittings
  • idlers and parts
  • tools and tool repair parts
  • cylinder gases
  • welding and cutting material
  • fasteners
  • drum lubricants
  • tires and truck parts
  • elec. wire, conduit, etc.
  • safety supplies
  • general industrial supplies
  • packaging paper
  • printed forms

The Strategy. The basic systems contract idea is to identify and manage the consumables supply chain using single sourcing with distribution as the primary application technique. It starts with listing the supply chain activities:

Supply Chain Activities

  • identify needs
  • material request
  • purchase order
  • receive material
  • put material away
  • disburse parts
  • use the right part
  • replenish stock
  • manage the inventory
  • provide for return goods
  • process the invoice

While this appears rather simple, and all companies already have ways of accomplishing these tasks, the question is "if procedures already exist, and are being followed, why don't the maintenance people have their parts when they need them?" In fact, the above process is loaded with extra time delaying steps and redundant/duplicate efforts. An approval system alone adds days to the process. Above all, the most time consuming and difficult task is identifying what is needed.

The primary objectives of the Systems Contract concept, then, are:

  • reduce search time for maintenance people
  • make sure the correct part is always available
  • carry no more stock than is necessary
  • provide quick technical and problem solving response
  • obtain the best total value for each application

The Method. The process of developing and installing an effective systems contract starts with the Survey, which is performed by the sole source supplier selected for a given commodity. The object of the survey is to document the answer to three questions:

  • What parts are currently on hand?
  • What and how many parts are needed for day-to-day maintenance?
  • Where should the parts be stored for easy and open access?

The process of doing the survey involves identifying the maintenance end users, conducting interviews, taking a physical inventory of stock on hand in the shop or work areas, and compiling lists and recommendations for reorganizing the material.

Reorganization of the storage locations is designed to create open stock access with clear and uniform material identification along with reliable replenishment. During this phase of the program much excess, obsolete and scrap parts will be uncovered. It is in maintenance's best interest to have this "stuff" removed from the plant site, sorted, and either held for re-delivery when needed or disposed of by selling or scrapping out. Having "dead" stock in the shop or work area is expensive, space consuming and leads to handling damage, environment damage, and a waste of investment monies.

Once the parts are reorganized with bin labels showing the min/max inventory levels, the distributor will work out an order/delivery schedule convenient to both. On the designated order day, the supplier's representative comes to the location and makes up a list of all items at or below the min., and how many it would take to get up to the max. This represents the "order". On the designated delivery day (usually 2-3 days later), the distrubutor's truck pulls up to each location and delivers the parts on the list. There are no back orders for bin stocked items and "specials" are given to the distributor via either phone or fax, and delivered subject to the manufacturer's promise. This, then is the fundamental bin-stocking systems contract concept.

Supporting the physical process of providing parts are many necessary features designed to provide long term consistency and continuous improvement:

  • management provided by the supplier
    • location usage by part number, quantity and cost
    • product purchases by manufacturer
    • supplier activity reports
  • supplier focus on cost savings ideas
    • longer life product
    • updated specs revisions
    • training
    • project design support
  • standardization

These features are a natural "fallout" of the systems contract process. Once the supply chain is secured, efforts by both the supplier and the maintenance forces can focus on "how" the product is being used instead of spending almost all their efforts in "finding" parts.

The Results. Over the past twelve years, we have estimated and document several results from the full blown systems contract idea:

  • search time has been reduced by 95%
  • stock outs have been eliminated (almost)
  • emergencies are now "real"
  • in-plant inventories have been reduced by 70%
  • cost savings ideas are averaging about 8% of purchased dollars
  • leveraging produces about 5-10% lower prices

When you add all these up, the total positive cost impact is in the $10,000,000 range each year on purchases of $30-35,000,000 annually.

Because of the processes implemented that produce these impact statistics, the overall "maintenance" program at the plant has improved greatly. This has been testified to by the maintenance supervision who has described the impacts:

  • people don't get frustrated because they can't find the right part
  • planned jobs don't get postponed due to lack of parts
  • we don't have to "make do" anymore, the right parts are always there
  • parts are easier to get to, and they work when you get them
  • the storage areas are not "pig sties" anymore
  • I get answers to my questions quickly
  • I have a better handle on my budget
  • we can get more maintenance jobs done cause we're not wasting our time looking for parts

Even more support comes from the maintenance workers themselves. They do not like to spend time looking for simple little parts. It causes high frustration and low morale. In extreme cases, they report that they are so angry by the time they find the parts, they don't feel like doing the job.

The Purchasing Impact. With the transactions out of the way, particularly for "emergencies", the buyer has time to use skills aimed at managing the supply base, negotiating leveraged pricing agreements, focusing on supplier development, and bringing real value to the bottom line.

The Conclusion. In summary, the Systems Contract concept for consumables is aimed at securing the supply chain by using a single source distributor supplier who focuses on identifying needs and having the parts stored and identified for easy replenishment through the "bin-stocking" method. Once the supply chain is secured, the distributor then focuses on product application and offers cost savings ideas and a logical process for standardization. Coming from these efforts is an effective inventory management program, usable management reporting, an effective commodity management strategy, and a simplification or elimination of the paperwork. The process also helps the advancement of the purchasing professional as a vital part of the entire corporate team.


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