MRO Strategies Mean Money in the Bank

Redundant purchasing and poor inventory management have cost companies millions of dollars for generations. Find mountains of savings in new and improved MRO management.

By Mike Pehanich, Plant Operations Editor

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The operations dictum of the new century is to find profit wherever you can. That means leaving no stone unturned in the effort to eliminate unnecessary costs from food operations.

For more than a decade now, food processors have been eliminating waste and squeezing unnecessary costs from their operations network to improve the bottom line. With many companies already operating with bare-bones workforces, questions of savings are apt to elicit a quirky twitch in many quarters as manufacturing and operations executives wonder just how low you can go before cuts cause serious bleeding.

Yet sometimes you can find savings in the oddest places, such as in MRO, a catch-all area of maintenance, repairs and operations costs that may include everything from bearings, belts, motors and bolts to lubricants, goggles and paper towels. Nickel and dime stuff, to be sure…

Not so fast.

"We've been able to reduce the cost of our inventory by hundreds of thousands of dollars in recent years," says one manufacturing executive, crediting the savings to creative partnerships and MRO strategies.

Parts consignment

A frequently targeted area for MRO savings in the post-2000 era is in equipment replacement parts. "A lot of the money a company has tied up in inventory is in obsolete parts," observes Brookes Britcher, project engineering manager for the Sara Lee Bakery Group in Tarboro, N.C.

Missing replacement parts in a stock room can cause costly and embarrassing downtime. More often than not, stock rooms are generously oversupplied with parts perceived as "critical." Many never leave the shelf even years after the equipment they were intended to rescue has left the facility.

Operations staff who have already been squeezed by corporate belt-tightening may not recognize the savings potential in eliminating unused parts inventory.

Eliminating the cost of unused inventory can mean parts savings in excess of 15 percent.

Smart processors work today with suppliers to work out their parts needs. Some are addressing the parts conundrum with consignment arrangements with their suppliers.

Here's how these consignment arrangements work: The manufacturer of electronic parts for a plant's programmable logic controllers (PLC) may agree to maintain a supply of critical parts for those PLCs in the processor's stockroom. The parts are ready and waiting for replacement as needed. However, the processor is not charged for them until they leave the shelf and enter operations.

Partnerships with key suppliers continue to evolve. In the 1990s, suppliers voiced acrid complaints that "partnership" really meant permission to beat the supplier down to the lowest possible price. Better understanding of the value of service and reliability on the part of processor and supplier alike has effected more genuine partnerships.

"You can't be successful in consignment arrangements if the suppliers are not actively involved," says Jeff Nord, group director of procurement for Campbell Soup Co., Camden, N.J.

Consignment arrangements may have additional benefits, such as automatic updates of parts when they become available. Not only are processors then using the latest and greatest, but they have zero dollars invested in parts that are collecting dust on store room shelves.

"More vendors seem to want to be part of partnerships with processors today," says Britcher, acknowledging that "partnership" has become an overused and sensitive term with suppliers. "You want the supplier working with you. If you are going to stock fewer parts, you want to be sure that you are stocking the right parts. You can't get those assurances if you always beating the guy up on price."

Of course, consignment can be a sticky point with vendors, since they carry the cost burden on consigned parts until those parts are deployed.

"We've gone to an even better system than consignment," says Stan Bogdan, maintenance manager for the Tarboro plant, noting the aversion vendors can have to such arrangements. The bakery has collaborated with suppliers to determine parts needs and arranged to keep necessary supplies and parts readily available at either plant or a supplier facility with back-up arrangements as well.

The purchase card phenomenon

Leveraging corporate buying power is becoming an art form, thanks to more progressive thinking on the part of maintenance managers. And thanks to creative customization of the good old American credit card.

Ariba Inc. (www.ariba.com), Sunnyvale, Calif., has brought credit card simplicity to MRO parts and supply purchases. The company found itself in front-page stories recently when President Bush announced his intention to nominate Ariba's president David McCormick as undersecretary of commerce. But Ariba already had become familiar to progressive processors looking to save money and simplify their MRO programs.

Ariba, which calls itself the "most comprehensive spend management company," built an advanced strategic sourcing system by blending technology, operations services and web savvy. Ariba maintains an electronic catalog and facilitates purchases like a consumer's credit card company.

Individuals are empowered to make purchases up to established limits without issuing purchase orders. The system allows companies with multiple manufacturing facilities to leverage cumulative volume purchases for better prices.

"You can reach discount agreements with certain vendors for company-wide discounts," says Sara Lee's Bogdan.

"It's like having a cooperative's buying power," adds Britcher. "You are leveraging the buying power of the whole company, not just your plant."

Standardize for savings

The bane of the stockroom is non-standard replacement parts. Nothing fills more shelves than the countless varieties of motors, shafts, bearings, photo eyes and other equipment parts found in food plants.

For more than a decade now, progressive engineers and maintenance supervisors have pressed their organizations and their equipment suppliers to convert from OEM parts to standard off-the-shelf parts wherever possible.

"Standardizing on parts means fewer vendors to deal with and a tighter network of suppliers," says Britcher. "You are getting good pricing, cutting fewer checks and doing less paperwork, so there are a lot of benefits."

Standardization, however, can't be a one-man or one-department decision. Mechanics, engineers, parts suppliers and equipment suppliers all should participate in decisions to narrow the range of parts used. They must decide together where and when standardization makes sense. Done right, the practice will reduce inventory and the number of stock items – often dramatically.

Standardization should be an ongoing effort. It should even precede capital purchases. Effective parts analysis can help anticipate cost and performance of equipment and entire production lines for the life of the machinery.

"When we get a spare parts list from the equipment maker, we ask for the ‘open' list," says Britcher. "We ask them to put the bearing model number, for example, so that if a potentially needed part is something that we have in stock, we won't have to buy it from the equipment maker."

These are still pioneering days in MRO strategies in this e-commerce era. Many creative solutions are being developed on the fly. Some are as simple as reorganizing the stock room and parts bins.

"Our maintenance manager likes to experiment," says Britcher of Bogdan's work in the store room. "He has brought a lot of ideas forward and has restocked the whole spare parts room."

Bogdan found bakery personnel lost amid the 15,000 line items of parts. Finding and retrieving items in the two-story store room "was a nightmare," he says, describing a situation common in store rooms across the country. Sign-out, parts tracking and redundant ordering plagued the system.

Rearranging the stock room and orienting and educating plant personnel on the new inventory and check-out system helped drop inventory miscalculations by more than 85 percent. The new store room positions frequently used items near the front. It also has a "job procurement" shelf with all items for the current day's projects sorted and ready for pick-up.

"Now they are pulling parts the day they will use them," says Bogdan. "They sign them out, expense them and use them. Nobody bypasses the system.

"Many manufacturers make the same parts – drives, motors, bearings, etc. – but call them something different. We're getting rid of duplicate parts and meeting with our vendors to get assurance of when we can receive parts," he continues. "The other key to our inventory reduction was understanding what the vendors have in inventory, where they have them and how quickly they can get parts to us. We gave our local belt vendor a list of the top 20 belts we use. The vendor keeps them on hand for our plant and another Sara Lee facility. We keep on hand in inventory only what we need."

In two years, Bogdan cut plant MRO inventory by $1.5 million.

The new system, coupled with new storage bins, has also enabled him to decrease the area of inventory storage by half. "We're going to build a conference room, two offices and a library from the saved space," he says.

Such are the rewards of an effective MRO system.


GETTING STARTED: TAKING THE FAST TRACK TO MRO SAVINGS

Campbell Soup takes MRO seriously. Very seriously.

That's because the non-ingredient purchases may amount to 80 percent of total dollar volume of transactions for a company each year.

"Everyone in the plant is acutely aware of the value of the investment tied up in our plants," says Jeff Nord, group director of procurement for the Camden, N.J.-based food giant. "Anything we can do to eliminate or streamline purchases allows us to do more things that add value."

Campbell Soup began to take MRO purchases – which encompass a wide band of items ranging from replacement parts to maintenance materials to simple items like paper towels and cleaning agents – back in 1996 when it piloted consignment arrangements with a number of its suppliers. Today, 70 percent of the value of items in the maintenance storeroom at Campbell is vendor owned. The entire Campbell organization has vastly improved its purchasing systems and approach. Highlighting the effort, one of its plants has been benchmarked as "Best in Class."

So how can you kick your MRO program into gear?

"This is a long-term process. You can't do it quickly," says Nord. "It boils down to the quality of your suppliers and their level of engagement in helping you manage your inventory."
  • Cross-functional team.
  • Standardize parts and identification.
  • Consignment and other purchase agreements.
  • Catalog items.
  • Bar coding and other tracking technology.
  • Start with the low-hanging fruit.
      Start by establishing a cross-functional team comprised of plant management, accounting, procurement, maintenance and engineering, suggests Nord. The teams will negotiate, evaluate and assist with vendor selection. A progressive maintenance manager can be a key driver to the program. Still, everyone must be aboard. Make certain that key plant personnel are involved. "This can't be done in a vacuum," says Nord. "The plants must be active. The key is to let (the plant) make the decisions. You facilitate."


      A company-wide effort to employ standard parts wherever possible not only simplifies purchasing but also enables larger volume discounts. But before you can get the benefits of standardization, you will need quality data. That means uniform parts description and categorization. "One plant may call a part ‘1234' while another calls it 123-4 and another refers to it as 123/4," explains Nord.


      Negotiating parts consignment agreements with suppliers will go a long way toward major MRO savings. "Consignment is a key part of the streamlining process," says Nord. "You want to get the least number of transactions with the highest degree of reliability in inventory management, re-orders, payments, etc."


      Web-based software can help create a company catalog of frequently purchased items negotiated in supplier contracts. These electronic catalogs provide user-friendly access not only to purchasing but to plant-floor personnel.


      Tracking technology is critical to an effective MRO system. Not only can it help speed up supply room turnaround, but it also provides the accuracy critical to an effective consignment program. "If you say you have it on the shelf, you better have it!" stresses Nord.


    Begin with items your plant and company use a lot. Power transmissions, electrical supplies, industrial supplies and frequently purchased OEM parts are usually good places to start.
"As we look back at MRO and sourcing, the old days of ‘three bids and a cloud of dust' are clearly gone," says Nord. "Yes, bidding is more competitive, but you negotiate (with suppliers) more. We leverage the volume of longer contracts nationally and bid less frequently. The supplier is assured of having the business if they perform, and the company has the incentive to provide the resources to help us drive further value. We determine the value of these agreements over a period of three to five years."

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