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How MRO As-a-Service is Changing the Procurement Outsourcing Market
Of late, HfS has been researching one of the most often overlooked areas of business operations—Maintenance, Repair and Operations (MRO). MRO addresses indirect spend in the enterprise on goods and services that are consumed during the production process but are not parts of the end product. This is the first part in a series of three Soundbites that will serve as an introduction to a forthcoming report on how MRO procurement is evolving in the As-a-Service Economy.
In our recent research, HfS has spoken to a number of MRO procurement professionals who have shared their challenges in this area. The issues that face MRO are not new, with many remaining the same as they were decades ago—how to extract value from MRO and achieve MRO excellence. Many of these problems stem from the large number of items that come under the MRO umbrella (manufacturing companies typically have several thousand unique SKUs in their MRO requirements), the diversity of these products in many instances, the lack of standard item identifiers, and the diversity of the numerous stakeholder groups with conflicting demands that rely on the MRO supply.
This leads companies to manage a large and diverse range of suppliers to get all the parts needed, with all the additional problems this brings with it: fragmented process management, different lead times, multiple delivery options, inconsistent pricing, inconsistent billing and credit terms to name but a few.
This confusion can result in the wrong part being ordered or not ordered on time, leading to the worst issue of all: not having the right part at the right time. It is important to remember that in a manufacturing environment the lack of a $10 part can cause stoppages and major disruption to the business. Coupled with the fact that most factories floors and MRO stores have been hostile to outsourcing and often difficult to manage in their own right.
Our research shows that value needs to be created rather than extracted. In many cases the MRO process overall is fragmented and has been left unmanaged or managed inconsistently across different locations, which compounds the problems and leads enterprises to employ ad-hoc or bespoke coping mechanisms to ensure continuous supply.
And because MRO is spread across many stakeholders, none of which has a full view of overall performance, this lack of process and management focus leads to sub-optimal results and coping mechanisms. These include holding stock of items just in case, use of expensive expedited delivery services and expensive high margin suppliers—in some cases leaving the engineers and maintenance staff to buy from their preferred supplier without regard to wider concerns.
Traditional procurement outsourcing service providers have come in and out of this market with point solution offerings in recent years to diversify from servicing general indirect procurement but in conversations with these professionals, it's clear that those offerings haven't been especially effective as they don't enable MRO as an end-to-end business process. The requirement for on-site staffing, the often sporadic nature of the purchasing with a long tail of small value items interspersed with high value—low volume specialized items, makes it hard for generalist service providers to get the required economies of scale that their category manager models require. The economics can be even harder for general procurement service providers when the client wants to pass over some of the inventory financial risk, necessitating strong analytics to manage demand and discussions at the C-suite about taking balance sheet risk on behalf of clients. Given the cost of failure to the client, it can lead to the service provider not being able to take the steps required to deliver value.
So where does this leave buyers? In recent research HfS has examined how the sourcing world is having to change due to the emergence of the As-a-Service Economy. MRO is being affected by these changes as well. HfS is seeing opportunities and a new type of MRO service emerge, partly as new technologies and capabilities including SaaS platforms, better analytics and risk management helps service providers add value. Service providers and service buyers are becoming more willing to consider new types of commercial arrangement that create greater benefit for enterprises than were available before. It's no longer just about procurement or who can buy the cheapest parts. It's about process and the ability to align organizationally to establish an MRO supply chain that delivers real business outcomes.
The next in these series of soundbites will look at what enterprises can do to move from inactive and reactive MRO sourcing to a more proactive, supply chain process model built around these new technologies and capabilities.