MRO Research: Leading, Evolving or Trailing?

When it comes to MRO (Maintenance, Repair and Operations), is your organization leading, evolving or trailing? That’s one of the questions posed by new research from the Center for Supply Chain Research at Penn State published in a recent issue of our sister publication, Supply Chain Management Review.

Based in part on an online survey of 171 respondents and interviews with subject matter experts on indirect spend and integrated MRO supply execution (see About the Research, p. 22), the authors conclude that MRO is evolving from a function too often viewed as a low-impact, low-dollar afterthought, with no central control, to an advantage for leading companies that are “moving steadily toward an integrated approach to MRO that facilitates operational excellence and promotes the total cost of ownership.”

Afterthought to advantage
“MRO management has always been something of an orphan,” the study contends. As the authors point out, the function has struggled to escape its back-office image and typically is characterized by fragmented decisions made by multiple individuals who represent multiple sites and business units. None of the parties involved has a full view of the MRO value chain, resulting in management practices that are well-intended but suboptimal.

With few standard processes in place to manage how supplies are purchased, stocked, consumed and analyzed and little or no focus on performance measurement, MRO managers’ decisions tend to be based on the way things have always been done or whether a manager likes a supplier. The researchers write that many executives feel they can’t justify the time required to integrate their MRO activities because they really don’t understand what they’re spending, or they believe that MRO is limited to low-cost items that present little opportunity for savings. Given the hundreds of other issues to address, why bother?

And yet, MRO is now a significant cost, accounting “for 5% to 9% of total indirect spend in typical manufacturing companies, and as much as 10% to 20% for pharmaceutical manufacturers and utilities,” according to the study, which notes that 20 years ago, MRO costs as a percentage of total indirect spend ranged from between 3% and 12%. Much of that increase is being driven by factors that will sound familiar to users of highly automated materials handling systems: We are seeing more—and more complex—automation than in the past, which is leading to more repairs and maintenance.

The good news: “More and more companies have been improving their MRO practices,” according to the authors, who add that “faced with rising pressure to cut costs and do more with their existing resources, they are recognizing that they can turn MRO from a headache into an enabler of operational excellence that contributes to overall revenue and profitability.”

Leading, evolving and trailing
What then do today’s MRO organizations look like? To answer that question, Penn State organized respondents into three categories:

• Leaders included about 20% of respondents who were far ahead in integrated MRO management.
• An estimated 55% were in an evolving stage, meaning they are moving in the right direction, but still behind the pack.

The researchers then identified the 15 most significant MRO management activities and looked how widely they were adopted by each group. Among the key findings:

• 78% of leaders have centralized the management of their MRO in-house, compared to 57% of the evolving group and 50% of the trailing group.
• 83% of the leader group uses master data management, compared to 56% of the evolving and 54% of the trailing groups.
• Over 70% of leaders evaluate the total cost of ownership compared to 49% of evolving and 39% of trailing groups.
• With the exception of TCO evaluation, the trailing group is most deficient in MRO activities related primarily to inventory management, while the leader group is furthest ahead in activities that reflect its data-driven and performance-oriented characteristics.

Key takeaways
Regardless of where your organization finds itself on the MRO maturity continuum, the Penn State authors offer three priority actions that can help both evolving and trailing groups advance their MRO organizations.

• Centralize more MRO activities. Most companies are already doing this to some extent, but they should expand the approach across a wider range of activities in the MRO value chain.
• Organize all the relevant data. Companies should focus on integrated master data management (MDM) with a comprehensive, unified governance model. Asset data should be collected and stored in a centralized data warehouse that is accessible to all business units and sites. MRO master catalogs and a centralized MRO catalog system should be developed for enterprise-wide use, leveraging industry-standard taxonomies, tools and knowledge bases. According to expert interviews, many of the leading MRO practitioners have invested in best-in-class MDM systems that link seamlessly to legacy systems (ERP/ EAM/CMMS) and are supplemented by business intelligence tools.
• Strive for data-driven and performance-oriented practices When companies have established an integrated MDM and governance structure, they should put their data to use to inform their MRO management decisions, focusing first on TCO evaluation.

For the trailing group, they propose these additional priorities:

• Get inventory in order. Since inventory management is an area in which trailing companies are very far behind, here is what can be done to progress from traditional to integrated approach:
1. Adopt data-driven, predictive planning based on detailed analyses of inventory characteristics and requirements (for example, data on equipment bills of material and mean times between failure).
2. Align inventory planning with maintenance and operation objectives.
3. Devise strategies for inventory deployment and replenishment that cater to different MRO items, based on segmentation analysis (for example, by ABC, criticality, and/or consumption rates).
4. Optimize inventory networks to increase availability, focusing not only on returns on invested capital, but also on operations support using facility-to-facility inventory transfer capabilities.
5. Use scorecard to track KPIs (for example, stock-out frequency, fulfillment rate and percent of inactive inventory), and identify areas for improvements.
• Leverage third-party expertise. Not all companies can train their teams to be MRO integration experts. Knowledgeable, experienced third parties can accelerate companies’ progress along the MRO maturity continuum

About the research

The research study was conducted by the Center for Supply Chain Research (CSCR) at the Smeal College of Business at The Pennsylvania State University, in collaboration with Supply Chain Management Review, and supported by the CSCR’s corporate sponsors.

Results were based on 171 online survey respondents along with insights from literature, the authors’ experience working with companies and interviews with subject matter experts on indirect spend and integrated MRO supply execution. Respondents represented companies with annual revenues ranging from less than $50 million (45%) to more than $1 billion (45%). Forty percent of respondents reported annual MRO spend of less than $1 million.

The full findings were written by Steve Tracey, Kusumal Ruamsook and Lauren Bechtel from Penn State and Carol Colgan, from North Bay, Inc. They were published in the May/June 2015 issue of Supply Chain Management Review and are available to subscribers at scmr.com.