Lean opportunities in MRO Procurement: Improved productivity and reduced waste

March 21, 2007
Consolidating to one source simplifies the process, saves valuable time, and reduces costs for product search and availability, increasing productivity.

Don Scheibenreif, Director of Segment Strategy & Planning — Grainger Corp.

Productivity and waste are two influential factors in determining the success of a MRO (maintenance, repair,and operations) procurement progrm. Productivity can be defined in two ways, "total labor productivity" or "total factor productivity."

Total labor productivity is output divided by the number of workers, or by the number of hours worked. "Output" is any manufactured product or service, and "labor productivity" indicates the contribution to output of inputs other than hours worked. Increases in total labor productivity, the amount of output created per unit input used, can reflect the fact that each worker is supported better by resources.

"Total factor productivity" identifies the contribution to output of everything except labor and capital, including innovation, managerial skill, organization, waste minimization (all forms), and even luck.

Gains in total factor productivity, or any effects in total output not caused by inputs or productivity, are frequently obtained by innovative process improvements or organizational changes.

Waste can be identified many ways, but ultimately it is any activity that requires allocated resources but adds no value from the customer's perspective. Some activities must be maintained, even if they do not add value to the product or process, such as time spent on maintenance or accounting. Other types of non-valueadding activities, like maintaining underutilized inventories or the time spent searching for tools, must be reviewed and constantly re-evaluated, and if identified as waste elimintated through appropriate steps.

Many initiatives and systematic approaches for improving efficiency have been adopted by manufacturing organizations to help improve their products and processes by focusing on quality, improving productivity, and reducing all types of waste. These are commonly known as "lean" methodologies.

One is the Toyota Production System, a framework and philosophy that organizes the automaker's manufacturing facilities and interaction with suppliers and customers. The main goal of TPS is eliminating waste in manufacturing, but it has become a popular tool for improving efficiencies in all types of organizations.

Total Quality Management (TQM) is another improvement method, centered on quality. It is based on the participation of all organizational members and aims at long-term success through customer satisfaction and system-wide benefits.

Another, Six Sigma, uses mathematical and statistical tools to manage process variations that can cause defects, and systematically works toward managing the goal of consistent and measurable quality.

These approaches to improve productivity and minimize waste are being used by many organizations to improve their products and processes. As of 2006, according to the IndustryWeek/MPI Census of Manufacturers, 40.5% of all manufacturers have adopted lean as their primary improvement method, a jump of nearly 5% from 2005. Lean methodologies focus on reducing "the seven deadly wastes": overproduction, waiting time, transportation, processing, inventory, motion, and production scrap.

By eliminating waste, quality is improved, and production time and cost are reduced. Among the over 30 "lean tools" are constant process analysis and continuous improvement (kaizen), "pull" production (by means of kanban), and mistake-proofing (poka-yoke). Lean, as a management philosophy, also concentrates on creating a better workplace. While some believe that the methodologies are problemsolving tools, most experts agree that the system is a holistic, comprehensive, enterprise-wide program designed to integrate with an organization's core strategy.

There are other key lean principles. Continuous improvement includes efforts to reduce costs, improve quality, increase productivity, and share information. Flexibility includes efforts to produce different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production. Supply-chain enhancement builds and maintains a long-term, strategic relationship with suppliers through collaborative risksharing, cost-sharing and information-sharing arrangements.

Lean basically gets the right things to the right place at the right time in the right quantity, while minimizing waste and remaining flexible and open to change. It also has implications on MRO and indirect procurement.

Indirect procurement refers to purchases of "operating resources." These are the things a company buys to "enable" its operations, including products for facilities MRO, and higher-value goods and services like heavy equipment and consulting services.

Purchasing organizations sometimes assume that "just-in-case" stores of indirect goods, specifically those used for maintenance and repair, are less costly than downtime or lost production. The perceived pain of being without something often creates inventories that are never used, obsolete, or damaged. In lean terms, these underutilized inventories, and the procurement activities not directly related to production are considered waste. The time and resources devoted to information administration and gathering, supplier contacts, background reviews, negotiations, and fulfillment activities of indirect materials create waste and reduce overall production activity.

Many organizations have strategic sourcing initiatives, but they do not extend to the indirect purchasing categories, specifically MRO. Hundreds of thousands of products can be considered MRO, such as lighting or safety. Buyers consider these about 40% of requirements for spot or unplanned purchases.

Unplanned purchases for MRO products are items bought infrequently and needed on an unpredictable basis, and not typically purchased year after year. The purchases are unplanned because of the role the item plays (example: an elevator up/down switch.) Neither purchasing, nor maintenance, plans for it to fail, but when it does it has to be replaced, whether or not it is in store.

There is a trend in facilities maintenance to reduce the number of suppliers and lower the procurement cost for tools, safety equipment, lighting, and other products. What actually is required are lean supply channels that possess more of a thorough understanding of customer needs, and that provide needed goods at the appropriate place and time, as determined by demand.

This would solve two problems – reducing costs (waste) associated with inventorying rarely used items, and allowing organizations to focus on their core competencies and production efforts, not spending time (waste) sourcing and procuring infrequently used MRO requirements.

For planned purchases, a typical company will use five to 10 suppliers from whom they purchase a few high-volume commodities. For unplanned purchases, a typical company will have over 20 suppliers to buy thousands of products every year. Managing those relationships and adjusting to different suppliers takes time and affects productivity. Managing as few relationships as possible for unplanned purchases will minimize procurement complexity and the associated costs.

Consolidation to one source simplifies the process, saves valuable time, and reduces costs for product search and availability, increasing productivity.

Many national distributors maintain inventories of hundreds of thousands of MRO items. They use distribution centers and local offices to ensure prompt, reliable deliveries. The advantages of scale provided by broad product lines, extensive customer coverage, and a logistics network of branches/distribution centers saves their customers time and money when they make unplanned purchases.

Don Scheibenreif is the director of Segment Strategy and Planning with W.W. Grainger Inc. Visit www.grainger.com, or contact a Grainger branch for more information about how a consolidated approach to MRO purchases can benefit your organization.