A case study on why a company adopted a new alternative strategy to reduce costs

Maintenance, repair, and operating supplies (MRO) are those items that are consumed in a manufacturing operation, but do not become a part of the final product. Costs could be reduced by following a predetermined strategy during MRO purchasing, receiving, stocking, and in distribution. These cost savings enhance the profitability of a manufacturing company.

Burns Harbour (BH) plant was a division of Bethlehem steel (BS). BS found it difficult to cut raw material costs and hence turned its focus on MRO costs. In its in-depth study, the purchasing and material control team at BH had documented the costs savings that could be achieved, by changing certain MRO purchasing practices. It was found that ordering and processing costs formed only a small percentage of the total MRO costs. Therefore BS wanted to develop and implement a new MRO purchasing strategy to achieve a drastic reduction in all MRO costs. Reduction in time spent on processing routine paper work was also planned.

The various strategies developed by companies for MRO purchases moved through three distinct stages: The First stage dealt with price, which was used as an index of competitiveness. The Second stage dealt with blanket purchase orders or contracting systems. The Third stage dealt with utilising procurement cards to provide faster purchase of items along reduction in administrative costs.

To study reduction in MRO costs, BS conducted basic research and arrived at the following assumptions:

1. MRO partnerships could provide significant cost reductions in all areas of a partnership including lower processing, stocking, distributing, and inventory costs.
   
2. MRO partnerships could also lead to significant year after year cost improvements.

These assumptions were tested using a combination of several methods. The performances of the partnerships were verified using the past-documented data, which was obtained from the meetings between BS and its suppliers. Information was also collected by interviews with employees and suppliers who were in partnership with BS.

In a manufacturing firm like BH, the maintenance department controlled MRO purchases. MRO items included bearings, pipes, valves, fittings, electrical repair and replacement items, office supplies, and spare parts.

It was found that the four key MRO areas were receiving, stocking, distribution, and locating parts at the store. It was important to identify and understand the key cost drivers affecting the above four areas.

More emphasis had been paid to maintenance of machines at BH instead of paying proper attention to inventory management. Hence the maintenance personnel faced a problem of locating the MRO items. In case of larger items, which could be reconditioned and reused, they were being reordered and this increased costs. The main problems in effective MRO management could be addressed by the segregation of MRO items into two broad groups. One group being that of the consumable items and the other group the spares items required for repairs. The key concerns with consumables were availability, ease of access, and accurate identification. The larger spare parts needed to be protected to avoid deterioration and damage in storage. An accurate record had to be maintained as this helped the maintenance personnel to determine if the spare part was in stock, along with its location and condition.

BH found two key factors that increased MRO costs and these were:

1. Ordering the wrong items. These wrong items created further complication of over usage of the wrong part and under usage of the proper part. Return of the wrong part was expensive and therefore ended up as unused inventory.
   
2. Lack of material management expertise. This was reflected in excessive paperwork, multiple counting and the inability to keep stock of consumables and stock out emergencies.

BS could now fully understand the MRO problem areas at BH. Moreover, BS had already conducted basic research, arrived at certain assumptions, and after verifying these assumptions, had evolved a comprehensive scheme to cut MRO costs.

BS therefore decided to apply this new strategy on MRO practices so as to reduce costs and enhance its profitability. BS could save up to $40 million (over ten years) by successfully implementing this new strategy.

Further Reading:

International Journal of Purchasing and Materials Management, Vol 33, No: 3, By C.Bechel & J.L.Pattterson.