A case study on how a company implemented the new MRO Strategy to reudce costs for increased profitability

Bethlehem Steel (BS) in its drive to cut costs, decided to implement a new MRO strategy. This strategy had evolved from basic research and had considered all the problems of the current MRO policy, including the key cost factors. This new MRO strategy highlighted close collaboration with important routine MRO suppliers who managed BS inventory and replenished their stocks.

BS followed a three-step process for better MRO relationship. The first step in better MRO purchasing was to form commodity groups. Depending on the commodity group a single supplier was chosen – who was financially sound, had a conducive culture, and could carry all the products of that commodity group. Choosing a single supplier for a group, helped because costs were reduced due to increased volumes. Paperwork was also reduced and the supplier could afford an on-site technical co-ordinator.

The second step was to break the MRO requirements into spare parts and consumables. BS achieved about 8.4% cost reduction by implementing ideas given by the supplier’s on-site co-ordinator. A supplier manages the entire inventory at different areas by checking stocks, once a week. By choosing a single supplier for a commodity group, supply volume increased and costs were reduced. The supplier was fully responsible for the supply chain of the specified commodity group.

The materials management of BS recommended that spare parts be stocked, and it restricted access to these spares. The MRO distributor is not involved in managing spares. In this secure storage area for spares, an identity tag was put to each spare part which was removed and logged when the spare part was drawn from the store.

The third step was the continuous improvement by suppliers. BS gained over $40 million during ten years by this programme. The highlight of this programme was that BS was appraised of all latest technical developments and their applications by their suppliers. Supplier knowledge and expertise was fully used to provide unique cost reduction methods to maintenance problems.

The BS purchasing team recorded each MRO supplier’s cost reduction ideas, and found that cost savings were around 8% per year per MRO source.

Due to the interaction between on-site representatives of the MRO suppliers, further long term cost savings and other benefits increased.

Stable and successful purchasing relationships were formed by forging trust and respect. BS had found that these have been the hidden reasons of the success of their commodity teams.

BS realised that the four underlying principles of all partnerships are:

• Have Person to person respect
• Do not ask more of your partner than you do of your own company
• Ensure your partner realises that you understand the importance of what they do.
• Create an open atmosphere by acknowledging the expertise of your partner.

BS found that various strategies and evaluations are essential in MRO partnerships but they need a foundation of trust and respect in order to be successful.

BS had nurtured an atmosphere of trust and respect in the internal relationships of the maintenance, stores and purchase personnel towards MRO alliances. The focus by the purchasing and materials team on the attitude of the internal maintenance and stores employees was a key element in implementing MRO alliance.

BS took ten years of significant investments in people to reap the benefits of MRO relationships. BS now finds itself in a strong competitive purchasing situation and invests time to improve existing relationships. BS hopes to increase profitability over the future.

Further Reading:

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