Redefining the MRO supply chain

Strategic Distribution's chief information officer Ron Fijalkowski looks at the relationship strategic outsourcing and e-commerce

by Ron Fijalkowski

As we progress into the 21st century, the ways in which we conduct our daily tasks will continue to grow and improve, all thanks to science and technology. The improvements of tomorrow will be miles ahead of those made yesterday. One area where we can see this constant betterment is on the Internet. The capabilities of the Internet have expanded immensely, making e-commerce an increasingly valuable tool. In the world of MRO, e-commerce coupled with integrated supply has the ability to redefine the MRO supply chain.

Today, the typical plant sources MRO supplies from as many as 500 traditional distributors. This has the potential to generate excess or duplicate inventories throughout the supply chain and thousands of purchase orders and invoices. It also increases the likelihood of ill-managed storerooms, and the chance of stock oversight. Additionally, a substantial portion of a plant's MRO supplies are often "non-stock" purchases, resulting in high cost and time-consuming efforts by plant personnel to source the item and validate that it meets proper specification. Such procurement inefficiencies cause plant productivity and working capital to suffer. When combined, integrated supply and e-commerce have the capabilities to reverse these weaknesses.

What is integrated supply?
Integrated supply is a form of supply chain management that can improve service performance within a plant's storeroom by simplifying inventory and purchasing practices, thereby saving valuable time and money. Through the consolidation of a plant's multiple vendors and sources, Integrated supply provides a cost-effective alternative to traditional, segmented supply chain management. Furthermore, it essentially allows a plant the opportunity to outsource non-core business activities while achieving higher levels of service and technical support for plant employees. Integrated supply enables a company to identify and eliminate the many redundancies in traditional supply chain management.

In 1996, approximately one in every 12 large plants – representing more than $1 million per year in MRO purchases – had entered into an integrated supply contract, and that number has since grown. Between 1997 and 1999, the integrated supply market experienced a 27 percent compounded annual growth rate, leading to an estimated $12 billion growth in 2001 — compared to $3.3 billion just five years earlier.

Integrated supply allows the centralization of all sourcing, procurement, receiving, internal distribution and service to one supplier. The full benefit of integrated supply is achieved when all MRO supply chain functions are outsourced, thereby allowing a plant to better focus on its core competencies.

What is e-commerce?
E-commerce involves the buying and selling of goods over the Internet, which in this case, means the purchase and consolidation of MRO supplies. It includes virtual storefronts on web sites or online catalogs, business-to-business exchange of data, and the security of business transactions. Internet-enabled commerce allows access to a large number of suppliers that can quote on business (therefore making the market more competitive), and supply enormous amounts of data on products, vendors and usage.

E-commerce can help reduce transaction costs, including order transactions to suppliers and automated receipt acknowledgement. This procurement solution increases specification and order accuracy, and reduces off-contract buying and on-hand inventory costs. Because e-commerce does not require full-time support, it is a viable answer for smaller manufacturing plants with limited budgets.

A comparison:
The primary strength of the integrated supply model is in the improvement of service to the end-user community; integrated supply improves storeroom management and offers a dedicated focus on reducing total cost in the supply chain. Comparatively, e-commerce, through its network of databases, allows for easy access to a large network of distributors, and in some cases, provides competitive pricing for general MRO goods.

After exploring the benefits of the two models, it is now important to examine the correlating shortcomings, evident through four different supply chain management functions: conducting transactions, managing inventory, providing technical recommendations and on-site support.

Conducting transactions
Transaction efficiency is one of the main cost-reduction objectives of integrated supply. Data is scrubbed and organized to make it easier to identify products and vendors. Brands are standardized and vendors consolidated to add value and reduce the difficult process of matching purchase orders, receipts and invoices often used to authorize payments.

When purchases are made via the Internet, Web sites can prompt add-on purchases, provide product-related FAQs (frequently asked questions) and their answers, share best practices and download product schema. However, using e-commerce can lead to an explosion of transaction volume, which undermines the goal of outsourcing. Furthermore, by using the Internet for transactions, plant personnel are still too involved in the purchasing process, hence, not contributing to the company's core competency.

Managing inventory
Storeroom management is an important element of integrated supply. After an initial implementation process to identify and count on-hand inventory, order replenishment is automated by an integrated supply expert based on recommended minimum and maximum inventory levels, according to user demand.

E-commerce provides the ability to inexpensively disseminate data and allows plant personnel to view inventory levels across multiple locations in the supply chain. However, effective inventory management requires more than electronic media — it requires an ongoing human presence to separate and define critical spares. Inventory needs to be managed from its arrival at the plant to its unpacking and storage in the plant storeroom. The reality is that none of the pure business-to-business MRO Internet companies provide on-site personnel to manage these essential functions.

Providing technical recommendations and on-site support
Integrated suppliers have technical representatives available to drive application savings, answer questions, identify and examine problems, demonstrate new product applications, improve manufacturing methods and offer problem solving. This can be offered either on-site or remotely. E-commerce cannot provide such thorough technical support. Although FAQs are considered a cost-effective means of answering some technical questions, they provide only passive sales support, void of the human touch a plant requires.

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