MRO on the Move
Outsourcing maintenance, repair and operations
To improve quality in certain critical operations and reduce costs in others, many industrial manufacturing companies are turning to integrated maintenance, repair and operations (MRO) service concepts. While internal MRO services for industrial production are projected to decline by 3 percent per year over the next three years, the European market for external MRO services is expected to grow by 2 percent a year—to about €60 billion ($82 billion)—over the same period. With MRO on the move, and more external providers coming on scene, what does this mean for manufacturers?
A.T. Kearney's recent study of MRO service concepts in Europe finds that the financial crisis spurred a trend toward MRO outsourcing as companies sought to cut costs. Our study shows that the trend continues and is both supply- and demand-driven. On the supply side, large MRO service providers are focusing on meeting customers' needs by providing quality services at affordable prices. On the demand side, pressure on manufacturers to reduce costs has increased the attractiveness of—and lowered the barriers to—advanced concepts in integrated MRO services.
MRO Service Providers: Managing Complexity
MRO service providers offer a wide range of services—from pure parts delivery and execution of services to comprehensive planning and coordination. These latter services are performed by integrated MRO providers that often take on additional responsibilities such as coordinating multiple parts and services categories and assuming responsibility for equipment performance. Providers of such highly integrated MRO services take on responsibility for manufacturers' inventory, existing management and operations personnel, and implement IT solutions to monitor the flow of MRO products and services. In addition, full-service contracts often include meeting agreed-to equipment availability and agreed-to total cost reductions in processes and purchased parts. Essentially, integrated MRO service providers must master the complexity of their clients' overall service and parts requirements.
In Europe, MRO providers are differentiated according to their geographic and service-category coverage. Generally, geographic coverage is either national or European. (A few regional providers exist, but they typically deal in low-level service categories such as equipment cleaning, where salary levels do not justify long travel distances.) Service categories include maintenance and repair, operating material, equipment cleaning, equipment installation and assembly.
Tracking Growth of European MRO Outsourcing
Overall, MRO volumes consist of two elements: internal, generated by in-house MRO employees, and external, purchased from MRO providers. In 2009, total MRO volume in Europe was approximately €87 billion ($119 billion), or about 5 percent of the gross value-added of manufacturing industries. We expect an annual growth of approximately 0.5 percent through 2014 to about €89 billion ($122 billion). This is lower than the growth of the value-added of manufacturing industries, which we estimate will be 1.4 percent per annum through 2014. The lower growth for MRO is driven by the expected 2.6 annual decline through 2014 due to the scale effects and efficiency improvements in internal MRO services. We see outsourced MRO services growing 2.1 percent annually, to €60 billion ($82 billion), by 2014. Within the four main MRO service types, equipment installation and assembly will have the highest growth rate (5.6 percent) through 2014, while operating material will have the lowest growth rate but will remain the largest external MRO service type (see figure 1).
In assessing the degree of outsourcing maturity and the level of integration of MRO services across countries, we found clear geographic differences. The highest levels of maturity and integration are in the United Kingdom, Scandinavia, Germany and the Netherlands. Southern and Eastern European countries, such as Spain, Italy and the Czech Republic, are not as mature or integrated. This is partly because production plants in Eastern and Southern Europe rely more on local workers and smaller companies to provide MRO services. Thus many large MRO service providers have not established service hubs in these regions because the demand does not justify the investment.
Crisis Exposed, Decentralization's Disadvantages
Growth for large European MRO service providers has come through either a centralized or decentralized business model. The centralized model, employed by only a few of Europe's large MRO providers, aims to achieve growth through comprehensive process integration and control mechanisms. Most providers, though, have relied on the decentralized model, which aims to acquire competitors and position them as local subsidiaries. These subsidiaries operate independently as long as revenue and profit targets are met. In periods of strong industrial output growth, this business model has proved to be ideal.
However, the decentralized business model has its disadvantages (see figure 2). These became evident in 2008-2009, when the global financial crisis was at its worst. The independently operating structure that worked so well when industrial output was strong made enterprise-wide liquidity improvement efforts and cost-reduction initiatives difficult when the economy faltered. In other words, the lack of integrated processes and control mechanisms between headquarters and subsidiaries was a barrier to belt-tightening. The decentralized model also limited future growth with large customers that expected integrated service delivery for multiple manufacturing plants across several geographic regions, as such service delivery requires solid key account and delivery processes within the entire group, not just the local units.
To address these disadvantages, several large MRO providers started integration programs to improve process alignment and control mechanisms between headquarters and subsidiaries. At the same time, several integrated providers streamlined their key account management processes in an effort to improve their methods for fulfilling customers' needs for outsourced MRO services across geographies.
MRO Demand: Transformation Programs for Integrated Services
The trend toward outsourcing MRO services varies widely among industries. For example, many asset-intensive industries—such as chemicals, steel and paper—continue to bring MRO service providers into their businesses. Their aim is to become more cost flexible, a lesson learned from the economic crisis. Other industries prefer to use predominantly internal MRO services combined with selective use of external MRO service providers for complex production equipment. These industries—automotive is a prime example—typically use non-standardized production technologies.
Pressure on manufacturers to reduce costs has increased the attractiveness of—and lowered the barriers to—advanced concepts in integrated MRO services.
We have observed several successful transformations to integrated MRO service provider concepts. Each followed a three-step approach (see figure 3). First, a "health check" is performed, which includes identifying existing MRO concepts and processes employed at the plant level. The check also ensures the availability and transparency of MRO data in IT systems (for example, spare parts and services descriptions), identifies the MRO cost base for parts, services and processes, and makes sure that all prerequisites, such as availability of preventive maintenance, are being fulfilled.
Next, the overall MRO concept is defined, taking into consideration all the requirements of manufacturing, maintenance, purchasing and other functions identified in the MRO health check. At the same time, an action plan is prepared, outlining how to achieve all the prerequisites for implementing the integrated MRO concept. When defining the action plan, it is essential to classify MRO services into critical and non-critical manufacturing operations, and to differentiate between internal and external services according to their value-add (see figure 4). This ensures availability and quality of services for critical operations, and cost-savings for non-critical operations.
Step three is implementation, where responsibilities are assigned and operational targets are agreed upon. Here a program-management office is essential to success, with senior management oversight to monitor and track implementation progress, measure cost savings and quickly resolve barriers. Some of the most common barriers to overcome include an inability to fulfill OEM specifications and warranties, excessive dependency on key suppliers, resistance to switching suppliers (after spending years building supplier relationships it is difficult to break them), and a general fear-of-risk inherent in many internal maintenance departments. For the latter two barriers, resistance to new suppliers can be alleviated through purchase-cost reductions and reducing the total number of suppliers to be managed; mollifying the risk averse can be accomplished by improving MRO services for critical operations. In the end, getting past these barriers is well worth the effort—companies have reduced MRO costs by up to 15 percent per year for parts, services and processes using this transformation model.
North America: A Step Ahead
Integrated MRO service provider concepts are more mature in North America than in European markets. The North America industry has always been more competitive and cost-sensitive; the economic downturn intensified their aggressive pricing strategies to gain (and retain) business. Many integrated MRO service providers are getting parts and operating materials from lower-cost countries, and some are expanding into new products and services. Manufacturers are contracting with these suppliers for various capabilities, including sourcing, procurement, logistics, reporting, invoicing and payment for all parts and services.
We think the top providers in North America are excellent examples of what European integrated MRO providers could become.
Integrated MRO providers in North America manage their customers' manufacturing complexity for plants both within and outside their borders—improving their processes, cost savings and delivery capabilities on an international level. We think the top providers in North America are excellent examples of what European integrated MRO providers could become. What sets these North America leaders apart? They:
- Have strong account management capabilities, which are used to better serve their customers in North America—and, increasingly, outside North America.
- Leverage pricing and availability of local suppliers, then develop a solid supply chain to expand coverage across plants and geographic regions.
- Build close relationships with a large number of manufacturers and are nimble enough to leverage their technical expertise as necessary.
- Make seamless interactions with enterprise resource planning (ERP) and procurement systems and invest time and resources to connect online with their customers.
- Develop strong relationships with low-cost country supply sources, thus addressing customers' demands for less expensive standardized parts and operating materials.
- Provide transparency into their MRO spend and use all relevant tools to optimize inventories.
Delivering on Customers' Requirements
What do customers want? In which areas do MRO service providers need to do their homework and come up with correct answers? Cost savings, of course. Customers want to know in which MRO categories and processes the integrated MRO service provider can help them cut costs. They want assurance that quality and delivery are key capabilities and that their plants can be served on a global scale with common standards. With MRO on the move, those that offer the right answers in all areas—costs, quality, delivery and global reach—will be in the best position for success.
Authors
Martin Haubensak is a partner in the automotive practice. He is based in the Düsseldorf office.
Peter Wessmann is a partner in the operations practice. He is based in the Düsseldorf office.
David Lamb is a principal in the automotive practice. He is based in the Detroit office.
Stephen Mickelson is a principal in the automotive practice. He is based in the Detroit office.
Andreas Graef is a consultant in the Munich office.
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