Mro on the_move

MRO on the Move Outsourcing maintenance, repair and operations

MRO On the MOve | A.t. Kearney 1

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 con-cepts in europe finds that the financial crisis spurred a trend toward MRO outsourcing as com-panies 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 cus-tomers’ 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 coordi-nation. these latter services are performed by integrated MRO providers that often take on addi-tional responsibilities such as coordinating multi-ple parts and services categories and assuming

responsibility for equipment performance. Pro-viders of such highly integrated MRO services take on responsibility for manufacturers’ inven-tory, existing management and operations person-nel, 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 provid-ers 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, equip-ment installation and assembly.

MRO On the MOve | A.t. Kearney2

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 approxi-mately €87 billion ($119 billion), or about 5 per-cent of the gross value-added of manufacturing industries. We expect an annual growth of approx-imately 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 effi-ciency 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 matu-rity and the level of integration of MRO services across countries, we found clear geographic dif-ferences. the highest levels of maturity and inte-gration 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.

Figure 1European market for MRO services

Source: A.T. Kearney analysis

Overall MRO market volume: internal versus external(€ bn, %)

External MRO market volume by service type(€ bn)

2009

-2.6%

2.1%

0.5%

2014e

€33(38%)

€29(33%)

€11(21%)

€32(60%)

€4 (8%)€5 (8%)

€6 (11%)€8

(13%)

€33(55%)

€14(23%)

€54(62%)

€60(67%)

Internal

External

Maintenanceand repair

Operatingmaterials

Equipment and cleaning

Equipment installationand assembly

2009 2014e

€87 €89€54

€60

Compound annual growth rate

5.6%

2.1%

5 65 6%%

1.8%

0.6%

4.4%


Crisis Exposed, Decentralization’s Disadvantages Growth for large european MRO service providers has come through either a centralized or decen-tralized business model. the centralized model, employed by only a few of europe’s large MRO providers, aims to achieve growth through com-prehensive process integration and control mech-anisms. Most providers, though, have relied on the decentralized model, which aims to acquire competitors and position them as local subsid-iaries. 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 operat-ing structure that worked so well when industrial output was strong made enterprise-wide liquidity improvement efforts and cost-reduction initia-tives difficult when the economy faltered. In other words, the lack of integrated processes and control mechanisms between headquarters and subsidiar-ies was a barrier to belt-tightening. the decentral-ized model also limited future growth with large customers that expected integrated service deliv-ery for multiple manufacturing plants across sev-eral 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

Figure 2Decentralized business model

Source: A.T. Kearney analysisKey responsibility

Supplierand service

partnerCustomer

Headquarters

Subsidiary 1

Subsidiary 2

Subsidiary 3

Subsidiary 4

Purchasing

Logist

ics

Service

delivery

Sales and

marketin

g ITHuman

resources

Finance and

controllin

g

Management

Advantages

• Smoother integration and motivated local management• Faster growth across geographies• More knowledge of local issues and customer requirements• Quicker decision-making regarding operational issues

Disadvantages

• More barriers • Less local support to implement cost reduction initiatives • Little coordination of sales activities and operations across

countries


improve process alignment and control mecha-nisms between headquarters and subsidiaries. At the same time, several integrated providers stream-lined 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 Servicesthe trend toward outsourcing MRO services varies widely among industries. For example, many asset-intensive industries—such as chem-icals, 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—auto-motive is a prime example—typically use non-standardized production technologies.

We have observed several successful trans- formations 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.

Figure 3Integrated MRO services: a three-step process


Perform MRO health check Implement MRO conceptDefine MRO concept

1 2 3

• Identify existing MRO concept and processes at plant level

• Check IT systems availability and transparency of MRO data

• Identify MRO cost base for parts, services, processes

• Determine prerequisites for an integrated MRO concept

• Define MRO concept at plant level

• Prepare action plan

• Prioritize MRO services

• Create implementation plan

• Assign responsibilities and define operational targets

• Launch implementation plan

• Set up program office

• Measure cost savings

Pressure on manufacturers to

reduce costs has increased the

attractiveness of — and lowered

the barriers to — advanced con-

cepts in integrated MRO services.


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, out- lining 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 avail-ability and quality of services for critical opera-tions, and cost-savings for non-critical operations. Step three is implementation, where responsi-bilities 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 depen-dency 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 bar-riers, 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

Figure 4Segment MRO services by operations and value-add


Criticaloperations

Non-criticaloperations

Internal value-add External value-add

Fulfill core MRO servicesquickly and easily

• Perform general maintenance of wear and tear parts

• Repair bottleneck production equipment

Fulfill OEM-specificservices

• Maintain robots

• Maintain OEM equipment

• Manage spare part production equipment

Providesuperior quality

and service

Capitalize on availableinternal resources

• Purchase general operations materials

• Optimize general production systems

Leverage volumeeffects of suppliers

• Clean machines

• Maintain forklifts

Focus oncost savings

Example: Automotive


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 get-ting parts and operating materials from lower- cost countries, and some are expanding into new products and services. Manufacturers are con-tracting with these suppliers for various capabili-ties, including sourcing, procurement, logistics, reporting, invoicing and payment for all parts and services. Integrated MRO providers in north America manage their customers’ manufacturing complex-ity for plants both within and outside their bor-ders—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:• Havestrongaccountmanagementcapabilities,

which are used to better serve their customers in north America—and, increasingly, outside north America.

• Leveragepricingandavailabilityoflocalsuppli-ers, then develop a solid supply chain to expand

coverage across plants and geographic regions.• Build close relationshipswith a large number of manufacturers and are nimble enough to leverage their tech- nical expertise as necessary.• Makeseamlessinteractionswithenter- prise 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.

• ProvidetransparencyintotheirMROspendanduse all relevant tools to optimize inventories.

Delivering on Customers’ RequirementsWhat 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 ser-vice provider can help them cut costs. they want assurance that quality and delivery are key capabil-ities 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.

We think the top providers in

North America are excellent

examples of what European

integrated MRO providers

could become.


AuthorsMartin Haubensak is a partner in the automotive practice. Based in the Dusseldorf office, he can be reached at [email protected].

Peter Wessmann is a partner in the operations practice. Based in the Dusseldorf office, he can be reached at [email protected].

David Lamb is a principal in the automotive practice. Based in the Detroit office, he can be reached at [email protected].

Stephen Mickelson is a principal in the automotive practice. Based in the Detroit office, he can be reached at [email protected].

Andreas Graef is a consultant in the Munich office. He can be reached at [email protected].

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