Strategic Sourcing in the Mid-Market
What's Behind Storeroom Wars

Each step in the distribution of MRO items from manufacturer to end user presents an opportunity for conflict which, if unresolved, adds cost to the process. George Krauter, an industry expert with years of experience in MRO distribution and integrated supply management, says there has to be a better way. He’s a proponent of outsourcing stores management.

By George Krauter

Here’s a brief analysis of the hypothetical MRO distribution chain:

A manufacturer markets through distribution. The company has two facilities to make its products, of which there are about 12,600 part numbers. It has finished goods inventory at the two facilities and in three regional warehouses to service distributors. Authorized distributors have five regional warehouses with finished goods inventory which services local distributors also with finished goods inventory. Local distributors solicit users and deliver parts to the receiving dock. The company moves parts through receiving into stores for distribution to substocks or to a use area with finished goods inventory. The part goes through five distribution steps and has the potential to exist in duplicated locations.

Here are opportunities for conflict or barriers:

Barrier One: Manufacturer vs. distributor. The manufacturer has multiple authorized distributors in geographic regions. These distributors also stock and distribute competitive brands. The manufacturer has salespeople who call on distributors to get them to sell its brand vs. the competition. Generally, manufacturers think that distributors do not stock enough inventory and rely on their finished goods stocks. In addition, the manufacturer takes umbrage because the distributor is selling competitive brands while bristling if the manufacturer adds distributors. Manufacturer salespeople are supposed to spend time at the user level and work with distributor salespeople. This creates conflict among distributor’s competition and can cause loss of sales concentration.

Barrier two: Distributor vs. manufacturer. The distributor makes money with stock turn and mark-up; more turn and more mark-up equals higher bonus for branch managers. They want better manufacturer’s delivery (in order to lower branch inventory) and deeper discounts for increased volume. They stock competitive brands because they do not want to give up sales where brands cannot be switched.

Barrier three: Outside vs. inside vs. management. This is internal at the distributor level and is three pronged—inside sales vs. outside sales vs. branch manager. The branch manager wants stock turn (lower inventory) and mark-up (bonus); inside sales wants higher mark-up (incentive payments) and higher inventory (order fulfillment); outside sales wants lower mark-up (gets paid on gross) and higher inventory (order fulfillment).

Barrier four: Outside sales vs. the MRO buyer. The distributor salespeople have no real advantage over the competition. The buyer wants lower prices and complete, quick delivery. The salesperson pressures the inside sales department for lower pricing and exceptions to scheduled deliveries.

Barrier five: MRO buyer vs. the requisitioner. The buyer balances price and availability to satisfy plant needs. The requisitioner wants it now and wants to show that the buyer’s price is too high. "I can get it from Evie and Ben’s Mill Supply for $1.20 cheaper." Requisitioners will try to buy around purchasing which causes a dilemma for the outside salespeople. "Do I go around purchasing and cause acrimony or stay with purchasing and lose the order," sales asks.

Barrier six: CFO and site purchasing vs. stores management. Who is in charge of stores? No matter; management wants lower inventory, higher fill rates, zero down time and less personnel time. Stores wants higher inventory to fill requests and not feel the brunt of requisitioner’s ire.

Barrier seven: Requisitioner vs. stores. Requisitioner: "You never have anything." Stores: "Use what we have." Since fill rates are generally below 90% and 25-35% of needed MRO parts are one-time nonstock buys, oftentimes requisitioners will go around stores to create their own stock numbers and substocks. Due to fear of downtime from perceived stores inefficiencies, requisitioners will take more than they actually need to guard against stock outs. This causes stock outs for other requisitioners. Stores is in a difficult spot. Management wants lower inventory; manufacturers of new machinery want "48 each" of spare parts into inventory; requisitioners take too much and take parts in off shifts because of emergencies or to avoid budget charges. The stores clerk is the front line of MRO irritation.

Barrier eight: Plant manager vs. everybody. MRO impacts site profitability. MRO inefficiencies, duplicated costs, missed opportunities for financial and nonfinancial improvements can be the difference in maintaining the viability of the entire facility.

The complexity of the MRO supply chain and the subjectivity of its links are the cause of undefined MRO expense, says Krauter. Since MRO is only about 10% of a company’s annual buy, management tends to turn its attention to “more important” things, taking the view that MRO is what it is and will remain so. Therefore the condition continues to exist.

"A look at the process highlights the conflicts that exist," Krauter says. "Each barrier, if toppled, contains an opportunity to recover value from MRO."

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