Recent strategies lower chemical inventory costs and environmental impacts

There may have been a day in American business when the term “MRO” (Maintenance, Repair and Operations) meant next to nothing to the people in charge of the corporate bottom line. But those days are apparently long gone.

Having squeezed every penny of savings out of their “direct” spend and manufacturing operations in the past 20 years, U.S. companies have been looking hard at the savings opportunities that can be realized by optimizing their “indirect” MRO material buys–which researchers say represent hundreds of billions of dollars in purchases annually in North America alone. Other studies show that, on average, as much as 40 percent of MRO dollars in business are spent in unplanned areas.

How a company actually saves, however, and what other benefits fall out of a sound MRO strategy, depends entirely on the company, its commitment and the cooperation, intelligence and hard work of their employees and vendor partners.

MRO Consolidation Is Important — and Growing

“In the almost eight years I’ve been covering supply chain management and how it touches procurement, I’ve seen a growing realization that MRO is important,” says Andrew K. Reese, editor of Supply and Demand Chain Executive magazine.

“I think, traditionally, people looked at the indirect spend as if it was unglamorous,” Reese observes. “But the fact is, if you look at most companies their MRO spend represents 15 to 40 percent of the cost of goods sold. In a situation like that, even a modest 10 percent or five percent savings could generate some significant money.”

Reese says to implement a successful MRO streamlining program a company should be sure to get early buy-in from all stakeholders in the process: procurement, supply chain, internal end-users of the MRO products and “senior support” from at least one person with some accountability for corporate profitability. Reese says companies need to be able to show the business case for an MRO program.

“These spends are traditionally uncontrolled, so decisions about the space must be made at a fairly micro level,” he adds. Reese states that while conventional wisdom is that MRO spends are “fragmented,” he believes the prudent way to pick the low-hanging fruit of MRO is to start by focusing on one “sub category” of indirect spend.

“The easiest, most logical way to MRO savings is to pick your sub category and collect good data on how much you spend on that specific type of MRO product aggregated across all of your facilities,” he advises. In this manner, Reese says, a company might find it has dozens of types of a product supplied by dozens of vendors–even though each of the various products is serving precisely the same MRO use.

“Of course, you would analyze why people were using so many different types of products (SKUs) for the same use across your facilities,” Reese says. “But it’s likely that these items are being purchased with little or no controls, and you might really need only five types of products from one or two vendors. That entails consolidations and leveraging your best possible prices on the products you do want to carry,” Reese says, “and it’s your source for savings.”

A Good Program Takes Leadership

Dave Porter, VP of Marketing for Barnes Distribution, agrees saving on MRO has been of increasing interest to businesses in the past decade. “MRO savings are really driven by business leadership, the people at a company who want to reduce their overall spend and overall cost of ownership,” says Porter. “These people are looking to outsource the cost of a high number of SKUs, and trying to reduce a lot of overall procurement time,” he adds. Barnes Distribution has been sourcing to industry for 80 years, and today provides to some 100,000 clients globally from a selection of 55,000 “general line” MRO products and millions of non-stock ones.

Watson Boxley, VP of Sales at Barnes Distribution, puts the benefits of strategic MRO purchases another way. “For years,” says Boxley, “companies only focused on Class A and Class B consumables. The Class C MRO items fell below the purchasing radar because they might represent only 10 percent of the overall spend. But, guess what? What we see is that Class C may only be 10 percent of spend, but finding the right supplier can have intangible benefits along with cost savings.”

CSTCM Today interviewed Barnes Distribution executives because the company, with its new “low hazard ‘green’ catalog,” is one of the emerging leaders in a new trend toward leveraging the opportunities available in sourcing less expensive and less toxic MRO chemicals.

Though American business has been searching for savings in MRO buying programs for a decade or two, it is only in the past couple of years that a significant number of companies have started looking at the aggregate purchase price–and just as important, the toxicity–of what may amount to thousands of small-volume, individual MRO chemical buys. For a company to do a good job of assessing their chemical inventories usually requires third-party expert assistance to make the right choices of what sustainable and affordable products to stock. After all, chemical, scientific and government sources estimate that there are some 100,000 synthetic chemicals in use in North America in some three million chemical-intensive products.

Spending (and Toxicity) Largely Uncontrolled

“It really can have a strong negative impact,” says Boxley. “The chemical play is particularly important, especially at institutions where there is uncontrolled spending on low-volume chemical products. A company may be unwittingly stockpiling hundreds, or thousands, of products annually, for which there are no valid spending controls. And, on top of that, a greater volume of hazardous materials on the site increases the company’s overall toxicity, risk and exposure.”

Companies should stop, take a deep breath and start looking at MRO chemical purchases and how they can be reduced and standardized, according to Dee Cozart, Senior Director of the Corporate Safety Office for the American Red Cross, which is now doing its own sweeping MRO chemical standardization program (see related story).

“Many companies simply don’t know the true toxicity levels of their MRO inventories. But I feel they should,” Cozart says. “Employees of companies who buy MRO chemicals, of course don’t go out and make these impulse buys and add to the toxic footprint of their organizations because they don’t care about the hazards. They might see that a chemical, a glass cleaner or other product is on sale,” says Cozart. “So, they’ll pick it up. But then they’ve got no concept of how dangerous it might be. There’s no real thought to the overall toxicity and the overall cost. It’s an impulse buy, and they just don’t know.”

The Data Side of the Equation

“Many well-meaning professionals simply can’t believe how terribly out of whack things are until they see their company’s data with their own eyes”, says Mark Wysong, CEO of Dolphin Software, a leader in software solutions for increased visibility into MRO chemical inventory costs and toxicity. “When we use our software to examine the company’s product use categories, of which there may be as many as 700, people are often shocked.

“Across all its facilities, a major company may be using 500 different adhesives from 120 vendors,” adds Wysong. “They might have nearly 900 greases from another 200 vendors. Financially, that’s not wise. Most often people also don’t realize that there are more sustainable products that can be purchased more affordably, and that some of those products are already being bought and used by their company in some other facility.”

At its simplest level, Wysong identifies two steps for a company in reaching real savings and reduced toxicity in their MRO chemical inventories.

“First, you must get an accurate physical inventory across all your sites, which today we can do quickly thanks to electronic inventory tools,” he says. “Then, by running that electronic inventory data through a software program you quickly get insight into product spend, hazards and proliferation. Ultimately, you get a comprehensive overview for greatly increased procurement performance.”

Wysong says Dolphin’s software allows for categorization of MRO chemical products by their general and specific use and ranks items by price-per-unit, as well as human and environmental hazard points assigned based on the ingredients on federal and international hazardous chemical lists. He says the software matches against such well-known lists as those from OSHA, EPA, the European Union, the National Toxicology Program, and California Proposition 65. From there, companies can identify and select the safest, most affordable chemical products from those already in use—while eliminating the most hazardous and expensive ones.

“It is not rocket science,” says Wysong, “but it is a fairly new best practice for industry. And it will require companies identifying leaders to drive these important programs. Once that exists, the savings and the return on a safer and cleaner inventory and business in general are simply enormous.”

Chemical SKU Reductions and Inventory Greening

“Taking advantage of opportunities to reduce costs and toxicity in MRO chemicals is vital,” says John Wierda, VP for Corporate Accounts at Barnes Distribution. “We are now seeing success stories in key markets such as utilities and mining. These companies are going through a four-step process: gaining visibility into the inventory, analyzing the inventory, selecting products that are less costly and less toxic, and sourcing those products. That’s how you effectively execute a program.”

But Wierda cautions that companies need to have good information upon which to make informed decisions.

“Some people are talking a good game,” he says, “about instituting so-called ‘green’ programs. But that’s ‘green’ relative to what? That’s why I encourage people to work with vendors who actually know what the chemical ingredients are in the products they are sourcing, understand how that data stacks up against the known hazardous chemical lists and how to measure and report on their progress in replacing these products with less toxic or hazardous alternatives.

“It requires companies going into their MRO programs with a true desire to do the right thing,” Wierda says. “With companies that make the effort to get good information and the right partners, we’re seeing a whole new world of opportunity for saving money, being more competitive and being socially responsible at the same time.”

From Compliance Side Total Chemical Management Today, Vol. 4. No. 1 2007