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Category Intelligence - Maintenance, Repair and Operation

Beth Seager

16 November 2020

10 mins

Maintenance, Repair and Operation (MRO) plays a crucial role in ensuring supply chains run smoothly.

The industry delivers spare parts and maintenance services to industries in all sectors to make sure they keep delivering to customers.

A lot of the products are low value but required in large volumes on short lead times.

This category intelligence report will show key facts about the industry including the market size, growth trends, competitive landscape, cost drivers, value chain vulnerabilities, technological disruptors before finishing with recommendations on how to thrive in MRO.

Definition

Maintenance, Repair and Operation (MRO) is an indirect spend category meaning quantities of parts used and value spent doesn’t directly correlate with the levels of production output. Additionally, the goods and services bought don’t become part of the company’s sales product.

In a manufacturing operation, MRO encompasses all the goods and services required to keep the production plant running: nuts and bolts, valves, motors, gaskets and thousands of other items.

In service organisations, MRO includes heating, ventilation and air conditioning (HVAC), buildings upkeep and janitorial products.

MRO is normally part of a company’s ‘tail’ spend. When undertaking a Pareto analysis, the top 80% of spend is almost always spent with only the top 20% of suppliers. The remaining 20% of external spend tails off into the remaining 80% of suppliers. MRO will normally fall into this 80%.

With tail spend, customers are looking to reduce the costs of each transaction. When a Purchase Order is requisitioned and raised, it has a cost to the business. According to CAPS Research, the average cost of this transaction is $217 but it varies by industry up to a huge $741 in the petroleum industry.

Reducing this operational spend is an opportunity for differentiation and competitiveness in the MRO industry and many companies are tackling this by introducing eProcurement and Vendor Managed Inventory. Mordor Intelligence has found that eCommerce has increased the availability of spare parts and was a key reason for Zoro’s $624m turnover in 2019.

When mapping the supply base using the Kraljic matrix, MRO will normally fall under the non-critical category. This is where you want to spend the least effort and leverage prices. However, this doesn’t mean you can’t become a key partner, something we’ll explore later.

Market Size

The global market value was $608bn in 2018[1]. The Asia Pacific (APAC) region is the largest region, with a value of $225bn, followed by Europe with $164bn and North America close behind.

The pandemic has impacted the market, with many customer factories closing either temporarily or, in some cases, permanently. This includes the automotive sector which is expected to see a vehicle sales decline of 22%.[2]

Similarly, in the aerospace sector Airbus reduced their EBIT by 59%[3] and the manufacture of new aircrafts were slowed or halted in Boeing and Bombardier.

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Growth Trends

Despite the economic downturn caused by the pandemic, MRO is still a growing sector worldwide.

The compound annual growth rate (CAGR) is expected to be 2.13% between 2019 and 2025[4]. This is being driven by an increase in digitalisation and a drive for greater efficiency in the market.

APAC expected to have the largest growth. This is driven by high investment in R&D and the creation of ‘intelligent’ factories. Remember that APAC is not just China. India and Taiwan are expected to receive investment as companies look to expand in the area around China.

Competitive Landscape

The MRO market is reasonably fragmented with several global players and many regional ones. There is also a lot of diversity in hyper-local markets.

The main global MRO operators are:

· Sonepar SA, turnover $26bn

· Adolf Wurth GmbH & Co, turnover $15.5bn

· W Grainger Inc, turnover $11.5bn

· WESCO International, turnover $8.4bn

· Airgas, Inc, turnover $5.3bn

· Rubix Group, turnover €2.3bn

· Electrocomponent (RS Components), turnover $2.3bn

· Eriks, turnover $2.2bn

The competitiveness between these companies forms part of the competitive landscape, but there are other external factors to consider as well. These external factors influence market competitiveness regardless of the quality of the product or service offering.

Michael Porter identified 5 external forces which affect the overall level of profitability of a product. Alongside the competitive rivalry, there is buyer power, supplier power, scope for new entrants and scope for substitutes. We’ll consider each of these below.

Power of Buyers

Where buyers are powerful in the market, they can leverage the price down and raise expectations for delivery, quality and innovation.

Key buyer industries are aerospace and automotive sectors, as well as other manufacturing.

One of the biggest competitive factors in the MRO market is the quantity of competitors and how easy it is to switch between providers. A lot of the service output is in distribution and the market is fragmented enough that there are many suppliers to choose from based on price or delivery capability.

This is being counteracted by large operators by providing more value-adding services, which has the dual purpose of providing a good service to customers and making it harder to switch to a competitor. An example is RS Connect, a vehicle telemetry system which automatically books services and repairs for vehicle fleets. This takes RS Components’ offering from the distribution of spare parts to a service that is integrated with their customers’ fleet, making them much more valuable to their customer.

Another factor in the competitive environment is the scope for backwards integration. This is an unlikely threat to the MRO market as the current trends for mergers and acquisitions are to focus on the core business and MRO is rarely considered core to manufacturers.

To counteract any threat of integration with customers, MRO providers can offer service integration with data analytics and software integration so that the perceived benefits of backward integration are already being fulfilled.

Power of Suppliers

The other side of the buyer power coin is how powerful the suppliers into the market are. Suppliers’ power is affected by:

· how differentiated their product is, including patents and brand loyalty

· the diversity of the supply market

· the threat of forward integration

· the availability of multiple marketplaces

· whether customers are ‘locked in’

Original Equipment Manufacturers (OEMs) are influential in the market where customers feel tied to their products for spare parts and repairs. This can tie customers in for the lifespan of the original equipment, which could be 20 years or more.

OEMs can dictate prices, particularly for legacy products that are no longer manufactured.

A way to counteract the power of suppliers is to market your own label goods. A market leader in this is Eriks, who sell bearings, belts and motors under their own brand and encourage customers towards the benefits of non-OEM parts where appropriate.

Sonepar own key brands recognised as specialists in their industry, including Routeco, an electrical, automation and pneumatics specialist.

Another threat from suppliers is if they offer preferred distributor status to an MRO supplier. This is usually allocated by geographic area. This can result in you being less price competitive on their products compared to their preferred distributor.

Forward integration could be a threat in this market, with OEMs investigating the opportunity of a one-stop-shop for their customers: “More OEMs and service providers are building repair facilities to take advantage of the increasing demand for MRO services. In regard to OEM Solutions, with our capability to focus on product lines and distribute throughout the world in many regions where OEMs are not specialized, we are benefiting from increased spare parts consumption,”[5] stated Eric Young, AAR’s vice president of OEM Solutions. In order to achieve this, OEMs may acquire MRO companies.

Scope of New Entrants

The ease for new entrants to disrupt the market affects the competitiveness of the overall market landscape. This, in turn, affects capacity which impacts individual companies’ market share and pricing within the market.

The barriers to entry are cost of entry, applicable regulations, the ability to access distribution channels, the retaliation from existing companies, the advantages from incumbents such as access to technology and economies of scale.

Nominally, the cost of entry to the market locally is small as distribution networks are easy to access and the goods are generally low value, high turnover. However, access on a multinational or global scale requires investment in excellent stock management and relationships with OEMs.

Customers in the MRO market require a next day delivery service and new entrants may not be access economies of scale or the advantages of having an existing distribution network.

Europe and North America are the most developed MRO markets but also the ones most under threat from new entrants. Here, new entrants with IT capabilities are attracting customers with their analytics and reliability capabilities.

Longer payment terms expected by the buying organisation for this type of purchase, which requires healthy operating capital and can act as a barrier for new entrants.

The trend towards becoming a reliability partner in increasing OEE and offering services such as condition monitoring has created a barrier to entry. New entrants will need expertise in the type of equipment their customers operate, whether that’s aerospace, automotive, pharmaceutical or any other market (or likely all of the above).

Scope for Substitutes

There are four types of substitute goods:

· a generic alternative

· an alternative brand

· an alternative product

· a re-evaluation of whether the product is needed

Generic substitutes are being offered by many MRO companies, for example RS Components offer ‘RS PRO’ branded items. Likewise, Eriks and Brammer sell components under their own name. This offers differentiation in the market based on price point, as these ‘own label’ products are a lower price than their OEM counterparts.

Customers can substitute their purchases for alternative brands. In some MRO categories, this is possible, such as motors, bearings and belts. However, key component parts are likely to be tied to the OEM.

MRO companies can also differentiate themselves by offering customers product substitutes. This is often offered in conjunction with added benefits such as energy savings. Sonepar offer energy audits and recommendations for LED lighting in place of traditional strip lights in offices and industrial settings.

The final substitute is one of need. MRO companies can consider whether their customer needs the product at all. Whilst this seems counterintuitive for a business that wants to increase its turnover, many MRO companies are expanding to offer reliability and condition monitoring services. The aim of this is to increase equipment run time and consequently decrease the amount of spare parts and maintenance services required.

When considering substitutes, it’s important to consider whether there is an alternative way for customers to fulfil their need without your product or service.

MRO companies are in an unusual position in that they can offer many types of substitute for the same goods. However, so can other MRO companies. This is one reason why the large companies have differentiated themselves by offering additional services. These services can be sourced in-house, with different MRO suppliers or potentially with OEMs.

This is one driver of the competitive rivalry in the market.

Competitive Rivalry

Part of the external marketplace is the amount of competitive rivalry between companies in the market. Put simply, it’s the consideration of how hard a company must work to retain or gain business.

The greater the competitive rivalry, the less potential there is for high profits in the market.

As previously discussed, the MRO market is fragmented, with competition between multinational and local players. On average, companies use 39 companies for their MRO purchases.[6]

Other factors that drive competitive rivalry are the industry growth rate, the desire of other players to dominate, capacity changes (e.g. adding a new facility) and high exit barriers.

The CASME Global Digest on Capital Procurement and MRO found “the main objectives of an MRO purchasing strategy include obtaining the lowest market prices for all products, as well as extended warranties, reduced lead times, the standardisation of parts, and rationalisation of the supplier base.”

Globally, the market can be considered highly or at least moderately fragmented, but on a local scale this can get even higher, with SMEs offering services locally.

Partnering

We’ve discussed above the competitiveness of the MRO industry. The supply of goods into this market is highly competitive in part because of the ease of change from one supplier to another.

To tackle this, large MRO suppliers are offering services to partner with their key customers. This offers incentives for the customer to enter longer term contracts and makes it more difficult to switch supplier.

MRO companies are differentiating themselves on the services they provide and tailoring them for their preferred market.

For example, Eriks and Brammer, part of Rubix Group, will embed personnel into their customers’ warehouses to manage the stock for them. Similarly, gathering data for reliability of plant equipment and offering services in this area decreases the ease of change to another supplier.

Cost drivers in MRO

Around 55-60% of the cost of components is materials.[7] This means that commodity prices and exchange rates can have an immediate effect on profit margins.

Similarly, parts must be distributed from their manufacturing base to customers around the world. The cost of distribution, including fuel and transport labour are another cost driver.

CASME found that “Organisations will continue to explore the use of [low cost country] suppliers, with China remaining a major supply centre. Vietnam’s rapid advancement in technological capabilities will continue to make an impact on the market.”

The international nature of sourcing through the supply chain means the ongoing trade escalations between the USA and China could impact some MRO categories by 8-12% on the price of spare parts.[8] This is most likely to effect tools, fasteners and power transmission.

For service provision, personnel, and the administration to support them, are required in each of the countries where the service is being provided. This means costs of labour and utilities is a driver.

Supply Chain

The MRO supply chain is global by nature. As many of the service offering is distribution and the intent of being a ‘one stop shop’ for OEM parts, the supply chain must naturally incorporate companies is whichever part of the world the OEM operates.

Some companies have retained operations in EMEA and North America, for example Flowserve manufactures valves and pumps in these continents. However, there has been sourcing from low cost countries like in many industries.

Long term agreements with OEMs and key suppliers, including volume discounts for those companies with large economies of scale are a way of offsetting the tariff costs of a global supply chain.

Local offices in low cost countries can also offer lower administration costs and local information regarding the supply market but also an entry point into servicing these parts of the world which are a developing market for MRO supply.

Value Chain Vulnerabilities

The value chain describes the activities that bring goods and services from the bottom of the supply chain to the final downstream customer, with emphasis on what adds value to the final user.

The vulnerabilities in the value chain include guaranteeing quality, ensuring stock levels, maintaining labour availability and pricing, and counteracting pressure from technology disruptors.

Guaranteeing quality from low cost countries means conducting thorough audits of the supply chain and having a robust quality assurance policy to check goods inwards meet the quality standards. For example, steel products must be certified and there have been examples of steel items being mis-labelled and mis-sold in the global marketplace.

Even though it’s not a direct good, a lack of supply of MRO goods and services can stop customers’ production. A stock out of PPE could prevent a team from working and a lack of the right bearing could prevent a chiller from cooling a process down.

Stock outs could be caused by delays at borders, transport availability or disruption at the manufacturer level. In MRO, customers are searching for a lean supply operation which saves them the cost of stocking items themselves. However, for the MRO supplier, a balance needs to be found between just-in-time and just-in-case stock levels to prevent stock outs.

Labour availability is a particular concern during the pandemic. For example, 300,000 people would ordinarily cross the border between Malaysia and Singapore every day, but this crossing closed from March 18th until August 10th 2020.

Technology can offer some resilience against value chain vulnerabilities, opening up chains of information and allowing decisions to be made faster. However, some technology has the capacity to change the market, not just speed up the current operating models.

Technology Disruptors

Called ‘Digital MRO,’ technology is making waves in the MRO market and can be a huge differentiator between competitors as well as a value-add to customers.

There are four main technological solutions that are changing the industrial landscape:

· Vendor Managed Inventory

· 3D printing

· Industrial Internet of Things

· Blockchain

Vendor Managed Inventory (VMI), sometimes coupled with industrial vending machines, offers customers the opportunity to reduce the cost of their stockholding whilst maintaining stock levels on their site. Stock management technology provides analytics to the customer about what is being used and when. When coupled with a vending option, stock is provided straight to the ‘shop floor’ and usage metrics drills down to each individual user.

One in four companies cite VMI as a strategic priority for their low value, high movement MRO items.[9]

Whilst VMI has caught on in the marketplace, some technology hasn’t been adopted widely yet but has potential to transform industry and MRO.

3D printing has been predicted to revolutionise mass manufacturing since its invention in the 1980s. In this time, it has struggled to get a foothold into the market, but now the technology has developed enough to print in a larger variety of materials, including metals, ceramic, resins, glass, carbon fibre and plastics. This means it’s likely to be offered as a viable option for MRO to shorten the supply chain and offer fast supply of items.

In fact, Etihad has partnered with BigRep to develop 3D printed cabin parts, including head rests, side panels and parts of the onboard entertainment system.

It still has a long way to go, not least because of the complex nature of certifying items for industrial settings. Nevertheless, early adopters of 3D printing could slash their operating costs and stand out to customers.

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A technological development which is already being widely discussed is the Industrial Internet of Things (IIoT), or Industry 4.0, is the term used for the introduction of connected devices and automation throughout the manufacturing value chain. This can include RFID tags on distributed goods to track precise locations through the supply chain, through to smart factories which monitor equipment health and report back for maintenance activities.

IIoT has three steps: data collection, data analysis and action. The MRO market has an opportunity to be part of all three. Data collection can be provided relatively easily because orders are placed electronically which can be outputted to the customer to demonstrate usage history. To move to step two and do data analysis, the MRO company will need further information. For example, if a customer continuously orders the same kind of bearing, it could be because it’s widely used across their plant or it could be used in the same pump which regularly breaks down. The latter could be vital to the customer to understand where their reliability problems lie. To move to the third step in the IIoT process, the MRO provider will need to provide other services, such as lubrication to prevent the bearings from seizing.

The more that IIoT is adopted, the more these actions can be driven by automated processes.

To take it even further, Artificial Intelligence (AI) is being used to determine maintenance schedules and the prioritisation of work tasks.

Digital devices and connected communication between plant equipment is likely to renovate the MRO market. Unlike 3D printing, it’s already forming part of customers’ strategies, particularly in the APAC region.

According to RS Components, 12% of APAC companies had an IIoT strategy in place, up from 4% in 2018. There is low adoption in the UK, but this has still risen from 4% to 7% over the same period. Largely, this difference can be cited to ageing equipment and the need for investment.

This connectivity doesn’t have to be solely between the customer and supplier. Blockchain technologies are increasing visibility through the supply chain. It puts information about stock levels, and the locations of each product in front of the end customer.

Another technological solution that is being offered by MRO companies is augmented reality. For example, with the use of a virtual reality headset, maintenance personnel can bring up instruction manuals and data relating to the equipment in front of them in the factory.

Recommendation to Thrive in the Category

Buying organisations want to focus on their core competencies.

The RS Components Whitepaper on The Future of MRO found that in 2019, 62% of professionals in charge of indirect spend had reducing operational spend as their number one priority, which is up from 58% the previous year.

By making it as easy as possible for your customer to order you also reduce their on-costs. Most MRO companies now provide an eProcurement system for quick and easy ordering. Procurement teams review the Total Cost of Ownership for their supplies. If your services lower their costs in other areas, you have a differentiator from competitors that isn’t price.

Additionally, 39% of procurement professionals were focussing on improving asset performance. This is where IIoT and reliability services can be brough in. Start small with regards to IIoT. Condition monitoring is an excellent source of data and can give eye-opening information into the health of a plant. Oil analysis from a motor is not a particularly hi-tech sounding solution, but it’s a simple entry point into IIoT.

Digital technology is becoming a common feature of MRO so investing in technology-driven solutions for your customers is critical. The problems your customers face are likely to be ageing equipment and plant reliability. Make your proposition resolve these problems.

Take opportunities offered by companies wanting to be lean and reduce the on-cost of having their own stock management. However, the future isn’t just about IIoT and lean supply chains, 35%[10] of procurement professionals experience business pressure towards sustainable procurement.

The close relationship offered by long term partnerships with customers opens opportunities to stay informed about the customer base’s key goals, including lean and sustainability, so that you can tailor your services to solve these problems.

This partnership also makes it more difficult to switch between suppliers, enhancing your position in the competitive landscape.


[1] Beroe Advantage Procurement

[2] The Effects of Coronavirus on the Automotive Industry, MES Insights, 19/06/2020

[3] Airbus Concentrates on Cash Preservation as Crisis Starts to Bite, Flight Global, 29/04/2020

[4] Mordor Intelligence

[5] Supplying the Supply Chain, Aviation Pros, 09/12/2019

[6] The Future of MRO, Indirect Procurement Report 2019, RS Components

[7] MRO Market to Reach $660bn by 2020, PR News Wire, 14/02/2019

[8] Beroe Advantage Procurement

[9] The Future of MRO, Indirect Procurement Report 2019, RS Components

[10] The Future of MRO, Indirect Procurement Report 2019, RS Components

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