Five steps to slash maintenance inventory costs

Joanne Kelley and Karen Schneider
January 31, 2003
By Joanne Kelley and Karen Schneider

Typically, managers hesitate to initiate a cost-cutting project in this area for fear that parts critical to operations may not be available when needed. And the numbers of each individual part-typically one or two-may look too small to yield meaningful cost savings.

In fact, however, it is possible to minimize the capital invested in inventory without risking equipment downtime, production downtime, or disruption to cyclical preventive maintenance. To achieve this goal, managers must:

• Isolate the sources of demand for MRO parts.
• Improve the processes involved in creating an inventory for planned demand.
• Improve safety stock calculation.
• Improve the processes by which unplanned demand is factored in.
• Optimize parts ordering.

Step 1: ISOLATE THE SOURCE OF DEMAND

There are two primary types of demand that drive MRO parts inventory:

Planned requirements, which include:
Maintenance parts used during scheduled maintenance, clean-up or quality inspection processes. Most of these items are consumable, and requirements for them are predictable over time.

Replacement parts, the need for which can be predicted using the equipment age and Mean Time Between Failure (MTBF) data as provided by the manufacturer.

Unplanned requirements, which result from unanticipated equipment failure or accidents.

Step 2: IMPROVEMENT PROCESSES FOR PLANNED REQUIREMENTS

Typical inventories for planned replacement parts can be minimized through:

• Rigorous adherence to inventory control processes.
• Accurate inventory quantity data.
• Accurate purchasing lead-time data.
• Accurate MTBF data.
• Predictable scheduled maintenance cycles.
• Accurate parts requirements lists for preventive maintenance work orders.
• Inventory system flexibility to order upgrade replacement parts in a timely manner through the formal system.

Many if not all of these processes are already in place in most companies that hold moderate to large parts inventories. But they are frequently not a high priority for rigorous administration, and they are rarely optimized. Thus, there are considerable opportunities for improvements that readily result in cost savings. Experience shows that honing in on these processes can result in significant initial reductions in MRO parts inventories; additional reductions almost always follow as staff confidence and expertise in the processes increases.

Step 3: IMPROVE SAFETY STOCK CALCULATION

Recommending purchase orders to replenish stocked parts is key to an effective CMMS (Computerized Maintenance Management System) or EAM (Enterprise Asset Management) program, which aims at minimizing total equipment downtime. But while these programs trigger reorders when safety stocks sink below levels specified, they depend on manual input to determine what those safety stock levels should be.

Calculating the safety stock quantity should include multiple variables, such as:

• Verification that the supported equipment is still in service.
• Cost of the part.
• Shortest delivery time from all sources including off-site storage, supplier distribution points and sister facilities.
• MTBF and standard deviation for the part.
• Critical level of equipment the part supports.
• Availability of substitute parts or "work around" processes.

In practice, systematic use of these variables is rare. Safety-stock levels are frequently determined by maintenance engineers or information technology support staff using seat-of-the-pants or "cya" estimates that exceed quantities actually needed.

Safety stock can be further optimized when staff have access to data and algorithms that can help them balance inventory costs against the risk of corporate loss. Developing such algorithms requires a clear understanding of the company's long- and short-term financial goals as well as, in the case of utilities, the obligation to serve.

Step 4: IMPROVE PROCESSES FOR UNPLANNED REQUIREMENTS

MRO inventories frequently contain major components of mission-critical equipment-an extra engine is common. These are frequently purchased at the same time as the equipment and capitalized as part of the total purchase. All too often multi-site facilities duplicate these rarely needed components and retain them until the equipment is retired, resulting in the need to discard essentially new components. Comparing component stockpiles available at different sites and reducing component inventories as equipment nears its replacement date can minimize such expenditures.

Cost savings can be realized when sites compare and share this inventory. To maximize multi-site sharing, staff must adhere rigorously to a common system of description when listing parts so that searches of multi-site inventories return correct results quickly.

Increasingly effective preventive maintenance programs reduce the demand for unplanned MRO parts inventories. Reality dictates, however, that the demand for such parts will never fall to zero.

Step 5: OPTIMIZE ORDERING

Ideally, each part would be ordered when the projected demand generated from the future scheduled maintenance work order exceeds the quantity on hand minus safety stock. The purchase order due date is calculated as follows:

• Begin with the date required for preventive maintenance scheduled work.
• Back up this date by the time required for internal picking and kitting of the material for the maintenance work order.
• Back up the new date by internal receiving, inspection, and testing time.
• Back up the new date by delivery time from the vendor site or distribution point to the receiving dock.
• Back up the new date by accurate (neither inflated, nor "rush") supplier lead time.
• Back up the new date by some factor for safety time (if required based on supplier & transportation reliability).
• Back up the new date by internal purchase order processing and approval lead-time.

Cost-cutting opportunities in this area include:

• A reduction in minimum-order requirements negotiated with the supplier.
• Supply chain initiatives like vendor consolidation and electronic ordering. These are frequently already in place in connection with large purchase orders; their extension to the small order quantities characteristic of MRO is often cost effective.
• Elimination of safety time used to insure timely delivery of parts. Safety time (not to be confused with safety stock) can frequently be reduced or eliminated as supplier programs and supplier communications evolve.

Conclusion

An inflated MRO inventory is an opportunity for cost reductions in most energy and manufacturing organizations. And it is not a one-time event. The MRO inventory must be reevaluated periodically to ensure that it is reduced appropriately following, for instance:

Mergers with or acquisitions of companies with similar or identical equipment. Mergers also create the possibility that stocks can be consolidated and reduced because the same MRO parts may support multiple pieces of equipment.

Changes in technology. Newly available parts from either the original manufacturer or an aftermarket supplier may, for instance, extend MTBF.

Changes in corporate strategy that alter the importance of specific equipment and its products to the bottom line. Such changes may significantly alter the risk factors used to optimize the capital investment in parts.

Joanne Kelley is managing director, TransFormance Group, and senior vice president, SPL WorldGroup. TransFormance Group Affiliate Karen Schneider is an expert in areas where information technology and strategy intersect, including process reengineering, IT issues during mergers, and enterprise resource planning.

What is MRO?

MRO (Maintenance, Repairs and Operations) inventory consists of the indirect materials that are required for manufacturing processes, but do not become part of the product. The bulk of MRO inventory consists of small quantities of lots of parts used for repairs to machinery and equipment.

Unlike Raw Materials (Raws), Work in Process (WIP) and Finished Goods (FGI) inventories, MRO inventory items are usually expensed upon receipt and do not appear on the balance sheet.

Add comment

Disclaimer
Note: By submitting your comments you acknowledge that Pulp and Paper Canada has the right to reproduce, broadcast and publicize those comments or any part thereof in any manner whatsoever. Please note that due to the volume of e-mails we receive, not all comments will be published and those that are published will not be edited. However, all will be carefully read, considered and appreciated.


Security code
Refresh

Subscription Centre

 
New Subscription
 
Already a Subscriber
 
Customer Service
 
View Digital Magazine Renew

Most Popular

We are using cookies to give you the best experience on our website. By continuing to use the site, you agree to the use of cookies. To find out more, read our Privacy Policy.