Leveraging the MRO storeroom’s ‘silver bullet’

MRO storerooms have universally become the dumping ground for just-in-case inventory. I have never been to a plant that didn’t have either secret hiding places, bone yards or cabinets filled with parts that can be cherry picked. Even in the most ardent organizations, there appears to be a constant battle among operations, maintenance, facilities and project engineering over who, what and ...

By Andy Gager, Marshall Institute July 1, 2009

MRO storerooms have universally become the dumping ground for just-in-case inventory. I have never been to a plant that didn’t have either secret hiding places, bone yards or cabinets filled with parts that can be cherry picked. Even in the most ardent organizations, there appears to be a constant battle among operations, maintenance, facilities and project engineering over who, what and where to store materials. A world-class storeroom operation manages spare parts that optimizes the availability of equipment and ensures mean time to repair is minimized, continuously improved and controlled. The issue then is how do organizations achieve this?

Believe it or not, there is a “silver bullet” in achieving ideal inventory levels in every manufacturing operation. Some companies view MRO storerooms as cheap insurance policies while others view it as a necessary evil. Looked at differently, this inventory is a cost of doing business or risk manipulation. I prefer to look at all MRO storeroom operations as the tactical and strategic costs of doing business that assures the right parts are available at the right time, at the right price and quantity. When this phenomenon aligns with maintenance excellence practices, reliability of the equipment and operation of it produces the sweet sound of money. Organizations should view the equipment as money-making machinery that assures it continues to make a quality product reliably.

What then is the right inventory level? There is a series of activities that are required before we can determine the correct stocking levels. I refer to this as a two-phase inventory management system. The first phase is tactical in nature and is the basics of fundamental storeroom operations. These are the activities that must be done daily to assure the storeroom operation is running effectively and efficiently.

We start with identifying all the items in our facility. This includes the parts stored behind benches, cabinets, closets, etc. We must first determine what we have. After we have documented what we have and how much, I suggest we weed out the obsolete, discontinued, damaged and the “don’t know what it is but don’t throw it away” stuff. Every plant has it and every plant will make an excuse as to why to keep it. My recommendation is this: if we need it, justify it, label it and manage it. If we can’t, get rid of it. If it truly is an item we must store, then reclassify the part as a critical or capital spare.

After we know what we have and how much of it, we can then begin to manage the stock in a more tactical business approach. This means implementing a series of processes that ensures the management of company assets. People come and go and titles change, but processes are what sustains the business and serves as the backbone of success to the operation.

Once we understand what we have and how much of it, the second phase is to identify the correct inventory levels by using the following specific methodologies.

Establish correct min/max levels

Use min-max planning to maintain inventory levels for all your items or selected items. With min-max planning, you have the option to specify minimum and maximum inventory levels for items. When the inventory level for an item drops below the minimum, then a requisition is automatically generated for a reorder quantity, usually the maximum level. Remember that the more successful min/max tools take lead times into account. It is very important that the information in the item master accurately reflects the lead time for a stocked item.

When the min/max levels are determined, a simple spreadsheet can be produced to reflect all the parts that are above the maximum levels. On average, 6% of total inventory value accounts for 90% of total storeroom issues. In this group alone, typically 47% is considered excess or above the maximum levels. Ignoring or allowing excessive inventory prevents buying the right materials that keep the operation running. Excess inventory is also a sure sign that the organization is in a reactive maintenance environment with little confidence in the MRO storeroom. Artificially inflating the inventory quantities has a direct impact on the cash flow of operations.

In the same spreadsheet, we can also identify those items that fall below the minimum levels. This will allow procurement to bring those items in at regular freight and greatly reduce the risk of a stock-out or worse.

Use EOQ models for redundant usage items

Most EOQ equations attempt to calculate the optimal order size by balancing the cost of carrying inventory against the cost of placing an order. The equations are based on the relationship between the cost of placing orders, the costs of carrying inventory and the order quantity. Most EOQ formulas also make assumptions that demand rate is constant, costs are fixed and carrying costs are calculated. EOQ is not intended to be used on all stock items.

Very few companies actually calculate the cost of placing an order. Most companies calculate carrying costs. But if your organization expenses MRO supplies, then this may be difficult to calculate. The fact that demand is known and consistent is contrary to typical maintenance operations. EOQ is best applied to an item that is a consumable or replaced regularly. Thus, daily, weekly or monthly PM consumables and/or replacement parts are prime candidates for use of EOQ calculations and ordering policies.

Critical spares

Critical spares are those items identified by some methodology (as opposed to emotional decision) that are required to be on-hand due to potential catastrophic equipment failure. The impact to the organization is so great that it would be more costly in downtime and lost production than to purchase and store.

In most organizations, critical spares have been designated because of some past traumatic experience when the part was not available and the decision was made to have it in stock no matter what. Then the case can be made to have one of everything in stock. Since this is neither reasonable nor feasible, organizations must use some methodology to help identify those items that truly are critical to the operation.

Critical spares are like a life insurance policy: you have to have it but you don’t want to use it. Think of these items as risk mitigation for managing and limiting the potential for catastrophic failures.

Obsolete materials

Obsolete or slow moving items take valuable space and consume valuable dollars. Typically, 58% of an MRO storeroom has not moved in more than three years. How did almost 60% of the inventory become obsolete? Capital project excess, unknown part usages, engineering changes to equipment bill of material, decommissioned equipment and OEM recommendations are some of the numerous reasons why MRO storerooms collect slow moving items. The work now is to develop a process that addresses these issues and assures that they don’t get out of hand again.

A cross-functional team should be formed to develop the process and make the disposition of materials. One suggestion is to create a list of all materials with no usage over three years. If this list is too large, back off to no usage for four years and so on. Then break this report down to smaller, more manageable buckets — for example, electrical, mechanical, rotating, departmental, production line, etc. Give this list to a functional expert of that area or person of expertise for review. The chances are greatly improved that the correct disposition will be made. If the item is required, reclassify it as critical, capital or consumable spare. If not, proceed with salvage value or scrap.

Strategic sourcing, supplier agreements

MRO purchasers are aggressively reducing supplier base and forming integrated relationships with key suppliers. They’ve implemented technology for the procure-to-pay process by streamlining the acquisition of materials by placing orders directly with suppliers who have national or regional contracts, often using online catalogs.

MRO suppliers are providing more technical assistance to the plants, bringing in their manufacturers who help with activities such as product substitution, standardization and demand management. Attractive payment terms and discounts are now negotiated regularly. By reducing outside procurement by a mere 10%, profitability may increase by 20%-60%.

Two options to strategically employ outside services and implement immediate benefits are MRO vending machines and consignment or vendor management parts programs.

Vending machines — A typical MRO dispensing machine stocked with Personal Protection Equipment, operating supplies, batteries, cutting tools, etc. has shown inventory cost reductions of 20% or greater and more than 40% reduction in manual systems such as ordering, stocking and issuing. Implemented correctly, all withdrawals are electronically transferred to the supplier for reordering thus eliminating this activity internally.

Consignment/vendor managed inventory (VMI) — A means of optimizing supply chain performance in which the supplier is responsible for maintaining the inventory levels at a site is also an inventory strategy that reduces financial liability and increases inventory turns. This significantly contributes to reducing ordering and handling costs while reducing carrying costs.

Data scrubbing, part standardization

More than 50% of companies are using standardized codes to classify inventory. The other half is using locally developed coding only meaningful to them. By adapting a uniform coding system to classify items with standard nomenclature and description, organizations are managing the supply chain with significant improvement to efficiency and effectiveness while reducing inventories, costs and sourcing strategies.

The benefits are enabling companies to identify and analyze spending patterns, reduce inventories by limiting the options for multiple items while improving quality and specifications of an item. Ultimately, this leads to reliability improvements and allows expertise of tradesmen to work on limited complex equipment as opposed to multiple complex pieces.

Companies that have vigorously cleansed their data report a 5%-12% reduction in duplicate parts. These are single products that appear multiple times across a division. This includes item masters, purchasing systems, engineering systems, manuals and supplier part numbering to name a few. There are numerous classification standards to use such as Standard Industrial Classification (SIC), North American Industry Classification System (NAICS) and Universal Standard Products & Services Classification (UNSPNC). The benefits of standardizing the naming and description of stocked items are immense. By assertively scrubbing and standardizing, we can capture spending patterns, identify opportunities for leverage buying and establish supplier agreements.

Identify what is currently in house; weed out the unnecessary; standardize the equipment; leverage spend; and identify the critical equipment so catastrophic failures are limited. If we establish and identify the critical spares and obsolete materials, implement and control min/max levels and strategically source standardized parts, we can determine the silver bullet of what the correct inventory levels should be in our storerooms. Wrap this progression with sound business processes and you are well on your way to a world-class MRO storeroom where you’ll become the new benchmarked operation.

Use min-max planning to maintain inventory levels

Material On hand Min Max Unit Cost Inventory $ Classification Overstock Understock
10044107 3 5 32 2.22 $41.37 A 0 2
20000591 1 69 415 110 $26,636.46 A 0 68
10047936 6 124 743 18.6 $8,062.60 A 0 118
10053091 19 1 5 1746.37 $5,239.11 B 14 0
10046587 36 1 8 1125 $5,268.15 A 28 0
10041590 3 1 4 1318.62 $3,296.55 C 0 0
10185823 40 10 58 139.16 $4,731.44 C 0 0
Author Information
Andy Gager is a senior consultant at Marshall Institute.