Slash maintenance inventory costs

Five steps for managing MRO parts

By Joanne Kelley, Karen Schneider

April 10, 2003

The quickest boost for most organizations' bottom line is finding opportunities for decreasing costs without sacrificing quality. An area frequently overlooked is the inventory of parts kept for maintenance, repair, and operations (MRO).

Typically, managers hesitate to initiate a cost-cutting project in this area because they fear that critical parts may not be available when they are needed. And the number of parts that can be reduced—typically one or two—may seem too few to yield meaningful cost savings.

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

1. Isolate the sources of demand for MRO parts.
2. Improve the processes for creating an inventory for planned requirements.
3. Improve safety stock calculation.
4. Improve the processes for unplanned requirements.
5. Optimize parts ordering.

Step 1: Isolate the Sources of Demand

Two primary types of demand drive MRO parts inventory:

• Planned requirements, which include:
  • Parts used during scheduled maintenance, cleanup, or quality inspection processes. Most of these items are consumable, and requirements for them are predictable over time.
  • Replacement parts for which need can be predicted by 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: Improve 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 already are in place in most companies that hold moderate to large parts inventories. But they frequently are not a high priority for rigorous administration, and they rarely are optimized. Thus, considerable opportunities exist for improvements that readily result in cost savings.

Experience shows that emphasizing 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 increase.

Step 3: Improve Safety Stock Calculation

Recommending purchase orders to replenish stocked parts is a key function of an effective computerized maintenance management system (CMMS) or Enterprise Asset Management (EAM) program, which aims to minimize total equipment downtime. But while these programs trigger reorders when safety stocks sink below specified levels, they depend on manual input to determine what those safety stock levels should be.

Calculating the safety stock quantity involves 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.
• Criticalness of equipment the part supports.
• Availability of substitute parts or work-around processes.

In practice, systematic inclusion of these variables in the calculation is rare. Safety stock levels frequently are determined by maintenance engineers or information technology support staff using seat-of-the-pants or cover-every-instance 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.

Step 4: Improve Processes for Unplanned Requirements

MRO inventories frequently contain major components of mission-critical equipment-an extra engine is common. These components frequently are purchased at the same time as the equipment and capitalized as part of the total purchase. All too often multisite 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.

Companies can realize cost savings when their sites compare and share this inventory. To maximize multisite sharing, staff must adhere rigorously to a common system of describing parts so that searches of multisite inventories return correct results quickly.

Step 5: Optimize Ordering

Ideally, each part would be ordered when the projected demand generated from a 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 scheduled preventive maintenance.
• Back up this date by the time required for internal picking and kitting of the material for the maintenance work order.
• Back up this new date by internal receiving, inspection, and testing time.
• Back up this new date by delivery time from the vendor site or distribution point to the receiving dock.
• Back up this 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 and transportation reliability).
• Back up the new date by internal purchase order processing and approval lead-time.

Cost-cutting opportunities in this area include

• Reducing minimum order requirements negotiated with the supplier.
• Introducing supply chain initiatives such as vendor consolidation and electronic ordering. These frequently are already in place for large purchase orders. Extending them to the small order quantities characteristic of MRO often is cost-effective.
• Eliminating safety time used to ensure 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.

Opportunity Knocks More Than Once

An inflated MRO inventory is an opportunity for cost reductions in most manufacturing organizations. And bringing it under control is not a one-time event. For instance, MRO inventory must be re-evaluated periodically to ensure that it is reduced appropriately following:

• Mergers with or acquisitions of companies with similar or identical equipment. Mergers also create the potential for stocks to be consolidated and reduced if the same MRO parts 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 of TransFormance Group and senior vice president of SPL WorldGroup, 157 Headquarters Plaza, North Tower, 8th Floor, Morristown, NJ 07960, 404-888-9628, joanne_kelley@splwg.com. Karen Schneider is a TransFormance Group affiliate with SPL WorldGroup, www.splworldgroup.com/tg. The TransFormance Group helps its customers transform products, services, and processes to compete in fast-changing markets.