The Case for Managing Mro Inventory

8/9/2019 The Case for Managing Mro Inventory

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BALANCE EFFICIENCY COLLABORATION LANGUAGE SIGNALS

The Case forManagingMRO Inventory

By John M. Donnelly

John M. Donnelly is the materials

manager at ITW/Hobart’s Weigh Wrap

Group. He can be reached at john.

[email protected].

In many organizations,

maintenance, repair, andoperations (MRO) inventory

accounts for a significant

slice—as much as 40 percent—

of the annual procurement

budget. Yet it is still not

managed with the level of rigor

typically applied to production

inventory. There are five basic

practices that can quickly close

the gap with best practices in

MRO inventory management.

In an earlier job, I was the materials manager in a man-ufacturing facility. A “tool crib” was the repository forofce supplies and safety supplies; the bulk of themaintenance, repair, and operations (MRO) inventorywas controlled by the maintenance department and wasstocked all over the plant. My group set out to bringbest practice in inventory management to the MRO

supply chain.Fasteners were the rst MRO component category that we

addressed. We selected a supplier to come in and regularly

replenish the fasteners in a central stocking area. The supplierinventoried and stocked the bins and invoiced us monthly. Thissimple process change eliminated the multitude of purchaseorders and the associated costs that had been typical of the pre-

vious arrangement; it was also designed to ensure that mainte-nance staff always knew where to get the fasteners they neededfor their tasks.

However, there was continued resistance to the idea of thematerials management function taking control of all MRO sup-ply. The turning point came when the stock of foundry tappingcones—used to control the ow of molten metal from a furnaceladle—was allowed to run out and the purchasing team had to

source and expedite replenishment on a Sunday. It became clearto everyone that it made more business sense to stock foundrysupplies in the tool crib. Soon after, additional supplies of tap-ping cones were moved into the crib. Not only were MRO cen-trally maintained and ordered after that, but the foundry main-tenance area’s housekeeping improved because there were nolonger skids of materials sitting around as “maintenance stuff.”

As this scenario demonstrates, it is possible to streamlineMRO inventory management practices and produce signicantbenets for the organization as a result. This article will addressseveral of the basic steps that organizations can take to improvetheir MRO supply chain activities.


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MRO Inventory: The OpportunityFirst of all, let’s be clear about what we mean by “MROsupplies.” We are talking about supplies consumed inthe production process but which do not become partof the end product or are not central to the organiza-tion’s saleable output.1 That denition includes itemssuch as repair components, cutting uids, lubricants,and tooling as well as ofce supplies, cleaning andother janitorial products, furniture, lighting xtures,building supplies, safety supplies, and other consum-ables that are not tied directly to the organization’s coreproducts or services.

The spend on MRO inventorycan be very substantial. Just twoexamples: The Helicopter AssociationInternational’s annual survey of oper-ating performance shows that 40 per-cent to 45 percent of expenditures aremaintenance-related.2 And at a TierOne automotive supplier, approxi-

mately 40 percent of the annualprocurement expenditure is con-sumed by MRO materials. As com-panies continue to do battle on thecost front, few see the likelihood ofMRO spend falling. A recent surveyshowed that nearly 60 percent ofmanufacturing industry managerssurveyed expect to maintain theirlevels of MRO spend in 2013. (SeeExhibit 1.)

Unfortunately, though, MRO sup-

ply is often overlooked as an “invento-ry” responsibility; as a consequence,it is rarely handled with the rigor andattention that it should be. It is allthe more regrettable in 2013, and allthe more crucial for organizations tounderstand and manage their costs,given the many uncertainties and the

volatility of the global economy. Yet inmy experience, MRO supply activi-ties have little direct accountability,and are driven too often by stock-

outs rather than to any overarching supply chain plan.Frequently, I have seen situations where MRO inventoryis expensed and sits in an area without any identiablelocator system, ID, or a usage history. Although morecompanies are coming round to the view that MRO sup-plies are true costs that can be tracked and controlled,clearly there is room for systematic control and moreefcient methods of handling.

MRO vs. “Real” Inventory ManagementTraditional inventory management—covering raw mate-rial, component parts, work in process (WIP), and

Stuart Briers


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MRO Inventory

nished goods—is controlled and managed to optimal

levels, providing enough supply to cover current pro-duction needs and allow for the most probable contin-gencies. The inventory is generally checked through aprocess known as cycle counting, using ABC analysiscosting. The inventory is received and located in a ware-house or WIP location and decremented as it is used.

When an enterprise resource planning (ERP) systemis utilized, the inventory may be replenished through areorder advisement through MRP or through a kanbantype of system where the supplier or vendor is notiedand the inventory is replenished. Bills of materials arekept for the end products; they detail the amount and

costs of the inventory. There is never an issue of seniormanagement doing an end run around the system toexpedite the process; that would hurt everything fromback ushing to inventory accuracy, and many other keyperformance indicators.

However, MRO inventory often lacks most of thesecontrols or practices. It is very rarely measured in termsof inventory on-hand, turns, obsolescence, or usage. Itgenerally turns less than once a year; request-to-ll ratesare usually less than 80 percent.3 Frequently, many ofthe supplies required for MRO tasks are actually instock but they just cannot be located. Another perfor-

mance shortfall: many of the items required for mainte-nance or repairs are obtained with spot buys that ignoreprice in favor of availability. Even worse: expeditedfreight becomes a factor as well. There is also the costof unplanned downtime, waiting for repair componentsthat might already be somewhere in the facility.

At the same time, there is the issue of diverting high-ly paid maintenance personnel from repairs and plannedmaintenance activities. Having them carry out materialsmanagement work is not the best use of their skills andtime. I’ve heard more than one plant manager complain-ing about maintenance staff sitting in an ofce talking

to vendors, and in the same breath, groaning aboutequipment downtime.

There are also big differences in managementof cash ow when we compare traditional inventorymanagement practices with what is still typical withMRO. It is not uncommon for a maintenance managerto attempt to “save money” by buying larger quanti-ties of, say, machinery components in order to getthe price break. But that generally means a large cashoutlay for inventory that is expensed when receivedrather than being on the books—and which may getlost or become obsolete. On the production side, sup-ply chain professionals facing similar volume issueswill handle the negotiations allowed for receiving the

volume discounts, but will usually split the deliveries

into multiple dates, thus lessening the expense impact,reducing the amount of shelf space required for stock,and allowing for order cancellation in the event that theitems are no longer required.

Rooting Out the “Hidden” Inventory Another common MRO practice is the use of “hidden”or “private” inventories of material that individuals keepin order to insure they have the items when they needthem. The material may be in tool boxes, shelves, orhidden in work closets. This squirreled away inventorycomes at some considerable cost to the organization—

everything from the obvious excess inventory to expe-dited freight fees.4

I have participated in several plant clean-ups wherelarge areas have been reorganized and material has beendisposed of because the equipment it was purchasedfor no longer exists or more commonly, no one remem-bers why the material was purchased in the rst place.In the same facilities, I have seen parts expedited foran emergency repair job, only to have the second-shiftmaintenance person perform the repair with the partsalready in his tool box. Another example: in one TierOne automotive facility, we had machining bits that

were stocked on an honor system. One day, there wereno bits on hand and nothing on order. While purchas-ers made frantic calls, operations people made plans toextend the usage of the remaining bits. It was assumedthat the operations would suffer within 12 hours. As itturned out, there was enough stock in operators’ toolboxes to run the operation for more than 48 hours with-out doing any of the gymnastics required to extend theoperating life of each bit.

There is a bit of a “Superman complex” on display insuch circumstances; the employee saves the day becausehe has the right parts right there.

EXHIBIT 1

MRO Product Spending Not About to Decline2013 MRO Product Spending for Plant and Production Floors,

Compared with 2012

Source: Managing the MRO Supply Chain,” IndustryWeek, December, 2012, pp. S2-S6.

Decrease

Remain the Same

Increase

0% 10% 20% 30% 40% 50% 60%


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Five Best Practices in MRO ManagementSo what are the hallmarks of good MRO inventory man-agement? In my experience, there are ve aspects thatconstitute best practice:

1. Central location of MRO inventory. It isinvariably more efcient to store MRO supplies in onecentral location per facility rather than keeping them in

various unidentied locations. It is crucial to have com-puter systems to track, manage, and control inventory.Armed with usage data and transaction costs, an organi-zation can “right-size” its MRO inventory in accordance

with supply chain performance standards.5

In a Tier One automotive supplier, we moved all ofthe maintenance items to a controlled area. The inven-tory was cataloged, assigned part numbers, and locatedon shelves that were also identied with a location ID.The inventory was then capitalized, boosting the balancesheet and allowing the costs of routine equipment main-tenance to be tracked properly. The new “stockroom”was then staffed with experienced supply chain person-nel who had established relationships with suppliers andwho understood the concept of partnering with suppliers

A

t one manufacturing company, an

end-to-end reorganization of MROinventory management produced huge

improvements. MRO activities had

been ad hoc, to say the least. The plant

engineering department maintained

the maintenance supplies, which were

stored behind the main building. This

required multiple touches to unload the

shipment, receive it, move it to plant

engineering, put it away, and then find

parts when needed.

Often, because maintenance

ordered the parts, the transaction washandled as a “verbal” purchase order,

with the requisition approval process

occurring after the fact. This created

the extra steps of having the items

physically received but unable to be

received in the procurement system.

Since the material was moved to plant

engineering and consumed, there was

no urgency to follow up with approv-

als, so that purchasing staff spent

unproductive time tracking down the

items and getting approvals to processthe purchase order. The supplier then

spent more time providing proof of

delivery—and had to wait longer for

payments. One outcome: the manufac-

turer missed being able to take advan-

tage of discounts for early payment.

Spurred to action by these difficul-

ties—in particular, by the sheer volume

of items that could not be accounted

for—the manufacturer’s supply chain

leader launched an initiative to reorga-

nize MRO supplies, starting by moving

responsibility for the supplies to the

materials department. Clear executive

sponsorship from the plant control-

ler overcame any political difficulties.

Receiving procedures were changed so

that items unable to be received were

placed on hold. The rule was simple: it

did not matter how important the part

seemed to be or who was yelling for it;

if the part or supply was truly critical,

then the person who had requisitioned

it had to walk the appropriate paper-

work through and the purchase orderwould be properly received.

The receiv ing dep artment added

a “hot board” to track urgent i tems:

the requisitioner would provide the

department with details of the sup-

plier, item, purchase order number, car-

rier (if known), and any other pertinent

information. The receiving department

would then look for any items on the

hot board, processing those items first

and also making the delivery directly

to the requisitioner or to the locationspecified by the requisitioner. This pro-

cess not only insured that the receiv-

ing procedures were followed, but

also allowed the requisitioner to deal

with other tasks rather than waiting in

receiving for items to arrive. Further,

maintenance personnel could now

spend their time on what they were

expected to do rather than searching

parts catalogs, getting quotes from

suppliers, and tracking deliveries.

Two months after it had begun, the

MRO overhaul was getting real results.

The storage area was relocated from

behind the building to the area next

to receiving. There, receiving person-

nel could work with staff from the tool

crib, reducing the number of touches

as a result. Eventually, the company

was able to save costs by consolidat-

ing departments and reducing man-

power. Additionally, purchasers were

no longer walking around the plant

looking for items or people to verify

items that were physically on site. Theyalso weren’t reordering the same items

because the original order could not

be located.

In turn, suppliers became more

responsive because they now had con-

fidence that if an order was placed, it

would be accurately received and

they would receive prompt payment.

In addition, the materials teams were

able to begin to anticipate and more

accurately predict MRO supply costs.

It was not difficult to get seniormanagement’s buy-in for the MRO

reorganization. Initially, the plant’s top

managers had been concerned about

critical production equipment being

down while waiting for paperwork. But

when they were shown both the cur-

rent state of MRO and the future state,

pointing out the cost avoidance and

cost reduction opportunities anticipat-

ed, the executives quickly got on board

with the initiative.

MRO Goes from Muddle to Mastery


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MRO Inventory

to help drive down costs. Where practical, suppliers were encouraged to own

and keep control of the inventory and to ship minimalquantities to cover “as needed” inventory requirements.There were also efforts to control costs by using lower-cost but fully compatible components rather than the“maintenance preferred” parts. Collectively, these initia-tives laid the groundwork for a preventive maintenanceprogram; the program involved scheduling of equipmentdowntime and establishing a pick list of repair items andsupplies, ensuring that equipment repair costs wouldbe recorded accurately and budget forecasting wouldimprove markedly.

2. Supplier-controlled consignment inventory.Many organizations have successfully used third partiesto manage MRO inventory.6 Vendor-managed inventory(VMI) approaches—well-proven in mainstream supply

chain management—often involves the supplier’s per-sonnel being on site to manage the inventory. This allowsthe customer’s staff to focus on their core functions, withthe assurance that the MRO inventory is being managedproperly by a trusted partner. And it means that the sup-plier, given greater visibility of downstream demand, maybe able to offer volume discounts that a maintenancerepresentative at the customer would not have access to.

The VMI approach can also reduce paperwork andreduce the number of inventory transactions on thecustomer side since the customer is paying for materialas it is used. The invoicing can then be scheduled on a

weekly or monthly basis to streamline the payables pro-cess, trimming the number of purchase orders createdand thus reducing transaction costs. Those savings canbe impressive by themselves: Figures for costs to processa purchase order (PO) range from $60 to $300, countingthe costs of everything from salaries of staff involved topayables costs and communications costs.7 Let’s assumea gure of $150; a reduction of 50 percent on an annual

volume of 5,000 MRO orders would be $375,000 in POcosts alone. (See Exhibit 2.)

3. An accurate, up-to-date fact base. This isanother important element, along with standardizing

the processes for stocking, consumption, and analysisfor better management. When there are standard busi-ness processes, it makes it easier to develop an accurate,timely base of data which in turn enables the mainte-nance/facilities teams to better plan scheduled main-tenance activities and enables them to forecast costsmuch more accurately. Also, the timelines required fora scheduled maintenance will be more accurate, allow-ing operations personnel to better plan around a down-time and not stockpile material because downtimes havealways been longer than promised in the past.

Fasteners are one of the MRO parts categories forwhich an accurate database can be developed very

quickly. Many fastener suppliers will sup-ply the storage equipment (shelves, bins or

racks), label the locations, and count andstock the locations. The customer then pullsany items that are required. There is notransaction, and no need for a requisition orpurchase order. The supplier restocks on anagreed-upon schedule and invoices monthlyor twice a month based on consumption.This reduces the number of purchase orders

considerably and signicantly reduces the associatedtime and labor that go into the inventory process.

4. A set of key performance indicators. As in anyproject or management of an operation, key performance

indicators (KPIs) must be established in order to mea-sure factors such as savings, costs, and obsolescence inan MRO project. If something is important enough totrack, it should be measured, so that upper managementcan not only be kept apprised of the project’s progressbut actually see its quantiable benets. Some mea-sures to consider might include days or months of on-hand inventory, the number of stockouts, the ratio ofrush orders to replenishment orders, and rates of partsobsolescence. Measures such as these should be tracked

EXHIBIT 2

Cost of Purchase Orders With and Without VMI

T o t a l P u r c h a s e O r d e r C o s t

( $ M i l l i o n s )

$1.5

$1.0

$0.5

$03,500 5,000

Number of Annual Purchase Orders

7,500 10,000

Original Cost

Utilizing VMI

No high-level meetings, no large-scale consulting programs, and nomanagement task forces are needed to justify

the savings that can be realized from sound

MRO inventory management.


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MRO Inventory

and posted so those responsible can see how they areperforming and are in a position to act to improve perfor-mance. In the example of the foundry items noted ear-lier, we were able to reduce the number of $500-and-uppurchase orders from 10 -12 per week to zero by fore-casting usage and ordering in smaller quantities withmore frequent deliveries.

The data should be included in the monthly or quar-terly reporting to management. If MRO inventory per-formance is reected in its implementation and manage-ment by supply chain professionals, then its KPIs willlikely be positive points in any report. To begin with, ofcourse, there may be data that is less than attering tosome departments. However, the open reporting of thatdata will bring the proper attention to the issues, and

over time, the improvements in the data will become apositive for the whole organization. The alternative reallyis not viable: when an issue is hidden away or ignored, itwill soon become even more serious, potentially derail-ing careers.

5. Supply chain education for MRO staff. Often,continuing education efforts such as a seminar serieson inventory management will allow those involved inMRO to understand the importance of adhering to bestpractice. Exposure to supply chain professionals’ orga-nizations such as APICS or ISM can be of great help;buyers, planners, and many other categories of supply

chain professionals regularly benet from ongoing edu-cation programs offered by such organizations and fromthe certication programs that they run. There are otherbenets of such programs: supply chain managers indi-cated that they saw training programs as signs of thecompanies’ commitment to their careers.8

Getting StartedI don’t pretend that reorganization of MRO inventoryactivities is a snap-of-the-ngers exercise—somethingthat is “one and done” with a simple e-mail from top man-agement. There are many cultural imperatives that sustain

the status quo, not least of which are the defense of turfby managers and heel-dragging by the many who fear lossof control and the many more who are distrustful of anydifferent ways of doing things because they want proofthat the new way will be that much better.

Change has to start somewhere. The best place tobegin is with data showing how subpar MRO activitiesactually are when compared with inventory managementnorms. It can be a real eye-opener for senior managementto review the annual maintenance expenditures on parts

or to see the costs of expedited freight charged to main-tenance. These two items alone may be enough for topmanagement to begin asking questions. And with seniorexecutives engaged, real change can start to happen.

As noted earlier, one of the easiest areas to begin anMRO inventory overhaul is with fasteners—ubiquitous,low-cost components whose mainstream supply chainprocesses are very mature. Many leading suppliers offasteners offer very advantageous VMI programs. Oncesuch processes are in place for fasteners, it is a fairlyeasy step to start moving other simple maintenance sup-plies into a tool crib or some other method of inventorycontrol. Another simple and practical method is the useof vending machines to dispense basic supplies. Themachines feature a code that is keyed in—work order

number or employee number, for instance—or theyaccept the employees’ ID when they swipe their ID card.MRO efciencies are within sight. In fact, they

have been so for decades. No high-level meetings, nolarge-scale consulting programs, and no managementtask forces are needed to justify the savings that can berealized. I hope that this article gives you some of theimpetus that your organization may need to get its MROsupply chain operating to its full potential.

Endnotes:

1 InventoryOps.com; “MRO-The Last Bastion of Uncontrolled

Expense” by George Krauter, Supply & Demand Executives,March, 2011, Vol. 12, Issue 1, pp. 44.

2 “Budgeting & Maintenance,” Conklin & de Decker (www.conklindd.com), Brandon Battles.

3 “The $12 Billion Question: How is Your Facility ManagingInventory?” by Deb Oler (VP&GM, Grainger Brand),Industrial Maintenance & Plant Operations, July, 2011, Vol.72, Issue 6, pp. 24-25.

4 “MRO Restructuring in Full Swing” by Nicole Beauclair,Interavia Business & Technology, Winter, 2006, Issue 686, pp.22-26.

5 “Making MRO Inventories Play by the Rules” by SteveMehltretter, Industry Week, August, 2009, pp. 40.

6 “MRO-The Last Bastion of Uncontrolled Expense” byGeorge Krauter, Supply & Demand Executives, March,2011, Vol. 12, Issue 1, pp. 44.

7 2006 APQC Report showed the range to be $35.88- $506.52; Supply Management Handbook range is$100.00++ to as high as $300.00; CAPS Research range is$59.00 - $741.00 with an average of $217.00

8 “The Three-Stage Implementation Model for Supply ChainCollaboration” by Stanley E. Fawcett, Gregory M. Magnan& Matthew W. McCarter, Journal of Business Logistics, Vol.29, No.1, 2008.


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The Case for Managing Mro Inventory