Excerpted from MRO Inventory and Purchasing
by Terry Wireman, CPMM
Courtesy of Industrial Press, Inc.
Finding Balances in MRO Management
MRO materials management is a decision-making process. It requires balancing financial differences between competing interests.
1. Service Level vs. Stock Out
At a 90% service level, there is a 10% chance that a part will not be available when required. The costs associated with a stock out include lost production (downtime cost), materials expediting cost, reduced maintenance labor productivity, etc.
If the service level is increased to 95%, then there is only a 5% chance that a part is not available. Although this change reduces the probability of incurring a stock-out cost, the additional inventory stocking level increases the capital investment costs, the holding cost, the size (and cost) of the storeroom, etc.
2. Cost of Safety Stock vs. Service Level
The more inventory that a company holds, the higher that its investment cost will be. If a company sets the safety stock at a high level (reorder point = minimum on hand quantity + safety stock), it will incur higher costs. Conversely, a higher investment cost generally corresponds to a higher MRO stores service level.
The question facing a company is “What service level can you afford?”
100% Capital investment too expensive for almost any plant
95% A good target for most companies
90% Downtime cost will be too high for almost any plant
3. Holding Cost vs. Ordering Cost
When larger quantities are ordered, they increase the holding cost, which is based on the total investment in the spare parts. However, ordering costs are lowered, such as paper work, purchasing time, expediting time, transportation, etc. The issue here is to balance the ordering costs with the holding costs.
Issues that Influence the Balance
What are some of the issues that influence the balance between ordering costs and holding costs? The following is a list of the factors.
1. Vendor or manufacturer order fulfillment lead-time
• How much time from order to delivery?
2. Variability of delivery lead-time
• Some times a day, some times a week
• Weather or seasonal-related impacts
3. Service level and safety stock
• Risk of using up all the stock before the order arrives
4. Variability of usage
• The plant used 1 in January, 13 in February, 8 in March
5. Other Issues influencing stocking decisions
• Vendor or manufacturer is prone to labor or strike problems
• Equipment that the spare parts are used on is no longer manufactured
• Geographical location of vendor or manufacturer
There are two general rules that balance MRO inventories. They are:
1. The larger the safety stock, the lower the risk of stock out and the higher the cost of holding inventory
2. The smaller the safety stock, the higher the risk of stock out and the higher the cost of purchasing
Determining Proper Stocking Policies
Based on the type of items that are carried in an MRO storeroom, it can be seen that one policy will not work for all inventory items. Some very expensive items are slow-moving, whereas other very inexpensive items move very quickly.
What are some of the factors that help determine the proper stocking policy for each item? Some of the factors include:
• What is the part?
• How critical is it to plant operation?
• What is its usage pattern?
• Is the part high usage? Low usage? Seasonal usage?
• What does the part cost? Is the part high cost? Low cost?
• Is there a discount for volume order?
• What is the part’s stock out impact?
• How expensive is the downtime?
• How long will the downtime last?
• What is the part’s lead time?
• How long does delivery take after the part is ordered?
Types of Spare Parts
Another way of looking at spare parts is by their part type. In any MRO storeroom, spare parts can be categorized by at least eight different types. These are:
• Bin stock—free issue
• Bin stock—controlled issue
• Critical or insurance spares
• Re-buildable spares
• Consumables
• Tools and equipment
• Surplus parts
• Scrap or useless parts
Bin Stock—Free Issue
Bin stock, free-issue items are typically parts like fasteners, including bolts, nuts, and washers. Pipe fittings may also fall into this category.
These items are usually stored in bins located directly outside the storeroom, where employees can take what they need to perform their jobs without requisitions.
Bin Stock—Controlled Issue
Bin stock, controlled-issue items are items with a little more shelf value than free-issue items. These are items that generally need some control.
They are usually behind the storeroom counter and issued to a requisition.
Critical or Insurance Spares
Critical or insurance spares are parts such as motors, pumps, gear cases, and other large spares. These are usually stored in locations where they can be carefully tracked and cared for so they are not damaged in storage.
Consumables
Consumables are maintenance-related items that are typically used in the performance of maintenance work. Items used during the performance of repair activities may include rags, tape, and speedy dry, etc.
Tools and Equipment
Tools and equipment are typically larger repair tools that are not assigned to a specific individual. These are issued to an employee or work order, then returned when the job is finished.
Surplus Parts
Surplus parts are found in the storeroom and are typically left over from projects or larger maintenance tasks. These surplus items should always be entered into the inventory tracking system before they are stored in the storeroom.
Scrap or Useless Parts
In most MRO storerooms, there are some scrap or useless parts.
These items should be targeted for removal from the inventory system.
ABC Analysis
With this many types of items in the storeroom, how can the proper stocking rules be applied to each item? One tool that is useful in any MRO storeroom is ABC Analysis. This tool focuses on a significant few rather than the overwhelming many.
“A” Items
“A” items are typically of high dollar value, but low usage. These items may make up 80% of the total inventory costs. However, these items will also make up less than 20% of all the spare parts carried. “A” items should have regular reviews of reorder points and reorder quantities, as well as usage trends. All details concerning these items should receive close follow-up. It is important for them to have complete and accurate MRO inventory and purchasing records.
“B” Items
“B” items are of moderate dollar value and have moderate usage.
These items may make up a total of 15% of the total inventory costs.
However, they will typically only be 30% of the total inventory items. “B” items should receive regular cycle counts and tracking; attention should be paid to keeping good transaction records.
“C” Items
“C” items have a low dollar value. These items will make up about 5% of the total inventory value. However, they will make up approximately 50% of the total number of inventory items. “C” items will be the larger part of the inventory. Because they have less value, they will require minimal recordkeeping.
Being able to classify the spare parts in the storeroom into one of the ABC classifications allows the storeroom resources to focus on controlling and managing the most important items.
Order Quantity Rules
When considering the order quantity rules for any of the ABC items, there are at least three sets of rules that can be used. “A” items will typically be controlled by maximum and minimum quantity specifications. “B” items will typically use some type of fixed re-order interval system. They may be reordered weekly, monthly, or quarterly. “C” items typically use a two-bin system. Items are issued out of one bin until it is empty. Then they began issuing from the second bin; meanwhile the first bin is restocked. Utilizing these simple controls reduces the workload in any MRO storeroom.
This a a very good article. MRO inventories and all the associated costs are real money and in this day and time we can not afford to overlook any opportunity to trim fat without sacrificing speed or quality. I have worked with MRO stores inventories for over 35 years and for the most part, companies do not pay attemtion to the details and leave many dollars on the table. If you take the above practice and apply it only one item in your storeroom (high usage) you will see a vast difference in your operation and cost. After that, you simply repeat the process on every item.
On another note, I have also be extremely successful with negotiating MRO spare parts when procuring the equipment of which it will be used on. If the manufacturer wants our business and they stand behind their product they have little problem stocking spare parts in your facitily and getting paid when you actually use them. "Food for Thought".
Jack O. Meeks, Sr.
CEO
Global Knowledge Mgt., Inc.
Posted by: Jack O. Meeks, Sr. | October 09, 2008 at 05:34 PM