It has been a wild year in the energy sector, particularly in Oil & Gas. Crude prices have fluctuated wildly, particularly in the third quarter of this year. Many upstream and integrated producers are feeling the pressure and even downstream-only companies while benefiting from lower raw material costs are all wary of spending right now. This is a dangerous situation in that as tight as revenue might be, some opportunities are just so great it doesn’t make sense not to invest, even now. Asset performance management (APM) is one area that has such a strong influence on safety, environmental and productivity issues that even though times might be tight, skimping now is more dangerous than spending. One particularly cost effective area within APM to invest in now is MRO inventory management AND optimization. This is an area where relatively small investments can yield some substantial payback. What’s worse than equipment breaking? Not having the materials to repair it when it does. The other side of the equation is carrying such a large just-in-case spares inventory that today’s slim profits are further eroded by inventory carrying costs and out dated material disposal costs.
Management is Not Optimization
Many asset intensive industries manage their spare parts, operating materials and consumables inventory. This is MRO inventory management. It is not, however, MRO inventory optimization. Management implies there is a process to track the inventory, replenish it and to account for MRO expenditures. It may even include rudimentary reordering algorithms based on minimum stock numbers and contractual order requirements. What is missing from the typical management discipline is the ability to ensure that the risk of not having a part or material when needed is absolutely minimized and managed according to the risk such a stock-out represents. The other problem with many typical MRO management approaches and tools is that they can lead you down the path of having too much stock on hand – just to avoid any risk associated with material unavailability. This generally leads to highly elevated inventory levels, often driven by fear instead of science. This is where optimization comes into play. Understanding the proper inventory levels to maintain can significantly reduce the amount of items at the same time you are minimizing the risk of not having enough of other critical items.
The Risk of Too Much
Besides the downside of just the financial costs of carrying excess inventory there are other costs as well. For many consumables there may be shelf-life expiration issues or age related degradation that shortens product life or even renders it unusable. Another risk of excessive inventory is the inability to take advantage of technological advances and product improvements. If it takes “forever” to use up an initial complement of spare parts product improvements due to newer materials or even design improvements may not be introduced in a timely fashion. In some cases these improvements are driven by reliability issues so you replace a failed part with the same part that is prone to failure just to use up stock when newer releases of the spare parts may have eliminated or at least greatly reduced the failure rate. Putting yourself at such a disadvantage is just plain bad business.
MRO Inventory Optimization Effective but Not Trivial
Since the advantages of inventory optimization seem to be so obvious why doesn’t everybody just do it? The reason is it isn’t easy. MRO inventory optimization done correctly has to balance a number of complex factors such as historical and actual failure rates of parts, supplier lead times and economic order quantities, equipment criticality and operational risk of failure as well as the underlying economics of it all. Fortunately there are suppliers that are offering products that go beyond simple MRO inventory management and do actual inventory optimization. But it is important to ensure your potential supplier understands all of the facets of the inventory optimization problem and can demonstrate real ROI.
Given all this it just makes sense for all industries, but particularly the Oil and Gas sector to leverage MRO inventory optimization to improve their APM results.
Download the LNS Research Report on MRO Inventory Optimization to learn more about how this powerful APM tool can help you.