Oniqua Intelligent MRO Blog

Why MRO Inventory Optimization Should be a Core Competency

Posted by Dan Miklovic, Principal Analyst - LNS Research

10/29/15 12:16 PM

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Spare parts: sounds like a relatively simple activity, yet for many organizations that have otherwise embarked on an Asset Performance Management (APM) journey it is an area where they’re terribly inefficient.

Far too many organizations find themselves in a situation where they have way too many spare parts and consumables for some machines and operations still run out of materials and critical spares for others. These spares and consumables fall into a category of inventory often referred to as MRO items or inventory (MRO being either Maintenance, Repair & Operations or Maintenance, Repair & Other). As with many other activities in a manufacturing plant, an asset intensive service provider like a utility, or transportation provider like an airline, keeping your spares and consumables at the right levels is an opportunity for optimizing.

Fortunately there are applications that are available to help enterprises do exactly this: MRO Inventory Optimizers or MRO Inventory Optimization applications or services. For industries like the Oil & Gas sector or Mining, where near record low margins currently are driving business decisions, MRO Inventory Optimization must become a core competency if they are to survive.

 

What Is the MRO Inventory Problem?

As noted above spare parts and consumable or MRO inventory can suffer from either the problem of not having enough or having too much. Let’s take a look at the former problem first. It should be obvious that not having the proper spare part to fix a broken piece of production machinery results in excessive downtime and probably increased costs to repair. If the part isn’t in stock then there are the internal costs of trying to process an expedited purchase request/order, the increased cost of express delivery of the spare part(s), and possible overtime costs for receiving and maintenance staff, as well as any others to process the part when it finally does arrive.

Compounding this, then there are the costs associated with the actual downtime itself, including lost production, possible lost orders, or even customers switching to another provider and penalties for not meeting contractual obligations. The same is true for consumables like fuels, lubricants, or other items like hydraulic fluids, catalysts, etc. If the inability to repair machinery causes safety or environmental issues the problem becomes an order-of-magnitude greater with not only financial risks but threats to the brand reputation and even the company’s survivability.

I expounded upon the latter problem in my blog post about dead inventory. Besides the carrying cost of excessive inventory, other “costs” include materials such as lubricants expiring while in inventory and requiring disposal (potentially at a cost), new releases, or parts variants being released to fix reliability or safety issues that render existing stock unusable, and of course the physical space needed to store excessive inventory that might be used for production instead of storage as well as the challenges of finding the correct parts in an excessively large storeroom. In margin-challenged industries like Oil & Gas or Mining these costs are not only avoidable but could represent the ability to keep assets operating and contributing to cash flow.

The reasons for both of these situations vary. For excess inventory most were explained in the dead inventory post. For too few items the reasons can often be attributed to cost and a poor understanding of the risks associated with not having the parts when needed. Basically, it results from poor operational risk management (ORM) practices. Sometimes it’s caused by consuming a greater-than-normal quantity of materials or parts during shutdown/turnaround situations and not allowing for proper replenishment. There are other situations that can cause the problem as well, such as OEMs having long lead times or parts being produced only “on demand” for obsolete or near obsolete equipment. These aren’t all the reasons for either over or under stock situations but they are the ones that are most common.

 

MRO Inventory Optimization Is Not a Trivial Problem

While you might think this is an easily solvable problem, unfortunately this is rarely the case, as the problem has multiple facets. Past and recent failure rates of equipment and the specific data on parts consumption is one element, but you also need to understand the context of when failures occurred. Historical failure information may be shaded by operating environments that have changed so rates may not be as accurate as you need.

Certain parts may have very long lead times while others may have shelf-life issues. And some parts or materials may have substitutes while others may not. Some suppliers may be preferred contractually but offer longer lead times while others may offer faster service but at a very high premium. Compounding this are regional issues like transportation time and costs, taxes on inventory, and purchases and capital versus expense accounting rules. The problem is complex both from an understanding perspective as well as the underlying mathematics that help you derive the best answer.

 

Solutions That Offer Help with MRO Inventory Optimization Are Available

Fortunately there are specialist solution providers that can help companies attack the problem. There are on-premise licensed solutions that through tight integration with EAM or ERP applications can automate the process once configured and operational risk targets/goals are established. However, generally only the most common EAM/ERP solutions like SAP, Oracle, and IBM are readily supported. Cloud delivery of MRO Inventory Optimization functionality is becoming more prevalent. With the advent of Cloud delivery the providers of MRO Inventory Optimization solutions will be able to serve more clients in the small to mid-sized market as well as to simplify implementation in larger asset intensive enterprises common in the Oil & Gas and Mining sectors.

The right solution for your enterprise will vary based on your MRO inventory value, how willing you are to outsource some of the work, and the ROI you expect to get. Any way you look at it MRO Inventory Optimization is a capability every industry, but especially those in sectors that face tough margin issues, must have to pursue excellence in APM.

Download the LNS Research Report on MRO Inventory Optimization to learn more about how this powerful APM tool can help you.

 

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Topics: inventory optimization

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