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When it comes to inventory, don’t be shortsighted


In previous columns, I have discussed the preventive maintenance program and its importance to achieving a proactive maintenance environment. In this column, we will find that the MRO (maintenance, repair and overhaul) inventory and purchasing system is critical in moving to a cost-effective planning and scheduling environment.

As the preventive maintenance program gains in effectiveness, the MRO inventory and purchasing systems must be analyzed. This must be accomplished before effective maintenance planning and scheduling can begin. The reason is, maintenance work can be planned and scheduled in great detail, yet when it is time to execute the work, if the spare parts are not readily available, all of the effort put into planning and scheduling is wasted. 

The service level of the MRO inventories is considered to be a key benchmark. A service level of 95 to 97 percent is considered to be the target. The indicator represents the total number of orders filled on demand divided by the total number of orders requested. If the service level is lower than 95 percent, it will contribute to delays in work execution; it may also lead to individuals developing their own storage areas, resulting in excess (and hidden) inventory being carried. Values higher than 97 percent suggest the company is stocking too many spare parts.

The balance is critical since there is a financial penalty for falling above or below the target range. From an inventory cost-control perspective, it is necessary to have the right parts, the right number of parts and properly managed inventory. These controls are necessary if the inventory and purchasing organizations are going to support the equipment maintenance department. MRO inventory and purchasing costs may make up 40 to 60 percent of a company’s total maintenance budget. This can quickly be determined by running an inventory valuation report from a CMMS/EAM system.

Carrying Less Stock: Shortsighted?
In addition, there are annual holding costs (sometimes up to 30 percent of the purchase price of the item) for carrying stocked items. So it would appear, from a pure cost perspective, that fewer spare parts would be better. This has led companies to reduce MRO inventories to decrease expenses. Of course, decreased expenses will increase short-term profits because expense dollars not spent drop to the bottom line. Therefore, dramatically reducing MRO material costs is a quick way to increase profits, as some companies see it.

This view is shortsighted, however, because decreasing MRO material costs finally will reach a level that decreases profitability due to increased equipment downtime and reduced capacity. If a breakdown occurs and emergency spare parts are not in stock, the lead-time to procure the item could be days, a week or, in some extreme cases, even months. This means the equipment will be out of service until the spare parts arrive, dramatically impacting plant capacity.

Even if a breakdown does not occur and the demand for a MRO spare is generated by a routine planned and scheduled maintenance task, the spare must be available when needed. If not, the maintenance schedule is compromised and the task is not completed as scheduled. In addition to having to reschedule the task, the productivity of the maintenance technicians who were to perform the task is impacted, requiring them to be rescheduled on another assignment. If this were to occur on multiple occasions, the lost productivity can amount to 100s or, in some cases, 1,000s of dollars.

As has been highlighted, the balance between carrying enough MRO Inventory and not too much is critical to a productive yet cost-effective maintenance organization. What type of controls must be in place to have a financially balanced MRO inventory and purchasing function? This will be the topic of the December Wireman’s Wire.