Computerized maintenance management software (CMMS) systems have numerous features and functions to help you better manage your MRO inventory. This results in lower inventory carrying costs and higher worker productivity. Here are some of the more strategic features and how best to use them:
Inventory service level
Service level can be defined in many ways, but typically it’s the percent availability of spare parts upon request. For example, a 95 percent service level means that 95 times out of 100, spare-part requests were fulfilled.
Service levels are analyzed by part and part category. This is because it would be completely impractical to maintain a service level of 100 percent across the entire inventory. The cost of carrying inventory to sustain 100 percent service would be astronomical, especially with thousands or even hundreds of inventory items. Typically, only certain parts or part categories require high service levels.
A sophisticated CMMS system will track the cost of carrying a part or part category at a given service level. Note that the cost begins to rise dramatically for every one percent increase in service level beyond approximately the 96 percent service level. This is essential when determining a service-level agreement with operations.
A good analysis tool will provide operations with a sense of the dollar trade-off when increasing service levels. Some of the more advanced inventory control systems will allow “what-if" analysis to strike a balance between inventory and service levels.
Other means of categorizing inventory for the optimization of service levels is using the ABC and/or XYZ classification systems. For ABC analysis, inventory items are classified into three groups:
- “A" class items constitute a small number of parts with a high volume usage (i.e. 20 percent of the parts account for 80 percent of the volume);
- “B" class items have a larger number of parts, but a lower volume usage (i.e. 30 percent of the parts with 15 percent of the volume); and
- “C" class items that are the balance of parts, but don’t turn over that often (i.e. 50 percent of the parts having only five percent of the volume).
Similarly, XYZ analysis deals with dollar value. For example, “X" class items may have 20 percent of the parts that account for 80 percent of the inventory value. Some systems will allow you to create more than three classifications (i.e. ABCDE classification). Across the entire inventory, this allows for fine-tuning of the delicate balance between service level and inventory value.
There are many methods for valuing inventory, including last-in, first-out (LIFO); first-in, first-out (FIFO); average costing; and activity-based costing (ABC). The most popular is average costing.
ABC, however, can significantly enrich the service-level agreement with operations through better allocation of maintenance costs. ABC ensures required costs are allocated to a product that’s based on a simple activity cost driver, such as throughput time.
Handling multiple warehouses
Better inventory control systems enable the establishment of multiple warehouses for tracking inventory and service levels within a given warehouse, as well as on a consolidated basis. Drill-down capability provides a means for managers to zoom in quickly on the underlying cause.
Good examples are excessive service-level or inventory turnover variances for a given period. This is a critical feature for multi-plant, distributed or decentralized maintenance departments. It allows them to properly monitor their service-level agreements with operations.
Economic order quantity
To optimize the cost of ordering, purchasing and carrying inventory, one or more economic order quantity (EOQ) algorithms can be used to calculate the right quantity of spare parts to purchase. One CMMS vendor has 19 algorithms available for EOQ calculations.
Better management of suppliers means improved service for operations. One of the most impressive features is the ability to build a hierarchy of suppliers and by commodity grouping, such as pumps. Users can also build hierarchies of the “parent-child" relations between supplier companies, and which inventory classes apply to which supplier agreements (blanket purchase orders) for pricing a given item.
Good supplier management requires proper records be kept. The following shows some of the supplier history captured by a preferred CMMS system:
- Parts purchased from a given supplier;
- Total volume purchased (year to date, last year);
- Average lead time;
- Number and duration of late shipments;
- Number of over-shipments;
- Number of short-shipments;
- Number and value of damaged goods shipped;
- Number of substitutions;
- Number of times improperly invoiced; and
- Supplier rating.
Rather than relying on gut feelings or vague recollections, analysis of supplier history is a powerful tool in negotiating with a supplier.
Here are some basic rules to keep in mind when ordering from suppliers:
1. Re-order point.
Reaching a pre-determined, re-order point triggers the stockkeeper, maintenance personnel or purchasing agent to initiate a purchase order. A CMMS system removes the guesswork about when to re-order stocked parts, thereby minimizing costly stock outs.
2. Spare parts.
Every purchased piece of equipment seems to be accompanied by a spare-parts list valued at three times the value of the original equipment. To avoid costly inventory, you should:
- Check to see if the part is common to another piece of equipment;
- Check for generic alternatives from cheaper, local sources;
- Ask about reconditioned or used parts;
- Investigate tooling an expensive part in-house or at a local machine shop; and
- Weigh the cost of stocking the part versus the net cost of downtime, plus a possible premium for a rush order.
- Analysis of parts usage history obtained from your CMMS system can assist in making these decisions.
3. Expensive items (capital expenditures).
Try to obtain at least three quotes, making sure every vendor is quoting on exactly the same specifications.
One critical consideration is not to buy a Rolls Royce when what you actually need is a wheelbarrow. For example, determine the life remaining on a piece of equipment and avoid buying expensive replacement parts, which will out last and out perform the equipment itself. A CMMS system can help compare maintenance costs associated with different vendors’ equipment.
Whenever possible, try to obtain three quotes prior to contracting out work. If time is of the essence, get a verbal estimate of the total cost. If this isn’t possible, obtain a verbal estimate of the contractor’s per-diem rate and probable expenses.
This is a must for critical parts, expensive inventory items or others with long lead times (i.e. equipment on order). Expeditors are a nuisance to suppliers, but invaluable to you for ensuring that deadlines are met and downtime is minimized. A CMMS system can act as a “tickler" file for triggering key dates for expediting.
David Berger, P.Eng. (Alta), is a principal with Western Management Consultants and is the founding president of the Plant Engineering and Maintenance Association of Canada (PEMAC). For more information call (416) 362-6863 ext. 237; email: firstname.lastname@example.org or visit www.wmc.on.ca