Maintenance, repair, and operating (MRO) inventory is a crucial part of any business, comprising a major portion of the annual budget. However, it frequently is an area where inventory management best practices are ignored. Significant cost reductions and improved performance can be achieved in MRO inventory with minimal investment simply by applying basic principles.
MRO inventory is defined as supplies consumed during production that do not become part of the finished good and are not central to the firm’s output. This includes items such as repair components, office supplies, cutting fluids, lubricants, and tooling. It also consists of more mundane items, such as cleaning, maintenance, and safety supplies, as well as any furniture and other commodities not directly tied to a product or service.
Unfortunately, MRO supplies often are not perceived as an inventory responsibility. Consequently, they may not be handled with the rigor and attention that they should. In many companies, there is no direct accountability for MRO inventory—unless (or until) there is a stockout. While MRO inventory accounts for a tremendous amount of cash outlay, the items may sit exposed without an identifier, locator, or usage history. The field is ripe for added controls and more efficient handling methods.
The dark side of MRO
Traditional inventory management comprises raw materials, component parts, work in process, and finished goods. When optimized, there is neither an excess nor a shortfall regarding
current production needs and contingencies. Traditional inventory is counted via cycle counting using ABC analysis and tracked as it moves through warehouses or work-in-process locations. Sophisticated tools enable timely replenishment, such as enterprise resources planning systems, material requirements planning systems, and kanban. Bills of material are carefully kept and maintained, detailing the amount and costs of inventory on end products.
However, these practices rarely apply to MRO inventory, and it’s infrequent that it’s measured in terms of on-hand, turns, obsolescence, or usage. Because MRO supplies are essential for maintenance or repairs, they often are bought at the last minute, ignoring price in favor of availability. And, because immediate buys stem from poor planning, expedited freight charges become a factor, as well. Another consideration is the cost of unplanned downtime when an MRO item is known to exist somewhere in the facility but is unable to be located. Additionally, MRO inventory turns less than once per year and its request-to-fill rate generally is less than 80 percent.
It’s not unheard of to encounter a manager complaining about equipment downtime while maintenance employees sit in negotiations with vendors. There is a common perception that maintenance and facilities professionals know exactly what is needed and can get it quickly. However, they are burdened enough with keeping facilities and equipment running. Additionally, these workers usually are highly paid, and requiring them to perform materials management instead of repairs and preventive maintenance is not the best use of time and resources. The people best suited for negotiating with suppliers are materials and purchasing personnel.
Unfortunately, some individuals have been known to keep private inventory stashes to ensure they always have the right supplies. These items might be stored in tool boxes, shelves, or secret closets around the facility. This squirreled-away material is associated with many hidden costs, including expedited freight, missing supplies, and carrying excess inventory. I have participated in several facility clean-up operations, reorganizing large areas for maximum efficiency. In some locations, I have seen parts ordered via expedite for an emergency repair job only to have a different maintenance worker later perform the repair using the parts in his tool box kept “just in case.”
Finally, large quantities of MRO inventory often have to be thrown away simply because the equipment for which they were originally purchased no longer exists. Or, even more commonly, no one remembers why the items were bought in the first place.
Treat inventory like inventory
The solution to these issues is the same as what it takes to manage raw, work-in-process, and finished inventory. The first step is to understand the cost of MRO inventory. Take jet engines in the airline industry—admittedly a somewhat extreme example. The material cost for one engine is 70 percent of its value, while labor comprises 20 percent. As each engine costs between $13 and $15 million, the material value is about $10 million per unit. One would assume that very tight controls are kept on engine inventory.
Here is a more common example that can illustrate these costs: Light bulbs are vital to the operation of every business, be it manufacturing, health care, assembly, or retail. Consider the following questions: How much does each bulb cost? How many does the facility keep in stock? Are they the right ones? What is the cost to purchase individual bulbs versus in bulk? What is the effect of replacing one bulb at a time versus maintaining an inventory and scheduling regular replacements so as not to disrupt normal operations? Once you know the answers to these questions, you can recognize the total costs and begin to more effectively manage MRO inventory.
The next step is to adopt some inventory management best practices. When considering location, for example, one option is to consolidate all MRO supplies into one central location per facility instead of various unidentified locations. Another is to move the inventory to a supplier-controlled consignment site. Many organizations successfully use a third party to manage certain inventory types—a practice known as vendor-managed inventory (VMI). This enables the company to focus on its business and let someone else worry about MRO items. It also frees up maintenance personnel for actual maintenance and repair work.
In a VMI scenario, the supplier can leverage its purchasing volume to generate discounts to which a single maintenance representative would not have access. Paperwork is reduced, as well as the number of inventory transactions on the customer side. Invoicing can be scheduled on a weekly or monthly basis to lower the number of purchase orders, further reducing expenses. Imagine the cost of a purchase order, including requisition, receiving, payables processing, and the order itself, is $150. A reduction of 50 percent on an annual volume of 5,000 orders results in a savings of $375,000 on purchase orders alone.
The last step is to build accurate MRO data. Software and information technology are essential to this endeavor. Coupled with this is standardizing the process for stocking, consumption, and analysis of MRO information. Doing so enables maintenance and facilities professionals to better plan scheduled downtimes and forecast costs with greater accuracy. Operations workers are able to prepare for downtimes and not stockpile materials as they might in situations where downtimes last much longer than promised.
Reaping the benefits
When performed well, an MRO management initiative can reduce maintenance spending by as much as 25 percent. For example, on an annual maintenance spend of $30 million, MRO inventory management equates to a savings of up to $7.5 million.
Incredibly, MRO inventory control can realize a savings of 25 percent without reducing personnel levels. Add to that the benefits of higher maintenance productivity; lower indirect spend from sourcing, negotiating, and procuring inventory; less overall and unplanned downtime from shortages; not purchasing items that are already on-site; and the improved housekeeping and safety that comes from proper storage, identification, and tracking.
When the materials management team is put in charge of MRO inventory, the best people are on the job. Meanwhile, those most equipped to maintain the facility can perform that function. Getting a handle on MRO inventory not only meets the goal of reducing costs, but also presents an opportunity to boost productivity, capacity, safety, and quality.
John Donnelly, CPIM, C.P.M., has more than 25 years experience in supply chain, materials, operations, and health care, having served as director of materials, director of procurement services, operations manager, purchasing manager, and materials manager. He is the president of the Dayton APICS chapter. Donnelly may be contacted at email@example.com.
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