Show Me the Money: MRO Analysis and Inventory Optimization

There is no question that a lot of money is tied up in MRO inventory but the common question companies ask is how to turn that unnecessary evil into cost savings.

The answer – Inventory Optimization.

Inventory Optimization can be defined as an action of balancing capital investment, service-level objectives and ROI, over a large number of stock-keeping units (SKUs), while taking demand and supply volatility into account.

As a service, Inventory Optimization is a method of analyzing historical data, identifying unnecessary expenses, disposing of excess inventory, and adjusting stock levels for maximum asset efficiency.

When a formal inventory optimization project is undertaken it is often found that many item descriptions are inconsistent with spelling errors and missing information such as manufacturer name and/or part number. When the part description is unrecognizable to maintenance workers, it leads to part duplication, false stock-outs, equipment downtime and overall maintenance inefficiency.

Before an inventory analysis can take place, all inventory data must first be cleansed to ensure that it is accurate, complete, and properly categorized.

Once the original data has been cleansed, we typically find that duplicate items range from 5-15% within a given site and the percentage of commonality across multi-site organizations can sometimes range as high as 25%.

Next, the inventory can be sorted into typical commodity groups, including: Bearing & PT, Industrial Supplies, Electrical, Instrumentation, Fluid Power, and Pipes, Valves & Fittings. Commodity groups can then be segmented into categories based on usage, such as: Required Active, Excess-Active and Inactive. Required Active parts are those which are used commonly and must be stocked at all times. Excess-Active parts are simply overstock of Required Active items.

Inactive parts can be further segmented into Critical Spares, Slow-moving or Obsolete Materials. Critical Spares include items that are essential for the business to operate and stocking out would significantly impact production, quality, safety or cost. Slow-moving items include parts with long lead times which may affect plant efficiency, or recommended spare parts which are kept to satisfy risk aversion.

Optimization and rationalization of the above mentioned categories requires a very strategic approach but can return significant cost savings.

Typically we find that Required Active items range from 25-30%, Excess Active items range from 10-20% and Inactive items range from 50-60% of all inventories. Furthermore, we consistently find that within all Inactive inventories, Critical Spares represent 15-20%, Slow-moving items represent 20-25%, and Obsolete items represent 15%.

The opportunity for cost savings predominantly comes through the elimination of duplicate items and the rationalization of Excess-Active and Slow-Moving inventory. These items can be used down through attrition, sold back to the supplier for credit towards future purchases, or sold to a third part for cash. In many cases obsolete items can also offer some opportunity for generating cash.

To take the process even further, an inventory analysis will reveal spend by commodity and spend by supplier, often resulting in a multitude or suppliers and a large range in pricing. With this information, procurement can now leverage spend to establish preferred supplier programs and receive reduced MRO item pricing.

For more information on Inventory Optimization and other services provided by I.M.A. Ltd., please visit www.imaltd.com or contact info@imaltd.com.