Many manufacturing and asset-intensive companies will agree that MRO / Indirect Materials represents one of the single largest cost savings opportunities within their organization. But with thousands of spare parts on-hand, limited spend visibility, and a multitude of suppliers at their disposal, how do purchasing and procurement departments begin to capture these highly sought-after cost savings?
Part 1 of the answer is Inventory Optimization.
IMA Ltd. offers a data-driven Inventory Optimization service, which will identify excess inventory and provide recommended stock levels.
Before this process can begin, a representative dataset must be obtained. At minimum, 24-36 months transactional usage and purchase history will be required and must include the following data fields:
- Internal Item Number
- Manufacturer Name
- Manufacturer Part Number
- Description
- Unit Cost
- Last Receipt Date
- Last Issue Date
- Order Number
- Re-Order Point (ROP)
- Re-Order Quantity (ROQ)
- MIN
- MAX
- Safety Stock
- Average Lead Time
- Last Lead Time
Using this historical data, each itemized purchase, receipt, and issue transaction is thoroughly analyzed to determine usage and purchase patterns. From here, proprietary software and customized formulas categorize each inventoried item as Required Active, Excess Active, or Inactive. These categories are defined as follows:
Required Active
- Items which have been purchased and/or issued at least once during the analysis period and do not have an on-hand quantity that exceeds the IMA recommended maximum inventory stocking level
Excess Active
- Items which have been purchased and/or issued at least once during the analysis period and have an on-hand quantity that exceeds the IMA recommended maximum inventory stocking level
Inactive
- Items which have not been purchased and/or issued during the analysis period – Upon further analysis, Inactive items can be categorized as Critical Spares, Slow-Moving or Obsolete
Based on a customer specified inventory reduction strategy (Conservative, Moderate, or Aggressive), recommended stock levels (ROP, ROQ, MIN, MAX) are calculated in an effort to right-size and efficiently manage on-hand inventory.
Below is a list of calculated values that are included as part of the Inventory Optimization deliverable.
- On-Hand Value ($)
- Lowest Lead Time
- Highest Lead Time
- Average Lead Time (Calculated)
- Last Lead Time
- Average Daily Consumption
- Calculated Safety Stock
- Total Issue Quantity
- Total Issue Frequency
- Average Issue Quantity
- Lowest Issue Quantity
- Over Current MAX (True/False)
- Over MAX Value ($)
- Under Current MIN (True/False)
- Under MIN Value ($)
- IMA Recommended MIN
- IMA Recommended MAX
- IMA Recommended ROQ
- Annual Consumption Value ($)
- Number of Turns
- Required Active (True/False)
- Require Active Quantity
- Required Active Value ($)
- Excess Active (True/False)
- Excess Active Quantity
- Excess Active Value ($)
- Inactive (True/False)
- Inactive Quantity
- Inactive Value ($)
Using this valuable information, stock levels can be set to the IMA recommended quantities and an excess / obsolete inventory disposition strategy can be implemented to reduce on-hand stock. Depending whether your objective is to recover some of the initial inventory investment or simply to free up storeroom space, there are many disposition strategies that can be applied. Some strategies to consider include:
Attrition
While this strategy will not deliver cash returns, it will allow for excess inventory to be used down to an efficient stocking level, reducing carrying costs and freeing up storeroom space. Based on the analysis of purchase and usage data, average daily usage can be calculated. Using this number along with other inventory variables, IMA can estimate the time it may take for excess inventory to be used down to an optimal stocking level. If the attrition timeline is estimated to exceed a targeted date, you may want to consider a different disposition strategy that can produce quicker results.
Corporate Internal Redeployment
Similar to the attrition strategy, Corporate Internal Redeployment may not deliver cash returns but it will allow for excess inventory to be transferred and consumed within other sites in your organization. In order to make this strategy successful, you must identify other sites within the organization that the excess and/or obsolete parts are used in. Based on usage activity and on-hand quantities at those sites, you must determine a timeline for usage. Does the other site have plans to purchase this part in the near future? Does it make sense to put another site in an over-max state if the parts will be consumed in a short period of time? There are many variables to consider with this strategy but if implemented properly, it can deliver great benefits to all sites involved. IMA can also help facilitate this strategy by providing data-driven insight and enterprise visibility.
Supplier Buy-Back
Supplier buy-backs are another effective disposition strategy and can often become a great negotiating factor within a tendering process. In many cases, suppliers will agree to purchase the excess items that fall into their product group(s) for cash or credit towards future purchases. For example, a Bearing & Power Transmission supplier may agree to purchase any excess bearings and belts that are new in the original unaltered box. So if you’re planning to tender out your MRO spend in the near future, this is a great strategy to keep in mind during the negotiating phase.
Auction
Now we’re getting to the more lucrative disposition strategies. Auctions are a great way to capture quick returns on excess and/or obsolete inventory. Typically auctions involve inventory being sold by the lot. The financial return from an auction sale can vary, as there may or may not be a set minimum bid. For that reason, this is a great strategy for companies who don’t have a set dollar value in mind and simply want to remove the inventory from their storeroom in a short amount of time.
Third-Party Liquidation
Once again, third party liquidation can provide cash returns and allow companies to remove excess inventory almost immediately. Often third party liquidation companies will purchase excess inventory at a percentage of the market value. In most cases, the third party provider will be responsible for gathering the inventory from your facilities, therefore eliminating any logistical burden on your company.
eCommerce
Often seen as the last resort, e-Commerce can be used to slowly sell off excess inventory online through various sites such as eBay, Amazon, and others. The eCommerce strategy requires much more management as each item is usually posted individually and inquiries may require a response. Once the sale has been made, you will also have to manage the logistics, including pulling the item from your storeroom, putting it in the appropriate shipping package, and sending it to the buyer.
As a result of an Inventory Optimization project, significant cost savings can be achieved almost immediately through excess inventory identification and disposition. From a long-term perspective, stock level optimization enables efficient asset utilization, ensuring that the right parts are stocked in the right quantities at all times, while preventing excess inventory from accumulating in the future.
To learn more about MRO Inventory Optimization services and request a preliminary inventory assessment, please visit www.imaltd.com or contact info@imaltd.com.
Stay tuned for our next blog post “MRO Spend Reduction PART 2: Spend Analysis”.
