Consider This -- Making MRO Inventories Play by the Rules

July 16, 2009
Well-managed MRO inventory can reduce costs and improve service levels.

While companies continually look for ways to improve their balance sheets and generate incremental cash, one frequently undertapped opportunity lies in the area of maintenance, repair and operations (MRO) inventories. In many industries, the spare part stock represents a significant portion of overall inventories -- and incurs substantial holding costs due to its typically very slow turn level. Efforts by finance teams to reduce these costs and underlying stock levels are regularly met with strong pushback by plant management and other front-line stakeholders. These groups cite the criticality of these spare parts and components inventories as a hedge against plant shutdowns. Furthermore, they cite the relatively low resale value of these assets as a rationale for retaining them.

Leading companies that manage their assets carefully through rigorous processes have been able to improve productivity and the return on investment in MRO inventories without negatively affecting their operations. In fact, the best companies have actually improved service levels to their operations through a careful approach to MRO inventory management.

Optimizing MRO spare parts inventory levels/values is based on the evaluation of six key dimensions:

Spare Parts Usage and Transaction Costs -- A rigorous analytical review of spare parts usage (quantity and frequency) and transaction costs (ordering cost and stocking cost) is done to "right-size" inventory levels in light of current supply chain performance and maintenance requirements.

MRO Supply Chain Performance -- Avenues to reduce inventory through improved supply chain performance often require re-engineering logistics, inventory deployment (line-side versus warehouse storage) and trimming overall supply cycle times to reduce inventory requirements. Suppliers are often essential partners in driving these supply chain improvements. Leading companies actively manage and enforce supplier lead-time adherence through tools such as supplier scorecards and contract incentives/penalties for service failures.

MRO Inventory Demand -- Applying demand management techniques to MRO inventory can improve maintenance practices and significantly reduce inventory levels. Predictive technologies and diligent preventive maintenance plans help do away with failures or at least make them more predictable, thus eliminating the need to keep as much inventory or any inventory at all. Inventory levels also can be reduced by standardizing equipment specifications across multiple sites and sharing spare parts across these various locations.

Spare Parts Ownership -- For new machinery and equipment investments, companies should consider negotiating ownership of spares with suppliers. In many situations, suppliers may be better suited to maintain required inventory levels, as they can leverage the aggregated demand across their customer base to reduce total inventory in the full supply chain.

Strategic Sourcing -- Strategically sourcing MRO spare parts in order to restructure vendor relationships and reduce purchase prices will lower the value of stock as it is purchased and oftentimes more importantly ensure that the company is fully leveraging their market power on supplier provided services.

Part and Equipment Criticality -- Determining what spare inventory to stock requires an evaluation of such things as supply chain lead times, vendor availability levels and part shelf life. However, the predictability of part failure and the criticality of a given spare to a business operation can be the overriding considerations in establishing minimum levels for certain spares, especially those that rarely move. Companies must focus on developing consistent definitions of "critical" (sometimes referred to as "insurance") spares with clear rules for how they should be treated. While companies often stock nonmoving inventory under the guise of criticality, as much as 60% of nonmoving inventory can be eliminated by establishing a more robust definition of importance.

The key to success lies in the use of a disciplined, rigorous process and an active management approach. While the cash benefit of these actions will depend on a companys particular situation, over the long term all organizations will achieve improved financial results from following the practices outlined above. Conversely, in cases where companies leave the MRO inventory unaddressed, inventory levels will continue to mount, unneeded parts will continue to be purchased, and time, resources and financial capital will remain poorly utilized.

Steve Mehltretter is a partner with A.T. Kearney and is based in Toronto. He can be reached at [email protected].

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