If your company is in the business of maintenance, repair, and operations, you should already be aware of the strengthening trend in service as a source of value, both in business-to-business and business-to-consumer marketplaces.
Given this knowledge then, does your organisation place enough importance on the management of MRO inventory?
In reality, many enterprises (even those for which MRO activities are core business functions) struggle to manage operational consumables. If yours is one of them, and you’re wondering where and how to start getting a grip on MRO inventory, this post might help.
Read on to discover the most common MRO inventory challenges and issues, the consequences of leaving them unresolved, and most importantly, the potential benefits of overcoming them.
But First, A Few More Questions…
If you have to answer “no” to any of the following questions, your company is probably one of those challenged by MRO inventory control issues:
- Do you know your supplier lead times for the fulfilment of MRO purchase orders?
- Do you know the depletion rate of your MRO-related inventory?
- Do you always manage to replenish MRO items before inventories reach zero?
- Do you know how many SKUs exist in your MRO inventory and what they are?
You might be surprised at how many MRO organisations would have to answer “no” to at least one or two of these questions. You might be even more surprised though, if you find yourself answering some of them in the negative.
But don’t worry; knowing what you don’t know is a good first step on the road to overcoming MRO inventory challenges.
So let’s take that first step with a look at demand forecasting—a notoriously tricky discipline—but also an essential foundation for successful MRO inventory management.
MRO Demand Forecasting: Into the Great Unknown
Demand forecasting is tough, even for product-based enterprises with a constant stream of sales to retailers or consumers. For MRO organisations, where demand for spares and consumables is completely erratic, it’s even more of a challenge to forecast consumption on an accurate basis.
However difficult it may be though, your forecasting accuracy has such an important bearing on MRO inventory costs that improvement must be a leading priority.
It’s understandable that in an industry where having the right part, at the right place, and the right time can be super-critical, there is a tendency toward risk-averse inventory policies (keeping more inventory on hand than might ever be required).
At the same time though, the MRO arena is becoming every more competitive, making reduced working capital investment a highly desirable goal.
But how are you supposed to accurately forecast demand for your MRO inventory, when it may be almost wholly comprised of slow-moving items subject to irregular demand? If this question was easy to answer, MRO businesses would not be suffering the high levels of obsolete material that currently plague the sector.
MRO Inventory Forecasting: A Matter of Opinion?
Is your company basing MRO inventory forecasts on extrapolated historical data? This is by far the most common demand forecasting method, but it’s not one with which your forecasts are ever likely to become more accurate.
The trouble is, historical data for MRO items tends to be inaccurate, given that consumables are prone to movement from place to place within an organisation.
For example, quantities of an item that data suggests have been consumed may actually be sitting in many personal stock caches appropriated by field engineers, factory staff, or other well-meaning members of your company’s workforce.
If you’re not using historical data, then it’s a fairly safe bet that your forecasts are qualitative, and based on the opinions of people who physically use your MRO consumables, like your field agents or plant maintenance engineers.
On Software and Segmentation
Whichever methods you employ, forecasting is a difficult aspect of MRO inventory management. Your best chances of improving accuracy lie in a breakdown of your inventory into segments, followed by the development of category-specific inventory strategies and investment in advanced demand forecasting technology.
Forecasting for each materials segment will probably need to be aided by the software tool most appropriate for the category.
For best results, software applications should be able to create forecasts based on causal factors, rather than historic data analysis. Such platforms are becoming more common and affordable as sensor and machine-learning technology improves in sophistication.
As well as helping with forecast accuracy, segmentation can also help you to deal with another chief MRO inventory challenge—purchasing.
The Challenges of MRO Inventory Purchasing
MRO inventory purchasing is typically a fragmented and complicated affair, rarely centralised and subject to strategies based more on personal points of view than any objective approach to spend-management.
To be a little more specific though, challenges include:
- Wide diversity in MRO inventory items and suppliers
- Purchases that are often reactive and unplanned
- Purchasing priorities that vary depending on who’s responsible for procurement
- Unpredictable demand for many MRO materials
- The tendency to purchase items that are rarely required (just in case)
Segmentation can help to address these challenges. By categorising MRO inventory according to specific criteria, purchasing strategies and standards can be matched to material characteristics such as:
- Movement frequency (inventory turns)
- Business/customer criticality
- Item value
- Supply availability and purchase order lead time
Product segmentation must be preceded by rigorous spend analysis though, and is itself only a single step forward in overcoming MRO inventory challenges. Furthermore, to be effective, inventory purchasing strategies need to be administered centrally, which means separating responsibility for purchasing from that for receiving.
The Big Step to Centralisation
A shift to centralised purchasing might be easier said than done if your company currently lets engineers and departmental managers purchase MRO inventory at their discretion. Despite the need to climb a change-management mountain though, there are many reasons to overcome resistance to centralised MRO purchasing.
Aside from being a foundation for cohesive and operable purchasing strategy, centralisation can help to drive standardisation, improve replenishment control, and reduce the costs of purchasing activity. The last point is particularly important, since the cost of raising and managing MRO purchase orders can often exceed the value of the purchased items.
Centralised purchasing can improve the efficiency of operational departments within your company too, by divorcing technicians, engineers, and business managers from the activities associated with sourcing and purchasing MRO consumables.
Managing MRO Inventory Across Functions
In addition to purchasing, the physical management of purchased inventory all too often falls upon the shoulders of service personnel. Again, apart from this being an unproductive use of their time, it also leaves inventory control at the mercy of people who can’t realistically take the time to focus on it.
If you want to improve MRO consumables management in your organisation, you need to create a cross-functional team dedicated to dealing with the many challenges and issues that exist, and for addressing the following important questions:
- Which items must be stocked, and which can easily and quickly be acquired on an “as needed” basis?
- How much of each item should continuously be maintained in the inventory?
- What should min/max inventory levels be for each MRO item?
- Which items might realistically be stored and supplied from a central facility, and which ones must be kept at points of use?
- What is a realistic level of safety inventory for each SKU?
- Where could you employ vendor-managed inventory to simplify the control of consumables?
The same team will need to work on consolidation of suppliers to align with the needs of your different product categories. Strategic relationships will need to be developed with your most important suppliers, while supplies of less critical consumables might be managed more tactically,
It may even prove more beneficial for your company to outsource some elements of MRO inventory control, perhaps by partnering with a third-party purchasing organisation, using a 3PL to store and distribute spares and consumables, or even engaging a specialist provider to maintain and manage MRO storerooms at your key operating centres.
Key Issues in MRO Inventory Management
Regardless of whether you choose to keep MRO inventory management in-house or outsource it, the existence of a cross-functional team is essential if you want to overcome inventory management challenges such as:
- The high levels of working capital tied up in safety stock
- The losses associated with inventory obsolescence
- The service and productivity impacts of stock-outs
- The high costs of purchase order management
- The labour costs involved in MRO inventory management
- Maverick spending within operational departments
- Personal MRO inventories held “unofficially” by field technicians, in-house engineers and heads of departments.
For the remainder of this post, we’ll look at some of these MRO inventory management challenges in a little more detail.
The Safety Stock Irony
In an MRO business, you don’t yet have the luxury of transforming your consumables supply chain to a “pull” model, though as sensor technology, machine-to-machine communication, and machine learning become more advanced, we’ll begin to see more parts being ordered on the basis of imminent failure detection.
However there will still be all the other times, like fasteners for instance, which can only realistically be made or purchased to stock.
Wherever there is MRO stock, there will be safety stock, but the difficulty is in determining how much to hold. Safety-stock needs for operational consumables are typically overestimated, which ironically, does nothing to reduce the risk of stock-outs, since it’s the re-order trigger that controls risk, not the actual level of stock maintained.
The imperative then, is to determine the right maximum and minimum stock levels and triggers for critical SKUs, to ensure that stock-out risk is minimised without tying up working capital in stock which adds no customer-service value.
The Need to Make Obsolescence Obsolete
Inventory obsolescence tends to be a bigger problem for MRO businesses than enterprises that sell products as a core activity. There are a number of reasons for this, which include:
- Unauthorised hoarding of operational consumables by technicians and other personnel
- The aforementioned excessive levels of safety stock
- The need to keep certain critical SKUs which may never actually be consumed
- The unpredictability of demand
- Poor visibility into the whereabouts of inventory within the business
To make matters worse, it’s common for managers to hold onto obsolete inventory for longer than necessary, for fear of the financial hit taken when inventory is written off the books. However, such reticence causes the costs of obsolete inventory to continue mounting.
No Stock = No Service = No Customers = No MRO Business
In a product-oriented business, a stock-out can result in lost sales, as customers decide to do without or to place an order with a competitor. Inevitably some customers will wait until the stock is available, so all is not lost.
In an MRO business, stock-outs of operational consumables can mean the end of the line for relationships between provider and customer.
If your customer’s industrial plant can’t function for example, and you can’t provide the part to get it running, the resulting losses for your customer might run into unimaginable sums of money. Is that customer going to place their trust in your organisation next time?
Depending on the nature of your business, unavailability may or may not be so disastrous. Still, the fact remains: for product-providers the loss of a customer due to a single stock-out is rare, but it’s much more of likelihood when customers rely on you for manufacturing, repair, or operational assistance.
So why are stock-outs in MRO organisations so commonplace? It’s mostly due to the issues already mentioned—all of which beg the need for MRO inventory management to be centralised, or at least placed in the hands of a dedicated professional team.
The Opportunities in Your MRO Inventory Challenges
Let’s conclude with a summary of the chief inventory challenges faced by most companies (and internal departments) involved in manufacturing, repair, and operations. The biggest concerns are likely to be:
- Fragmentation and lack of visibility into inventory quantities and locations
- Excessive levels of safety stock
- Stock-outs resulting from a lack of proactive inventory management
- Hoarding of inventory by individuals and departments throughout the business
- A lack of purchasing control
- Inability to forecast demand accurately for operational consumables
MRO inventory is a different beast to direct product inventory, and the tools and methodologies used in the product supply chain can’t always be applied to MRO scenarios. At the same time, it does make sense to engage supply chain specialists to help you overcome MRO inventory challenges and capitalise on the opportunities they present.
Supply chain people are used to dealing with the causes and effects of inventory issues, and can hence aid your service teams in identifying realistic solutions.
As for what those solutions will be; segmenting your inventory into categories, developing category-specific strategies, and centralising inventory control are all worthy of consideration, as is the use of vendors (to manage inventory) and outsourced MRO inventory management providers.
Need a Little Help With Your MRO Inventory Challenges?
If you don’t have a sufficiency of supply chain professionals to work on your improvement projects, it can make good sense to engage a management consulting company to help you with spend analyses, inventory segmentation, forecasting-tool selection, and strategic decision-making.
Here at Logistics Bureau for example, our team has successfully helped a great many MRO organisations to improve control of operational consumables.
Through the services of our experienced consultants, those organisations have enjoyed lower operating costs, improved service levels, and reduced working capital requirements. To find out how we can help your company rise to MRO inventory challenges, contact us today and speak to one of our inventory management consultants.
Here at the MTA and New York City Transit, the vast majority of our supply chain involves the procurement, storage and issuance of material used in the Maintenance, Repair and Operation of subway cars, rail cars, and buses. My question is in your experience have you seen S&OP used in any form to manage MRO materials in capital intensive industries? I am interested in S&OP as a best practice and would like to know if you have ever seen in applied to manage MRO.
Thank you for any help you can provide.
OK, this reply is from Keiran Hogan one of our MRO Inventory specialists.
• Yes, many times – sometimes successfully and sometimes not so much.
• I call it IBP (Integrated Business Planning) rather than S&OP – but there’s a lot in common, and some significant differences.
• In MRO there’s Engineers, but no product managers – and the Engineers responsibilities and interests are very different.
• Also MROs issue but don’t sell …
• Procurement is arguably more important in MRO IBP processes than in Wholesale/Retail .
• Organisational Structure is important to MRO IBP Success. A lot depends on whether Supply Chain reports up through Operations or through Finance … and why‼
• The KPIs are quite different (Availability is more important, stock turns less, control and compliance more, penalties for non-availability much more important)
• The ABC and criticality flags are very different to a standard Wholesale/Retail business.
• IBP (S&OP) meeting cycle and meeting agenda is different – but similar – and the correct agenda is very important
• Just like S&OP, the senior management support for the process is critical to success.
• Supply Chain alignment to the Operations Strategy is also critical – and so often the SC and Ops have different formal and informal goals –
• We have an MRO Excellence Model, and IBP/S&OP is a part of that.
• We also have a MRO/IBP maturity model.
Rob / Keiran,
Thank you for the reply. It was very helpful and confirms several things I suspected and provided some new insights.
I would be interested if you could provide me the names of some companies that use integrated business planning to plan their MRO material. I would very much like to contact them to share experiences.
Also, can you provide me some more information on why the difference in IBP’s KPI’s and why procurement is so much more important?