Key MRO Inventory Management Challenges in Your Supply Chain

If your company is in the business of maintenance, repair, and operations (MRO) — providing services and supplies to keep equipment and facilities running — 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, 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.

What is MRO? – Acronym Meaning

MRO stands for Maintenance, Repair, and Operations (or sometimes Maintenance, Repair, and Overhaul). In a supply chain context, it refers to the supplies, equipment, and activities needed to keep a business’s operations running smoothly. Here’s a breakdown:

Maintenance: Regular upkeep activities to prevent equipment breakdown and ensure continuous operation. This includes routine inspections, cleaning, lubrication, and minor repairs.

Repair: Fixing equipment and facilities when they break down or malfunction. This involves replacement parts, tools, and labour needed to restore functionality.

Operations: The supplies and materials needed for day-to-day business operations that aren’t directly part of the finished product. This includes:

• Office supplies (paper, pens, toner)
• Safety equipment (gloves, goggles, first aid supplies)
• Cleaning supplies
• Tools and equipment
• Spare parts
• Laboratory supplies
• Computer hardware and software

MRO is crucial for several reasons:

• It helps prevent costly production downtime
• It ensures workplace safety and compliance
• It maintains product quality by keeping equipment in optimal condition
• It represents a significant portion of indirect spend for many companies

Managing MRO in the supply chain involves:

• Inventory management of spare parts and supplies
• Vendor relationship management
• Procurement strategies (like just-in-time ordering or bulk purchasing)
• Warehouse management for MRO items
• Maintenance scheduling and planning
• Budget control and cost optimisation

Many organisations these days use computerised maintenance management systems (CMMS) to track and manage their MRO activities and inventory.

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 at 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 ever 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, you can match purchasing strategies and standards 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.

Performing an MRO Spend Analysis

An MRO spend analysis is the foundation for inventory segmentation and strategy. This process starts with data collection from purchase orders over the previous 12–24 months. The process involves item master records, supplier contracts, pricing structures, usage data, current inventory levels and lead times for each SKU. Emergency order frequency data can give more insight into your supply chain weaknesses.

The spend analysis process typically continues with data cleansing. What does this mean? Well, organisations need to standardise their item descriptions, remove duplicate entries, validate their pricing information and consolidate all of their supplier data, which helps to bring more accuracy to their operation. This cleansed data then allows for spend classification, where items are categorised by type and criticality, and spending patterns and supplier relationships mapped.

After doing this, we evaluate performance. We analyse total spend by category and supplier, looking at purchase frequencies and order quantities to identify patterns that can show correlation. Things like price variations across suppliers and lead times become apparent, and we can then see performance gaps. Common issues like stock-out incidents and emergency purchase costs will highlight areas that we can look to improve.

During this whole process, we’re really looking at some key metrics to drive the analysis. Common metrics like cost per SKU, order frequency patterns and average order values give us a baseline to work with, as well as supplier metrics used to evaluate vendor relationships. In addition, stock turn and carrying costs show your inventory efficiency, and obsolescence rates highlight areas that need immediate focus.

The final phase is opportunity identification, which will show areas for supplier consolidation, pricing and inventory reduction. Your organisation can see which SKUs need lead times or order quantities adjusted. This approach means that subsequent inventory segmentation strategies are built on fact, not assumptions.

An MRO spend analysis works to support your strategic planning initiatives for the future. For example, when organisations find 20% of their suppliers account for 80% of total spend, they can focus on relationship management. When high-cost, low-turn items are identified, organisations can make working capital improvements straight away through changed stocking strategies.

It can be an important part of the supply chain management process that should help you not only to analyse your MRO spend data, but also to understand it.

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 to 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, whilst 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 items — 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 for 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 a likelihood when customers rely on you for maintenance, 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 underline 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 maintenance, 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 speak to 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.