MRO efficiency can help keep costs down

Over the course of our careers, the two of us have probably consulted on a dozen MRO projects in industries as varied as energy and mining. While the engagements were diverse, it’s surprising how much similarity existed across the organizations we worked with.

The most fundamental similarities were a lack of management knowledge of the problems with MRO, a lack of management direction, a lack of rudimentary policies and procedures, a lack of day-to-day supervision and follow through, and an unawareness of how much more it was costing to manage the MRO than it needed to cost. Management involvement was not forthcoming because there was no perceived need. And, we all know about the squeaky wheel.

The results were pretty much the same across industries: We found extraordinarily high volumes of obsolete materials, high back-order rates and high volumes of excess materials. As if that weren’t bad enough, the physical inventory adjustment ranged almost to 50%, often coupled with an inability to find requested materials due to inaccurate inventories. Given that companies may maintain millions to hundreds of millions of dollars in spare parts inventories across thousands of SKUs, when inventories are off or items have been misplaced, the cost to the organization can run in the millions of dollars.

What we’ve outlined so far does not even begin to touch on things such as lost craftsmen productivity, lost revenue generation due to down time, extended down time due to material shortages/backorders/lapses in delivers and availability, re-planning/rescheduling outage repairs and associated contract labor. Additionally, MRO organizations deal with situations such as the mishandling of sensitive or hazardous materials, expired shelf life and the high cost of expediting out-of-stock parts when equipment is unexpectedly out of service.

Last, but not least, organizations often add resources to compensate for inefficiencies in their MRO supply chains for tasks such as searching for missing components or picking up expedited items. The impact on productivity and profitability is phenomenal to say the least. That doesn’t consider the potential added costs of fines and intrusion by regulatory agencies such as OSHA, MSHA and the EPA.

Why would any organization knowingly allow these profit-eroding activities and processes to continue? Let’s start by suggesting that too often, MRO operates beneath the radar or is considered a cost of doing business. As a result, upper management is often unaware of the extent and cost of mismanagement in the MRO supply chain.

One place to begin turning this around is to establish key performance indicators (KPIs) for MRO activities. KPIs, after all, are indicative of how well the customer is being served and how well the company’s money is being spent and/or tracked. In this instance, the customer is internal to the organization. The seven KPIs listed in the chart measure whether the stock is available when required to meet a customer’s need (stock outs, inventory accuracy and supplied replenishment programs), inventory cost (inventory turns and cost) and efficiency (slow moving and obsolete inventory). Performance measurements are captured and key ones tracked to achieve MRO supply and stocking goals. A KPI can only be identified as a KPI if the performance is measured and a target is established.

When it comes to inventory management, best practices that will improve KPIs include a regular review of stock to ensure that all inventories are up-to-date and relevant. Obsolete items should be marked as such, or used up. Irrelevant items should be removed from the active catalog listing and isolated from active storage locations to free up space and improve warehouse efficiency. If a review and identification of slow-moving and obsolete inventories has not been accomplished, as much as 20% of the inventory is probably surplus and/or obsolete.

Managing on a day-to-day basis means all the activities documented here are performed by inventory control personnel. Inventory analyst roles, specifically, are analyzing min/max quantities and adjusting as required, reconciling and monitoring cycle counts, addressing count errors, monitoring and reporting multiple locations, monitoring on order status, back orders and expediting and authorizing taking parts from kits in an emergency (as last resort), facilitating meetings for new inventory items, ensuring inventory organization is entered and accurate, and facilitating obsolete inventory disposal process. This is not a part-time role for a warehouse manager. It’s a full-time job to ensure the inventories are under care and control.

Far from an exhaustive list, these are just a few steps an organization can take around MRO. The point is that maintenance doesn’t have to be a cost of doing business. Done right, it can be managed for a profit.

Phil R. Hebert has 40 years experience in MRO, manufacturing and supply chain management. Rick Wakeland has 45 years experience in procurement, materials management and operations.