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BALANCE

EFFICIENCY

COLLABORATION

LANGUAGE

SIGNALS

The Case for

Managing
MRO Inventory

By John M. Donnelly
John M. Donnelly is the materials
manager at ITW/Hobarts Weigh Wrap
Group. He can be reached at john.
donnelly@hobartcorp.com.

In many organizations,
maintenance, repair, and
operations (MRO) inventory
accounts for a significant
sliceas much as 40 percent
of the annual procurement
budget. Yet it is still not
managed with the level of rigor
typically applied to production
inventory. There are five basic
practices that can quickly close
the gap with best practices in
MRO inventory management.

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n an earlier job, I was the materials manager in a manufacturing facility. A tool crib was the repository for
office supplies and safety supplies; the bulk of the
maintenance, repair, and operations (MRO) inventory
was controlled by the maintenance department and was
stocked all over the plant. My group set out to bring
best practice in inventory management to the MRO
supply chain.
Fasteners were the first MRO component category that we
addressed. We selected a supplier to come in and regularly
replenish the fasteners in a central stocking area. The supplier
inventoried and stocked the bins and invoiced us monthly. This
simple process change eliminated the multitude of purchase
orders and the associated costs that had been typical of the previous arrangement; it was also designed to ensure that maintenance staff always knew where to get the fasteners they needed
for their tasks.
However, there was continued resistance to the idea of the
materials management function taking control of all MRO supply. The turning point came when the stock of foundry tapping
conesused to control the flow of molten metal from a furnace
ladlewas allowed to run out and the purchasing team had to
source and expedite replenishment on a Sunday. It became clear
to everyone that it made more business sense to stock foundry
supplies in the tool crib. Soon after, additional supplies of tapping cones were moved into the crib. Not only were MRO centrally maintained and ordered after that, but the foundry maintenance areas housekeeping improved because there were no
longer skids of materials sitting around as maintenance stuff.
As this scenario demonstrates, it is possible to streamline
MRO inventory management practices and produce significant
benefits for the organization as a result. This article will address
several of the basic steps that organizations can take to improve
their MRO supply chain activities.

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MRO Inventory: The Opportunity


First of all, lets be clear about what we mean by MRO
supplies. We are talking about supplies consumed in
the production process but which do not become part
of the end product or are not central to the organizations saleable output.1 That definition includes items
such as repair components, cutting fluids, lubricants,
and tooling as well as office supplies, cleaning and
other janitorial products, furniture, lighting fixtures,
building supplies, safety supplies, and other consumables that are not tied directly to the organizations core
products or services.
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The spend on MRO inventory


can be very substantial. Just two
examples: The Helicopter Association
Internationals annual survey of operating performance shows that 40 percent to 45 percent of expenditures are
maintenance-related.2 And at a Tier
One automotive supplier, approximately 40 percent of the annual
procurement expenditure is consumed by MRO materials. As companies continue to do battle on the
cost front, few see the likelihood of
MRO spend falling. A recent survey
showed that nearly 60 percent of
manufacturing industry managers
surveyed expect to maintain their
levels of MRO spend in 2013. (See
Exhibit 1.)
Unfortunately, though, MRO supply is often overlooked as an inventory responsibility; as a consequence,
it is rarely handled with the rigor and
attention that it should be. It is all
the more regrettable in 2013, and all
the more crucial for organizations to
understand and manage their costs,
given the many uncertainties and the
volatility of the global economy. Yet in
my experience, MRO supply activiStuart Briers
ties have little direct accountability,
and are driven too often by stockouts rather than to any overarching supply chain plan.
Frequently, I have seen situations where MRO inventory
is expensed and sits in an area without any identifiable
locator system, ID, or a usage history. Although more
companies are coming round to the view that MRO supplies are true costs that can be tracked and controlled,
clearly there is room for systematic control and more
efficient methods of handling.

MRO vs. Real Inventory Management


Traditional inventory managementcovering raw material, component parts, work in process (WIP), and

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MRO Inventory

EXHIBIT 1

MRO Product Spending Not About to Decline


2013 MRO Product Spending for Plant and Production Floors,
Compared with 2012
Decrease
Remain the Same
Increase
0%

10%

20%

30%

40%

50%

60%

Source: Managing the MRO Supply Chain, IndustryWeek,


December, 2012, pp. S2-S6.

finished goodsis controlled and managed to optimal


levels, providing enough supply to cover current production needs and allow for the most probable contingencies. The inventory is generally checked through a
process known as cycle counting, using ABC analysis
costing. The inventory is received and located in a warehouse or WIP location and decremented as it is used.
When an enterprise resource planning (ERP) system
is utilized, the inventory may be replenished through a
reorder advisement through MRP or through a kanban
type of system where the supplier or vendor is notified
and the inventory is replenished. Bills of materials are
kept for the end products; they detail the amount and
costs of the inventory. There is never an issue of senior
management doing an end run around the system to
expedite the process; that would hurt everything from
back flushing to inventory accuracy, and many other key
performance indicators.
However, MRO inventory often lacks most of these
controls or practices. It is very rarely measured in terms
of inventory on-hand, turns, obsolescence, or usage. It
generally turns less than once a year; request-to-fill rates
are usually less than 80 percent.3 Frequently, many of
the supplies required for MRO tasks are actually in
stock but they just cannot be located. Another performance shortfall: many of the items required for maintenance or repairs are obtained with spot buys that ignore
price in favor of availability. Even worse: expedited
freight becomes a factor as well. There is also the cost
of unplanned downtime, waiting for repair components
that might already be somewhere in the facility.
At the same time, there is the issue of diverting highly paid maintenance personnel from repairs and planned
maintenance activities. Having them carry out materials
management work is not the best use of their skills and
time. Ive heard more than one plant manager complaining about maintenance staff sitting in an office talking
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Supply Chain Management Review

to vendors, and in the same breath, groaning about


equipment downtime.
There are also big differences in management
of cash flow when we compare traditional inventory
management practices with what is still typical with
MRO. It is not uncommon for a maintenance manager
to attempt to save money by buying larger quantities of, say, machinery components in order to get
the price break. But that generally means a large cash
outlay for inventory that is expensed when received
rather than being on the booksand which may get
lost or become obsolete. On the production side, supply chain professionals facing similar volume issues
will handle the negotiations allowed for receiving the
volume discounts, but will usually split the deliveries
into multiple dates, thus lessening the expense impact,
reducing the amount of shelf space required for stock,
and allowing for order cancellation in the event that the
items are no longer required.

Rooting Out the Hidden Inventory


Another common MRO practice is the use of hidden
or private inventories of material that individuals keep
in order to insure they have the items when they need
them. The material may be in tool boxes, shelves, or
hidden in work closets. This squirreled away inventory
comes at some considerable cost to the organization
everything from the obvious excess inventory to expedited freight fees.4
I have participated in several plant clean-ups where
large areas have been reorganized and material has been
disposed of because the equipment it was purchased
for no longer exists or more commonly, no one remembers why the material was purchased in the first place.
In the same facilities, I have seen parts expedited for
an emergency repair job, only to have the second-shift
maintenance person perform the repair with the parts
already in his tool box. Another example: in one Tier
One automotive facility, we had machining bits that
were stocked on an honor system. One day, there were
no bits on hand and nothing on order. While purchasers made frantic calls, operations people made plans to
extend the usage of the remaining bits. It was assumed
that the operations would suffer within 12 hours. As it
turned out, there was enough stock in operators tool
boxes to run the operation for more than 48 hours without doing any of the gymnastics required to extend the
operating life of each bit.
There is a bit of a Superman complex on display in
such circumstances; the employee saves the day because
he has the right parts right there.

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Five Best Practices in MRO Management


So what are the hallmarks of good MRO inventory management? In my experience, there are five aspects that
constitute best practice:
1. Central location of MRO inventory. It is
invariably more efficient to store MRO supplies in one
central location per facility rather than keeping them in
various unidentified locations. It is crucial to have computer systems to track, manage, and control inventory.
Armed with usage data and transaction costs, an organization can right-size its MRO inventory in accordance

MRO Goes from Muddle to Mastery

t one manufacturing company, an


end-to-end reorganization of MRO
inventory management produced huge
improvements. MRO activities had
been ad hoc, to say the least. The plant
engineering department maintained
the maintenance supplies, which were
stored behind the main building. This
required multiple touches to unload the
shipment, receive it, move it to plant
engineering, put it away, and then find
parts when needed.
Often, because maintenance
ordered the parts, the transaction was
handled as a verbal purchase order,
with the requisition approval process
occurring after the fact. This created
the extra steps of having the items
physically received but unable to be
received in the procurement system.
Since the material was moved to plant
engineering and consumed, there was
no urgency to follow up with approvals, so that purchasing staff spent
unproductive time tracking down the
items and getting approvals to process
the purchase order. The supplier then
spent more time providing proof of
deliveryand had to wait longer for
payments. One outcome: the manufacturer missed being able to take advantage of discounts for early payment.
Spurred to action by these difficultiesin particular, by the sheer volume
of items that could not be accounted
forthe manufacturers supply chain
leader launched an initiative to reorga-

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with supply chain performance standards.5


In a Tier One automotive supplier, we moved all of
the maintenance items to a controlled area. The inventory was cataloged, assigned part numbers, and located
on shelves that were also identified with a location ID.
The inventory was then capitalized, boosting the balance
sheet and allowing the costs of routine equipment maintenance to be tracked properly. The new stockroom
was then staffed with experienced supply chain personnel who had established relationships with suppliers and
who understood the concept of partnering with suppliers

nize MRO supplies, starting by moving


responsibility for the supplies to the
materials department. Clear executive
sponsorship from the plant controller overcame any political difficulties.
Receiving procedures were changed so
that items unable to be received were
placed on hold. The rule was simple: it
did not matter how important the part
seemed to be or who was yelling for it;
if the part or supply was truly critical,
then the person who had requisitioned
it had to walk the appropriate paperwork through and the purchase order
would be properly received.
The receiving department added
a hot board to track urgent items:
the requisitioner would provide the
department with details of the supplier, item, purchase order number, carrier (if known), and any other pertinent
information. The receiving department
would then look for any items on the
hot board, processing those items first
and also making the delivery directly
to the requisitioner or to the location
specified by the requisitioner. This process not only insured that the receiving procedures were followed, but
also allowed the requisitioner to deal
with other tasks rather than waiting in
receiving for items to arrive. Further,
maintenance personnel could now
spend their time on what they were
expected to do rather than searching
parts catalogs, getting quotes from
suppliers, and tracking deliveries.

Two months after it had begun, the


MRO overhaul was getting real results.
The storage area was relocated from
behind the building to the area next
to receiving. There, receiving personnel could work with staff from the tool
crib, reducing the number of touches
as a result. Eventually, the company
was able to save costs by consolidating departments and reducing manpower. Additionally, purchasers were
no longer walking around the plant
looking for items or people to verify
items that were physically on site. They
also werent reordering the same items
because the original order could not
be located.
In turn, suppliers became more
responsive because they now had confidence that if an order was placed, it
would be accurately received and
they would receive prompt payment.
In addition, the materials teams were
able to begin to anticipate and more
accurately predict MRO supply costs.
It was not difficult to get senior
managements buy-in for the MRO
reorganization. Initially, the plants top
managers had been concerned about
critical production equipment being
down while waiting for paperwork. But
when they were shown both the current state of MRO and the future state,
pointing out the cost avoidance and
cost reduction opportunities anticipated, the executives quickly got on board
with the initiative.

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MRO Inventory

to help drive down costs.


Where practical, suppliers were encouraged to own
and keep control of the inventory and to ship minimal
quantities to cover as needed inventory requirements.
There were also efforts to control costs by using lowercost but fully compatible components rather than the
maintenance preferred parts. Collectively, these initiatives laid the groundwork for a preventive maintenance
program; the program involved scheduling of equipment
downtime and establishing a pick list of repair items and
supplies, ensuring that equipment repair costs would
be recorded accurately and budget forecasting would
improve markedly.

the processes for stocking, consumption, and analysis


for better management. When there are standard business processes, it makes it easier to develop an accurate,
timely base of data which in turn enables the maintenance/facilities teams to better plan scheduled maintenance activities and enables them to forecast costs
much more accurately. Also, the timelines required for
a scheduled maintenance will be more accurate, allowing operations personnel to better plan around a downtime and not stockpile material because downtimes have
always been longer than promised in the past.
Fasteners are one of the MRO parts categories for
which an accurate database can be developed very
quickly. Many fastener suppliers will supply the storage equipment (shelves, bins or
racks), label the locations, and count and
stock the locations. The customer then pulls
and no
any items that are required. There is no
management task forces are needed to justify transaction, and no need for a requisition or
purchase order. The supplier restocks on an
the savings that can be realized from sound
agreed-upon schedule and invoices monthly
MRO inventory management.
or twice a month based on consumption.
This reduces the number of purchase orders
2. Supplier-controlled consignment inventory. considerably and significantly reduces the associated
Many organizations have successfully used third parties time and labor that go into the inventory process.
to manage MRO inventory.6 Vendor-managed inventory
4. A set of key performance indicators. As in any
(VMI) approacheswell-proven in mainstream supply project or management of an operation, key performance
chain managementoften involves the suppliers per- indicators (KPIs) must be established in order to measonnel being on site to manage the inventory. This allows sure factors such as savings, costs, and obsolescence in
the customers staff to focus on their core functions, with an MRO project. If something is important enough to
the assurance that the MRO inventory is being managed track, it should be measured, so that upper management
properly by a trusted partner. And it means that the sup- can not only be kept apprised of the projects progress
plier, given greater visibility of downstream demand, may but actually see its quantifiable benefits. Some meabe able to offer volume discounts that a maintenance sures to consider might include days or months of onrepresentative at the customer would not have access to. hand inventory, the number of stockouts, the ratio of
The VMI approach can also reduce paperwork and rush orders to replenishment orders, and rates of parts
reduce the number of inventory transactions on the obsolescence. Measures such as these should be tracked
customer side since the customer is paying for material
as it is used. The invoicing can then be scheduled on a
EXHIBIT 2
weekly or monthly basis to streamline the payables proCost of Purchase Orders With and Without VMI
cess, trimming the number of purchase orders created

No high-level meetings, no largescale consulting programs,

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$1.5
Total Purchase Order Cost
($ Millions)

and thus reducing transaction costs. Those savings can


be impressive by themselves: Figures for costs to process
a purchase order (PO) range from $60 to $300, counting
the costs of everything from salaries of staff involved to
payables costs and communications costs.7 Lets assume
a figure of $150; a reduction of 50 percent on an annual
volume of 5,000 MRO orders would be $375,000 in PO
costs alone. (See Exhibit 2.)
3. An accurate, up-to-date fact base. This is
another important element, along with standardizing

March/April 2013

Original Cost
Utilizing VMI

$1.0

$0.5

$0

3,500

5,000

7,500

10,000

Number of Annual Purchase Orders

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MRO Inventory

and posted so those responsible can see how they are


performing and are in a position to act to improve performance. In the example of the foundry items noted earlier, we were able to reduce the number of $500-and-up
purchase orders from 10 -12 per week to zero by forecasting usage and ordering in smaller quantities with
more frequent deliveries.
The data should be included in the monthly or quarterly reporting to management. If MRO inventory performance is reflected in its implementation and management by supply chain professionals, then its KPIs will
likely be positive points in any report. To begin with, of
course, there may be data that is less than flattering to
some departments. However, the open reporting of that
data will bring the proper attention to the issues, and
over time, the improvements in the data will become a
positive for the whole organization. The alternative really
is not viable: when an issue is hidden away or ignored, it
will soon become even more serious, potentially derailing careers.
5. Supply chain education for MRO staff. Often,
continuing education efforts such as a seminar series
on inventory management will allow those involved in
MRO to understand the importance of adhering to best
practice. Exposure to supply chain professionals organizations such as APICS or ISM can be of great help;
buyers, planners, and many other categories of supply
chain professionals regularly benefit from ongoing education programs offered by such organizations and from
the certification programs that they run. There are other
benefits of such programs: supply chain managers indicated that they saw training programs as signs of the
companies commitment to their careers.8

Getting Started
I dont pretend that reorganization of MRO inventory
activities is a snap-of-the-fingers exercisesomething
that is one and done with a simple e-mail from top management. There are many cultural imperatives that sustain
the status quo, not least of which are the defense of turf
by managers and heel-dragging by the many who fear loss
of control and the many more who are distrustful of any
different ways of doing things because they want proof
that the new way will be that much better.
Change has to start somewhere. The best place to
begin is with data showing how subpar MRO activities
actually are when compared with inventory management
norms. It can be a real eye-opener for senior management
to review the annual maintenance expenditures on parts

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or to see the costs of expedited freight charged to maintenance. These two items alone may be enough for top
management to begin asking questions. And with senior
executives engaged, real change can start to happen.
As noted earlier, one of the easiest areas to begin an
MRO inventory overhaul is with fastenersubiquitous,
low-cost components whose mainstream supply chain
processes are very mature. Many leading suppliers of
fasteners offer very advantageous VMI programs. Once
such processes are in place for fasteners, it is a fairly
easy step to start moving other simple maintenance supplies into a tool crib or some other method of inventory
control. Another simple and practical method is the use
of vending machines to dispense basic supplies. The
machines feature a code that is keyed inwork order
number or employee number, for instanceor they
accept the employees ID when they swipe their ID card.
MRO efficiencies are within sight. In fact, they
have been so for decades. No high-level meetings, no
large-scale consulting programs, and no management
task forces are needed to justify the savings that can be
realized. I hope that this article gives you some of the
impetus that your organization may need to get its MRO
supply chain operating to its full potential.
Endnotes:
1 InventoryOps.com; MRO-The Last Bastion of Uncontrolled
Expense by George Krauter, Supply & Demand Executives,
March, 2011, Vol. 12, Issue 1, pp. 44.
2 Budgeting & Maintenance, Conklin & de Decker (www.
conklindd.com), Brandon Battles.
3 The $12 Billion Question: How is Your Facility Managing
Inventory? by Deb Oler (VP&GM, Grainger Brand),
Industrial Maintenance & Plant Operations, July, 2011, Vol.
72, Issue 6, pp. 24-25.
4 MRO Restructuring in Full Swing by Nicole Beauclair,
Interavia Business & Technology, Winter, 2006, Issue 686, pp.
22-26.
5 Making MRO Inventories Play by the Rules by Steve
Mehltretter, Industry Week, August, 2009, pp. 40.
6 MRO-The Last Bastion of Uncontrolled Expense by
George Krauter, Supply & Demand Executives, March,
2011, Vol. 12, Issue 1, pp. 44.
7 2006 APQC Report showed the range to be $35.88
- $506.52; Supply Management Handbook range is
$100.00++ to as high as $300.00; CAPS Research range is
$59.00 - $741.00 with an average of $217.00
8 The Three-Stage Implementation Model for Supply Chain
Collaboration by Stanley E. Fawcett, Gregory M. Magnan
& Matthew W. McCarter, Journal of Business Logistics, Vol.
29, No.1, 2008.

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