(And What You Can Do About It)
The Best Way to Reduce MRO Spare Parts Holdings?
Is it true that MRO spare parts held as inventory for maintenance use are primarily captive to the sophistication and execution of the maintenance system that they support?
Is maintenance and reliability execution really the driving force behind the MRO spare parts holding levels?
Would improvements in maintenance planning, scheduling, and condition monitoring make a significant difference to inventory levels?
There is a persistent belief among many in the maintenance community that these things are all true, that is, that the best way to reduce spare parts holdings is to improve maintenance systems.
Visit any maintenance or reliability forum, attend a maintenance conference, or strike up the discussion at your local professional group meeting and you will no doubt hear someone saying, ‘Our spare parts problems would be fixed if only we could improve our maintenance’.
Unfortunately, for many companies, this belief then results in little being done to improve spare parts management, while everyone waits for maintenance system changes to take effect.
This, in turn, results in those companies spending maybe millions of dollars more than they need to on spare parts because they are not addressing the real reason that they hold too much inventory.
It’s Not Just About MRO Spare Parts Supply and Demand
It is easy to see where this belief comes from. MRO spare parts are held as supply to satisfy maintenance demand. Therefore, if companies were better able to reliably predict demand they could better match the supply and so hold only the inventory they need in the quantity that they need it.
If only the machinations of people and process were so simple!
The belief that maintenance improvements will have a major impact on MRO spare parts holdings is only true in this idealized and theoretical world.
However, in practice, MRO spare parts management is subject to a wide range of forces that have little or nothing directly to do with maintenance.
These forces include, human behavior, different attitudes and management of risk, supply chain variability, procurement myths such as the effectiveness of the EOQ formula, storeroom management, and administrative practices.
In terms of the investment that companies hold as spare parts inventory, the maintenance system is not the main driver of spare parts holding values.
The proof of this is as simple as checking the results that companies have achieved in reducing MRO spare parts inventory and increasing parts availability while largely ignoring the maintenance system.
The Reality of Maintenance and MRO Spare Parts
The belief is only theoretically correct because if the maintenance system can be made sufficiently sophisticated that it can reliably forecast spare parts needs, then a company could optimize its spare parts to suit its maintenance needs.
The reality is that this maintenance driven belief doesn’t work in practice for two reasons:
- Most maintenance systems contain systemic flaws or short cuts that make them incapable of providing the required data at the required quality.
- Similarly, most MRO spare parts management systems are as flawed as the maintenance systems they support.
Therefore, significant improvements in spare parts holdings can be achieved without doing anything to the maintenance systems and this can lead to significant spare parts and procurement savings with no negative operational results.
Yes, you read that correctly. Most companies can optimize their spare parts inventory, for the environment in which they operate, without actually changing anything about the way they do maintenance or negatively impacting their service to maintenance.
This is because most spare parts decision-making is ad-hoc and emotionally based, there is little or no structure or system to the way stock holding decisions are made, and terms such as safety stock, Re-Order Point (ROP), and min (as in max and min) are used inter-changeably, when they are not interchangeable.
This all means that the actual stock levels become a matter of opinion that is has no standard against which to compare.
In addition, genuine periodic reviews of spare parts levels, so that they may be adjusted to current expectations, are either almost non-existent or they focus on single issues such as slow moving stock.
Furthermore, there is usually some form of behavioral ‘blame game’ around stock outs that drives overstocking rather than continuous improvement.
This is Supported by Research
This situation is demonstrated in the results from a spare parts management quiz that we recently ran online. The quiz assesses a company’s approach to spare parts inventory management based on just 7 simple questions.
This quiz has now been taken more than 200 times, which is more than enough to remove any small sample bias. Here is what the quiz results show:
- 70% of companies say that they don’t consistently provide guidance on how to determine both the re-order point and re-order quantity. Only 30% say that they do this always.
- 68% of companies say that they don’t consistently provide guidance on whether or not to stock an item. Only 32% say that they do this always.
- 64% of companies say that they don’t review inventory holdings as part of a formal plan of continuous improvement. Only 36% say that they do this at least annually.
So, if there is no standardized approach for deciding what to stock, no standardized approach for deciding how many to stock, and no review of the current validity of past decisions, is it any wonder that spare parts stock holdings are way higher than they ought to be? Some companies can be overstocked by more than 100%!
An MRO Spare Parts Review Can Actually Improve Maintenance
In a recent case, a company that reviewed their spare parts holdings, and introduced a decision making policy and process, reduced their inventory holdings by an average of 42% across four locations, in three countries, in just six months.
At the worst location (in terms of stocking) the inventory reduction exceeded 50% (which equates to being overstocked by more than 100%).
At the same time the anecdotal feedback was that they improved their parts availability. This was because quality decision-making that sets appropriate holding levels works both ways, it establishes the right inventory, at the right time.
Could an overhaul of their maintenance systems have improved the availability and reliability of spare parts data and so help in getting the holding levels even lower? Of course.
But it would take years to stabilize the maintenance system and collect reliable data.
Is the maintenance improvement necessary in order to achieve a significant reduction in spares holdings while simultaneously improving spare parts availability? Absolutely not.
In fact, the interrogation of spare parts holdings actually forces the maintenance team to think about their needs and so the spare parts project actually improves maintenance!
What You Can Do About This
For some people this information will be a surprise, to others it may get them asking the question of what to do next. There are two things that you can do to make a real and lasting difference to your spare parts inventory holdings:
- Train your team in practical techniques for determining the appropriate stock holding level. This doesn’t mean buying a software package to do calculations, or learning statistics, it means training your team in the simple ROP and ROQ calculation method that achieved the above results.
- Establish a set of policies that provide guidance on spare parts management decisions. These need to be specific and descriptive, which sounds simple but actually is not easy.
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Posted by: Phillip Slater