In a recent seminar for high-level plant managers and plant engineers, a particular session related to the world of MRO operations was held. The speaker asked how many in the audience are in the manufacturing business; all raised their hands. When the speaker next asked, “How many of you are in the hardware store business,” no one responded. With that, the speaker averred that they all were in the hardware business and proceeded to explain why.
DO YOU REALIZE THAT YOU ARE IN THE HARDWARE STORE BUSINESS, AND YOU LOSE MONEY EVERY DAY YOU ARE THERE?
There’s a new sheriff in town…AKA your new CEO. Your first order of direction from the new boss: “Take $8 million out of the MRO spend and, by the way, get us out of the hardware store business.” [You understand spend reduction, but what in the world does he mean about the “Hardware store” business?].
As opposed to the seminar scenario above, your new CEO obviously knows that he is in the hardware business and that the MRO store represents a profit drain within his operation; he wants to get rid of it just as he would correct a function in his manufacturing process that effected a like determent to his corporate goals.
What functional factors are essential to sustain a profitable store operation? Consider the essential considerations that companies like Home Depot, Lowe’s and Ace Hardware chains must employ in order to maintain a profitable scenario:
- PROFIT MARGIN: A percentage factor is added to their best cost of goods sold to cover costs and return a profit to justify the investment.
- TURNOVER: Inventory turnover rates are a major factor in the calculation of R.O.I. considerations relating to cash flow and profit generation. Anything less than a six time overall turn is considered unacceptable.
- SUPPLIER SUPPORT: Suppliers will support inventory investment via various methods including consignment, stocking locations, inventory housekeeping, and accepting returns that are free of restocking charges.
- OVERSTOCK: There is none; Min/Max levels are accurately calculated, adjusted and applied based upon the particular market. Necessary corrections are made back to suppliers with zero restocking charges.
- STOCK OUTS: Out of stock situations are rare, and, when they occur, are quickly corrected. Stock can be moved from location to location quickly.
- OBSOLESCENCE: There is none; non-moving inventory is returned to the supplier.
- STOCK UNITS: Items approved for stock reflect the requirements of the markets.
- LOCATIONS: Stock units are strategically located and not duplicated or combined with other non-related categories.
- PRODUCT KNOWLEDGE: Store clerks are trained in the application and use of the products they sell; they know the locations.
- SECURITY: When the store is closed, there is no access to inventory by unauthorized people.
- CHARGES: All sales [issues from inventory] are charged to an authorized account number, AKA the customer’s credit/debit card.
This functionally produces a profit for the investors which in turn effects sustainability for the company.
Now compare the situation in the many MRO store rooms. The word “store” is the operative word here, because the MRO storeroom is in fact a “store”:
- PROFIT MARGIN: There is none; parts are issued to work orders for the same price paid to the supplier with no additional charges to the users’ budget... Think of what would happen if Home Depot sold stock units for the same price they paid the supplier; they would lose money and shut down.
In a real life situation, a major university decided to charge a 15 percent fee on parts issued from stock. To save, the budget holders used their P. cards and bought around the storeroom, causing existing inventory to become obsolete and, in turn, creating excess inventory and uncontrolled sub-stocks. In addition, the situation turned mechanics into purchasing agents.
- TURNOVER: MRO inventory turns less than one, resulting in negative cash flow and restricting money available for important projects.
- SUPPLIER SUPPORT: Suppliers give little support to stock adjustments; most have a restocking charge that exceeds inventory carrying charges.
- OVERSTOCK: Min/Max quantities are rarely managed for a variety of reasons. This is a major cause of negative inventory turns as well as stock outs.
- STOCK OUTS: If and when stock outs are measured, it is not uncommon for requisitions to be unfilled over 25% of the time. It is rare when a sister plant, with like inventory, is willing to supply a part needed because of an “emergency” that MAY occur. This is especially true for critical spares.
- OBSOLESCENCE: Parts that are unused exist in excess, and, in many cases, consist of spares for machinery that is no longer in the plant. When MRO inventory is listed as an asset, companies are sometimes reluctant to sell off such inventory at a reduced rate because of the negative effects on the income statement.
- STOCK UNITS: Because of asset improvements and new processes, the needs of MRO constantly change. Many of the SKU’s do not reflect current requirements, and due to restrictions on inventory levels, result in special stocking areas outside of MRO stores control.
- LOCATIONS: Many storerooms are in need of reengineering to utilize space, availability, and safety; lack of time and priorities allows the situation to exist.
- PRODUCT KNOWLEDGE: When storeroom personnel are long-term associates with plant experience, knowledge of parts applications exists and can be utilized. However, when the storeroom is a place holder for people ready to retire and/or for recuperating personnel, the knowledge is less than accurate and the communication with maintenance requirements is lacking.
- SECURITY: Most storerooms have “dark” hours when the cost of staffing is not consistent with activity on slow shifts. However, emergencies and lack of planning require access to inventory during these dark, non-staffed hours. Although plant personnel are instructed to write down what and how many parts were taken during the off hours, these instructions are not always followed. This is a major cause of stock-outs [downtime] and the placement of SKU’s in incorrect locations.
- CHARGES: Issues from stock must be recorded in order to relieve inventory, reorder stock, and charge jobs, assets, etc. i.e. satisfy the company’s audit trail requirements. In too many cases, incomplete, missing, and incorrect data exists on issue tickets and/or is incorrectly entered into the CMMS system. This situation is exacerbated with respect to withdrawals when the store is not staffed.
This functionally produces a profit drain for the company which, when allowed to continue, constitutes a detriment to a reliable plant and, in turn, a reliable product.
QUESTIONS TO BE ADDRESSED?
What business are you in? Should you be in the hardware business?
MRO stores represent a cost you assume that is not recovered in your manufacturing process; How can those costs be recovered and still increase the quality of the MRO supply chain to support your plant operations?
Please leave your comments below.
George Krauter serves as Vice President of Storeroom Solutions, Inc. He brings more than 50 years of experience in establishing cost recovery methods for the MRO supply chain. Contact George at 610-246-6492 or via email at firstname.lastname@example.org. www.StoreroomSolutions.com