Determining the optimal stock levels for MRO spares should be a science, not an art. But for most organizations, it represents an impossible numbers game.
Inventory managers are faced with the challenge of managing tens or hundreds of thousands of items, each with their own characteristics, requiring complex and time-consuming calculations. Without a structured methodology and powerful analytical tools, the proactive management of large inventories becomes an impossible task, resulting in rapidly increasing inventory levels combined with critical shortages of spare parts.
Today, organizations without optimized inventory run the risk of overpaying and underperforming.
In order to avoid costly shortages, MRO inventory managers often choose to err on the side of caution when it comes to determining stocking levels.
But that strategy has its costs. Inventory consumes space, gets damaged, and sometimes becomes obsolete — and carrying surplus inventory costs the organization. Over time, massive amounts of unused or obsolete inventory translate to waste and loss.
Simply, optimizing inventory means finding the perfect balance between demand and supply. Optimized service spares inventory maintains a level of inventory that virtually eliminates out-of-stock situations while improving efficiency and cutting inventory costs.
Optimizing MRO Inventory
To achieve key business benefits, companies need an approach that supports the unique management requirements of MRO inventory, including:
• High criticality
• Long lead time
• High price
• Generally infrequent and highly variable usage
• Low data quality
Optimized inventory requires frequently obtained data points and evolution of the inventory in question based on those measurements in real time. A decision support system that incorporates best practice methodologies gives inventory managers a powerful tool to manage their business objectives and make their teams significantly more effective.
By leveraging technology tools, automated processes and inventory management best practices to optimize MRO spares and consumables, asset-intensive organizations can consistently produce results like these:
• 15-25 percent reduction in funds invested in safety stock
• 5-20 percent decrease in write-offs of surplus and obsolete stock
• 10-25 percent fewer stock-outs, for improved availability and productivity
• 10-25 percent drop in administrative costs for replenishing inventory
• 33-66 percent less resource time spent managing inventory.
The 12 best practices of inventory optimization
These best practices — the new business requirements for MRO inventory optimization — are based on specialist inventory analysis and optimization methodologies developed by Oniqua — and supported by Oniqua Analytics Solution (OAS). These proven best practices are fundamental to achieving the significant inventory reductions and substantial bottom-line savings that are the hallmarks of inventory optimization.
1. Criticality Analysis
Generate a recommended criticality (business impact code) for each stock item by analyzing:
- Application (where used and fitted.
- Commodity classifications
- Practical “real-world” considerations or “workarounds”
- Supplier or OEM
2. Demand Forecasting
Commissioning of additional equipment may be expected to increase demand for certain inventory items. Demand forecasting capabilities should include:
- Selection of appropriate forecasting algorithms
- Automatic selection of algorithms for each stock item
- Use of forecasting and statistical distributions that are appropriate for a wide range of spares items including slow moving and lumpy demand
- Clipping and filtering techniques to manage abnormal data
- The ability to isolate planned maintenance and project demand from unplanned demand
- Capabilities to use knowledge of expected future events or trends to apply demand profiles to future forecasts
3. Lead Time Forecasting
Forecast lead time is a key factor in determining optimal safety stocks — aspire to achieve these capabilities:
- Forecast average lead time using purchase order and receipts history
- Filtering and clipping techniques to eliminate abnormal data
- Override lead times as required, and calculate lead time variance to assess expected service level
4. Issue Size Forecasting
The number of units typically required for an application (the issue size) is also a key factor in determining stock levels — a good inventory optimization solution will provide:
- The ability to forecast average issue size using issues history
- Appropriate filtering and clipping techniques to eliminate abnormal data
- Capabilities to override forecast issue size as required
- Calculation of issue size variance and use of this variable in calculating expected service level
5. Economic Modeling
Economic modeling capabilities should allow for “what-if” modeling of inventory trade-off decisions:
- Inventory holding costs for different types of items
- Total replenishment costs for different purchasing methods
- Expediting or emergency freight costs
- Stock-out costs, based on criticality and duration of stock-out
- Comparing existing and optimized results for metrics such as inventory value, service level and more
6. Optimization of Reordering Parameters
The reordering parameters — minimum and maximum levels (MIN/MAX) — used by the ERP materials management system to generate replenishment orders are the main determinants of inventory outcomes. Reordering parameters should be optimized periodically to reflect changes. The optimization process addresses:
- Selection of appropriate algorithms to optimize minimum and maximum stocking levels
- Use of an economic cost model that considers costs of holding inventory, replenishment, expediting and stock-outs as a preferred alternative to a fixed service level approach
- Analysis of groups of items rather than one-by-one, one at a time
- The ability to perform “what-if” modelling and compare optimized results against current inventory performance
- Consideration of “real-world” constraints including maximum bin capacity, storage capacity and more
7. Exception Management
For large, complex MRO inventories, a “management by exception” approach ensures that inventory review time is focused on high value or problem items. Exception management capabilities include:
- Tools for users to define any number of exception conditions with related alert thresholds
- The ability to search, sort and filter by exceptions
- Mechanisms to exclude changes to reordering parameters for items with exception conditions
8. Inventory Segmentation
Inventory segmentation provides a management framework for inventory that recognizes that a number of different management techniques are required for various item profiles:
- Segment the inventory based on characteristics such as usage or holding value, movement frequency and more
- Apply structured policies or business rules to the management of each inventory segment, such as manual control of special items or review or potentially obsolete items
9. Spares Risk Assessment
Some MRO inventories will include a high proportion of spares that are high cost, critical, have little or no expected usage and require long lead times to receive. Managing these items requires specific techniques:
- Risk modelling of the effect of holding zero, one or two sets
- The ability to perform sensitivity analysis around expected mean-time-between-demand and stock-out cost
- The ability to model or override all inputs to the stocking decision
10. Spares Pooling
Significant reductions in overall safety stock investment are possible through the pooling or sharing of high value, infrequent items (insurance spares) across multiple sites. To facilitate such arrangements, companies should:
- Identify common spares that are suitable for sharing
- Establish the optimal number of pooled spares to be held
- Determine the optimal location for holding the spares
11. Knowledge Capture
Capturing organizational knowledge relating to inventory items is an important business process in preventing mistakes and re-investigation; the inventory optimization solution should:
- Capture notes and commentary about inventory items
- Provide an audit trail for decisions
- Ensure high data quality for input parameters and classification codes
- Provide reminders when reviews are due
12. Reporting Inventory KPIs
Inventory KPI reporting is important to allow progress in improving inventory to be tracked. KPI reporting should include:
- A selection of pre-defined inventory management reports
- The ability to automatically capture a large selection of pre-defined inventory KPIs
- The ability for users to customize reports and statistics
For today’s asset-intensive companies, competitive advantage requires a positive mindset towards innovation and technology. Without technology solutions and best practices, companies are left to struggle with manual processes, standard ERP system functionality, and ad hoc databases or spreadsheets. These manually intensive approaches are prone to error and impossible to sustain on a repetitive basis.
Inventory optimization is just good business. Achieving and maintaining inventory optimization is possible and profitable, with the right tools and the right type of help.
Andy Hill is CEO and co-founder of Oniqua.