The case for vendor-managed MRO inventory
Cost savings, productivity gains and greater availability among benefits
In lean economies, processors look for ways to streamline operations, improve productivity and gain a competitive edge. Typically, they might look first at the price of goods, materials and supplies. They might review and evaluate ongoing operational and production costs, supply-chain efficiency, resource allocation and anything else that can help reduce costs and waste. They also would likely examine operating expenses such as IT and labor costs, utilities and other recurring expenses.
One area often overlooked in the quest for cost savings is Maintenance, Repair and Operations (MRO) inventories. MRO refers to all the activities required to keep an organization and its facilities up and running smoothly and to ensure the maintenance and repair of anything essential to achieving that goal. MRO inventories are the various goods and supplies purchased and deployed internally to enable these mission-critical activities. Depending on the organization, MRO supplies might range from mundane items such as light bulbs, electrical fuses and office supplies, to more specialized items such as replacement machine parts and generators.
Many companies never consider a strategic approach to managing critical MRO inventories. Depending on the facility or plant size, a company could have thousands or even millions of dollars tied up in MRO supplies and spare parts, which may be stored in various locations and too often not accurately tracked and monitored.
Annual budgets for stocking and replenishing MRO inventory may fall within the purview of the facility manager, plant manager or building maintenance engineer. Efforts by finance or business management to reduce these budgets are often met with resistance by the front-line stakeholders responsible for spending these funds.
Why stock MRO products?
However, it just makes sense that managing maintenance and repair inventories more strategically can pay dividends in terms of saving time, labor and costs — and that these savings can contribute significantly to an organization’s bottom line.
Inventory management allows accurate tracking of items required for operations and maintains a proper balance between supply and demand. The goal is to have the right product in the right place at the right time, without overstocking or under-stocking.
However, decisions about what to keep on hand are often based on “guesstimates” because it’s hard to know when a specific part will be needed on short notice.
As a result of this unpredictability, companies can be plagued by out-of-control MRO spending, inefficient and disorganized ordering processes, overstocking of seldom used parts and emergency runs to replenish out-of-stock consumables or parts.
So, if MRO inventory management is so complex, why do companies find it advantageous to maintain certain levels of consumables and supplies? The first reason is convenience. It would be time-consuming, costly and impractical to procure critical or frequently used items as each individual need arises. The second reason is insurance to mitigate the risk associated with not having an adequate supply of replacement parts critical to the facility or operation. Some manufacturing companies call this “safety stock” because the cost of production downtime can be so prohibitive. Organizations routinely make these kinds of cost and benefit trade-offs in determining their “must-have” inventory requirements.
On the corporate balance sheet, MRO inventory is usually treated not as an asset or investment, but rather an expense. Yet there are indirect costs associated with maintaining MRO inventory over the initial purchase price.
Adding items to inventory requires labor and administrative time to select products and track their inflow and outflow. Storing them requires space, a costly commodity in today’s world, and often necessitates the acquisition of storage units such as bins, cabinets, shelving and even warehouses. And, if certain items in inventory are slow to move, the cost of storage accrues month after month, year after year.
Studies done on inventory carrying costs estimate they represent 18% to 25% of the on-hand value maintained therein. In addition, the annual cash outlay for stocking supplies and replacement parts means that the cash is not available for alternative purposes.
More strategic ways
The good news is that there are now creative ways to manage inventory that offer greater flexibility and cost control while still providing the convenience needed to ensure smooth operation of the facility or business. The key is to work with an MRO supplier willing to provide options such as customer-managed inventory (CMI), vendor-managed inventory (VMI) and localized, secure cabinets or vending machines.
Approaches to building an effective inventory-management strategy differ widely depending on the size and nature of the business, as well as its requirements and challenges faced. Deciding which approach is most appropriate is definitely not a “one size fits all” decision.
Take frequently used items, for example. If your plant workers use protective gloves and safety goggles daily to perform their jobs, you’d need to keep an ample supply on hand. If you manage a maintenance staff for a hotel or school campus, you would likely need to have a supply of consumables, light bulbs, tools and other items ready for immediate use.
Basically, three types of inventory management solutions are available in today’s marketplace. CMI is well suited to facilities desiring a relatively simple program and self-managed tools. VMI is often the most cost-effective option for organizations having larger, more diverse inventories and more complex needs. Vending solutions via localized secured cabinets or vending machines can be very helpful for sites that require controlled access inventory at the point of use where needs are more specific and shrinkage may be a problem. Working with the right vendor, all three approaches are easy to use and can dramatically reduce the complexity of MRO inventory management.
Tangible and intangible
Revamping internal processes through collaboration with key suppliers is one method for organizations to realize operational and business value. Leading companies that have taken this path to improved management of their MRO assets report numerous benefits, both tangible and intangible. Chief among these are measurable cost savings on MRO convenience and safety stocks, as well as productivity gains due to better resource allocation and reduced administrative time and labor. Additional cost and labor savings may also be realized by reducing re-order processing time, eliminating express freight shipping charges and emergency runs to replenish fast-moving consumable items.
Well-managed inventory specific to the organization’s needs also results in greater visibility and more accurate tracking and record-keeping of where the dollars and supplies are going. In addition, it helps to alleviate challenges caused by excessive consumption, lack of organization, and loss due to shrinkage and theft.
The key to successful inventory control is to partner with a reliable MRO supplier willing to take the time to evaluate your business model and understand your inventory needs and to offer a range of flexible solution options that address your most critical challenges and concerns.