Managing maintenance, repair, and operations (MRO) inventory is a balancing act between part availability and inventory costs. Organizations must have parts available for planned maintenance and in case of a breakdown, but not so much stock that it ties up significant money in inventory.
Organizations use various methods of inventory control to optimize the dollar value of their held MRO inventory. This article introduces you to common inventory optimization techniques that can help lower your maintenance inventory management costs.
Methods for MRO Inventory Control
Inventory optimization techniques vary from organization to organization. Methods that work best in one industry or for one type of item might not work well for others. There is no “one size fits all” approach. That being said, organizations often use multiple inventory control techniques at once. In the following sections, we provide an overview of different methods for inventory control.
Just-in-Time (JIT) Inventory Management
Just-in-Time (JIT) inventory management is an inventory control technique typically applied to production inventory in industries that employ lean manufacturing, such as the automotive manufacturing industry. The main goal of JIT is to allow organizations to operate at the minimum amount of inventory possible without disrupting production. Depending on the production schedule, parts are ordered to arrive “just in time” to meet a need.
When used for maintenance purposes, JIT inventory management involves identifying local vendors that carry parts the organization can obtain quickly when needed. This eliminates the need for the organization to keep a large supply of parts in stock themselves, thereby reducing overstock and the amount of resources needed to manage inventory.
JIT applies best to preventive maintenance (PM) tasks because they are scheduled and demand is easier to forecast. For example, an organization might decide that there is little need to order air filters far in advance, because they will sit on a shelf for weeks, take up valuable space, and tie up funds. Instead, the filters can be ordered from a vendor shortly before they are needed. Depending on their proximity, the vendor can ship the filters at a more reasonable rate or maintenance personnel can pick the filters up themselves in a pinch.
Reorder Points, Economic Order Quantities, and Other Factors Impacting JIT
MRO buyers often determine inventory order quantities without any formal analysis, leading to a whole host of issues. Over-ordering items ties up money that could be used elsewhere, in addition to cluttering up the stockroom. Under-ordering runs the risk of stockouts, which results in unnecessary downtime and emergency shipping fees.
To optimize stock levels, organizations must know when to reorder and what quantity to purchase. Organizations consider a number of factors, such as reorder points and order quantities to make appropriate inventory purchases.
Reorder point is the minimum quantity an item reaches that triggers an action to replenish stock. This calculation must take into consideration order lead time, current usage, and safety stock. For example, imagine that an organization is trying to come up with an appropriate reorder point for a bearing. The organization must consider:
- How long will it take to receive a shipment?
- Based on current usage, will the quantity on hand last until a new order arrives?
- How much safety stock is kept on hand to protect against unexpected demand?
Once the reorder point is estimated, there still remains the question of how much to order. To do so, organizations determine the economic order quantity (EOQ), which is the ideal order quantity to minimize inventory costs. EOQ considers a part’s purchase cost, quantity discounts, shipping and handling fees, current usage, and holding costs. Decision-makers must consider questions like:
- Is it worth buying more units than needed now to secure a discount?
- Are units used at a rate where purchasing in bulk makes sense?
- Will ordering in bulk cause units to sit on stockroom shelves for long periods of time?
These are the tough decisions organizations face. Fortunately, some of this decision-making can be handled by vendors through a vendor managed inventory (VMI) strategy, described later.
Risks of JIT
While many organizations use JIT successfully, they also assume some level of risk with this inventory control technique. For example, suppliers may run out of parts just when they are needed for maintenance. Parts may become obsolete between orders. Rising prices may make parts too costly to purchase when needed.
Scenarios like these leave the organization in a bind. Overcoming these events creates costs as a result of sourcing alternative parts, identifying alternative vendors, accepting higher prices, and paying for expedited freight.
Vendor Managed Inventory (VMI) Management
Vendor managed inventory (VMI) management is an inventory control technique that shifts some of the responsibility of managing stocking levels from the user (organization) to the supplier. With this method, the vendor supplies and replenishes MRO items on the organization’s behalf. The stocked items, called consignment inventory, are then paid for only when used. Alternatively, the organization may pre-pay for stock that is replenished by the vendor.
VMI is typically used for low-value, high-volume consumable items such as fasteners, tools, and personal protective equipment (PPE). Stock is made available through industrial vending machines that automatically record usage or cabinets where employees are responsible for logging usage on a pull sheet. Vendors periodically check stock levels to determine whether or not parts need to be restocked.
Maintenance organizations use VMI because it eliminates common inventory management problems. Assuming that the vendor is reliable, organizations no longer have to worry about overstock or out-of-stock occurrences caused by improper inventory adjustments, ineffective ordering, and poor forecasting. A reduction in stockouts also leads to a reduction in unplanned downtime because required parts are always on hand.
Though VMI can be effective in any industry, manufacturers that require many part suppliers and face significant losses during maintenance downtime stand to benefit most. This includes organizations in the automotive, oil and gas, food and beverage, and pharmaceuticals industry.
Risks of VMI
Giving inventory management responsibilities to a vendor comes with some risks. A major risk is reliance on a third party. Organizations that use VMI are at the mercy of the supplier and may be forced to live with higher prices, reduced quality, or other issues.
On the other hand, problems may arise if the vendor cannot handle your orders. Orders that are late or inaccurate puts stress on maintenance operations.
Because of these factors, it is important to find a trustworthy vendor, and trust takes time to build. If the relationship with the vendor goes sour, transitioning to another VMI distributor may be difficult due to their importance to your operations, contract terms, or resources dedicated to vendor management.
Helpful Resources: Looking to become an expert in inventory control and management? The following professional organizations offer learning opportunities and certification programs:
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MRO Inventory Optimization Strategies and the COVID-19 Pandemic
The goal of the methods for inventory control discussed in this article is to optimize on-hand inventory and minimize its associated costs. However, a downside of operating on minimal inventory has been exposed by the COVID-19 pandemic.
Supply chain interruptions have caused organizations to rethink their “lean” inventory strategy. Due to supply disruptions, part availability and lead times are less reliable, leading to stockouts if preventive actions aren’t taken. Many organizations have increased their stock of critical spares and high-volume parts to combat the uncertainty. Even as day-to-day life appears to be slowly moving back to “normal,” organizations should be careful about operating with too low of an MRO inventory.
Regardless of how organizations manage their inventory, inventory management software can be an effective tool for inventory optimization.
MRO Inventory Management Software
Effective inventory control relies on accurate part tracking. Computerized maintenance management system (CMMS) software is designed to help maintenance teams gain control over their MRO inventory management practices.
CMMS software allows organizations to track important inventory data including a part’s specifications, location, criticality, and quantities. Many solutions also integrate vendor management and purchasing capabilities. Additionally, CMMS software provides maintenance reports that track key performance indicators (KPIs) to help you make smarter decisions about your inventory.
Further Reading: 4 Inventory KPIs to Improve MRO Inventory Management
A CMMS can be used to implement JIT by allowing organizations to track part usage, view parts assigned to upcoming planned maintenance work orders, and identify local vendors. Usage data helps determine appropriate reorder points. Visibility of upcoming maintenance makes it easier to forecast demand. Vendor tracking capability allows organizations to make decisions about where and when to place orders.
A CMMS is also useful when a VMI strategy is employed. Even though managed by a vendor, organizations find value in tracking consumable parts used for asset maintenance history purposes. For example, parts are tracked by work orders so that the organization can tell when a component was last repaired or replaced, what parts were used, and how much was spent on the repair. Other organization-managed inventory is still tracked in the CMMS.
Optimize Your MRO Inventory with FTMaintenance
FTMaintenance supports inventory optimization techniques like JIT and VMI. FTMaintenance is a CMMS solution that allows you to easily manage and track maintenance activities and resources, such as spare parts inventory. Combining robust inventory tracking with vendor management, purchasing, and receiving capability, FTMaintenance is an all-in-one MRO inventory management solution. Request a demo of FTMaintenance today.