Phill, Lynn and others,

A reviewer of my book said the following in an Amazon review,
quote I think in this bottom line world we know the cost of everything but perhaps the value of nothing unquote
which about sums up the illogic behind MRO decisions.

The war stories already quoted by you and others underline this madness. However.... to play the devil's advocate
- Are we maintainers guilty of keeping things in stock 'just in case?' Sometimes, maybe? Not you of course, but.....
- Do we actually review inventory levels proactively? During one review in a Gas Plant in its 17th year of operation, a colleague of mine found that pump gaskets required in 'sets of 8' were stocked as single items; items were stocked where the asset itself had been retired, some spares would have lasted 20 years or more at maximum known rates of use, etc., etc.
- the reasons for squirrel stores is well known, but are their costs known?

When we operate in silos, and are rewarded for 'local optimization' we develop a departmental focus instead of having a business focus with company-wide optimization, . Eli Goldratt in his brilliuant book 'The Goal', explains why all the links in the chain matter (Theory of Constraints). Poor leadership allows silos to develop, and the rest follows. That includes, unfiortunately, some of us in maintenance too (oops, sorry!).

One unfortunate by-product of a successful reliabilkity improvement program is in fact slow moving stocks. We heros go and do our RCAs and RCMs and get the MTBFs up by 30 or 50%, perhaps collecting bonuses(as a result of silos). Failures drop of course, but do we review our stocks? Come on, be honest, we are too busy chasing our own tails.... You see, the shoe fits our feet too.

Hello Phill,

quote:

Originally posted by Phillip Slater:
Is MRO inventory management and reduction becoming a more important issue as companies seek new ways to reduce working capital and improve their ROI?

I think that it is usefull to think about inventory.
Nowadays we have other options for buying spare parts as they are required. You can get a lot of these things within a couple of hours without problems (and with no additional costs) from the vendor / manufacturer.
A criticality analysis for spare parts has to be done at that time too.
This gives you the chance to reduce the amount of stocked material (allowing the commercial guys to reduce the fixed capital in stock).

Going throug your warehouse gives you also the chance to throw away all these old things which are either no more used and/or in bad state.

And as the result you get a smaller and better organized warehouse. This requires also less administration.

quote:

You can get a lot of these things within a couple of hours without problems (and with no additional costs) from the vendor / manufacturer

That was exactly the excuse from the stores supervisor. But if the cheap battery clamp is not in the system, and I need to make a purchase request for one line item where the $10 amount worth of goods is outraged by the cost of processing workorder-purchase request - telephone fax costs and salaries of everybody in the authorization chain ... (no wonder that maintenance is infested by pack-rats).
In this case I let the s..t hit the fan. Then they come talking about proper planning?
We have a good system but how can you reserve what is not in the system. I do not care if they call it a suppliers designated warehouse. If I need to do a descent job, in a timely manner, I need materials period

quote:

You can get a lot of these things within a couple of hours without problems (and with no additional costs) from the vendor / manufacturer

They ran the risk of a small additional cost: renting

Hello Steven,

quote:

Originally posted by svanels:
... But if the cheap battery clamp is not in the system, and I need to make a purchase request for one line item where the $10 amount worth of goods is outraged by the cost of processing workorder-purchase request
...
If I need to do a descent job, in a timely manner, I need materials period

I absolutly with you. What I wrote above was not to set the inventory to zero (which would cause the mentioned results) but to check whether it's possible to reduce the stock due to fast and simple supply from vendors.
And it's urgent to include all additional costs (time, phone, fax, express delivery) in the decission whether to reduce the stock or not.

A few years ago the Purchasing Department estimated in something around $142.00 the cost to process a purchase order (from purchase requisition, order, follow up, billing, up to filing).

Darth,

You just highlighted one of those accounting myths! This is a fallacy based on overhead accounting methods, what we really need is a marginal costing method.

quote:

Purchasing Department estimated in something around $142.00 the cost to process a purchase order

Let me explain. In overhead accounting systems, we add up all the direct costs, paper, manhours for processing, supervision costs etc. To this we add a notional cost of items which we dont or cant measure costs; e.g., floor space costs, electricity, postage, fax machine etc, based on a 'formula'. Over a given time period, we add up all these costs, real and notional. Let us call it $142000. Let us say we issued 1000 purchase orders in such a period, on average. Ergo, the cost per order is ..... $142! Brilliant, is'nt it?

If you look closely, you will note that it is rubbish. Supposing you manage to reduce the number of POs by the ways suggested (vendor stocking etc) to say 500, will the cost per PO be $142? Of course it will be less, e.g., lower postage, lesser use of electricity etc., but these are trivial. The real cost is ... in the number of buyers. Will the Purchase Dept. reduce these numbers when the no. of POs goes down to 500? Really? Do you believe that? And will they then use less floor space, less air conditioning etc?
If they dont, and I dont think they will, then the cost per PO will now be close to $250, so you are back where you started. You will still pay the same total, whatever be the cost per PO.

I am not against the use of the $142, but remember how it is computed, and take such numbers with a large lump of salt!

And what to do with a lump of salt? Toss it over the shoulder?

Vee, I would disagree a little, I am right now in a "battle"about these battery clamps

The calculation factor of the Purchase Order cost is very vague terrain, but what I do know:
I must take a maintenance professional to prepare a purchase request, look to it that it is delivered in a reasonable time, probably reschedule a lousy PM jobs in two parts, while the client is crying about his equipment not being available.
Not having that headache is worth more than the $40 "saved by the beancounters", and in the main time it will boost the productivity of my maintenance craft, by not having to look at the same equipment twice for the same job.

I totally agree that the reduction of the spares consumption is achieved by better maintenance, but if you come to the point that there is nothing in the stores, what will happen?
If the Store's only Long Time Vision is based on usage/year, what will happen? Exactly squirel stores, maintenance having lots of containers with parts that might come handy.
When a fan fails, Operations wants Maintenance to stock all bearings possible, but consumables like filters, lube oil, battery clamps receive the same threatment as critical spares and insurance items? Based on some idiot assumption of usage/year

Maybe this scenario sounds familiar to the audience:

Big Boss inspects maintenance facilities, is pissed of by the amount of "parts" wandering over the place and demands proper housekeeping. Result containers are appearing in maintenance/engineering area.
Big Boss again on inspection runs into container mesh. Demands that parts are stored properly in the Stores and demands that everything is returned to the warehouse

What will happen? Maybe I should have made a quiz of it.

Svanels,

I have been there, and understand your situation very well. I too have had squirrel stores, had bosses complaining about parts, containers etc., so dont get me wrong.

There is however a better way. It takes a lot of time and effort, and works when people come out of their silos and comfort zones.

If you were running a supermarket, say a Walmart store, how would you manage your stocks? With lots of squirrel stores, just in case? Yes I know, you are running a Refinery, not a Walmart, but are the principles so different? Walmart cannot afford to have people working in silos, their customers will take their business elsewhere. In Industry, we have the comfort of 'captive customers', whom we can mistreat and still get away. Thus Purchasing Dept. can buy the wrong item (cheaper, generic versions) and let Maintenance hold the baby. Stores can write off battery clamps and let you sweat it out. Maintenance can delay work and let Operations ....etc. In each case, the customer is at the mercy of the supplier.

If you aim to be best-in-class, you have to do things like Fedex, Walmart, and Toyota. The first step is to get a business focus and get away from a Department focus. If you attend IMC 2006 in Florida, we can discuss this in greater detail there.

You have already taken the first step with getting your supplier (Stores) to understand why stocks of infrequent and erratic consumption items must be kept, by showing your Customer (the same Stores) what happens when you dont. Use this example to get them aligned with you; make a presentation to them, your Management (call in the bean counters). Before you do so,do some private lobbying, and get people on your side. (If you think I can help you with your presentation, please contact me directly). All this takes time and effort, and you have a day job to do as well! But it will pay off in the end. Good luck with your efforts.

Svanels,

quote:

I must take a maintenance professional to prepare a purchase request, look to it that it is delivered in a reasonable time, probably reschedule a lousy PM jobs in two parts, while the client is crying about his equipment not being available.

Yes, all the while the guy is not doing any real maintenance! The opportunity costs (this the bean counters will understand) can be quite significant. In your presentation, get your 'client' to explain why he is crying, get the maintainer to explain how he had to work late to complete his 'day job' while he wasted time with unnecessary POs, ask the Purchaser to explain how much effort there was in expediting two lousy battery clamps etc. Put a $ figure on all this, using some absurdly high values (dont worry, the bean counters do the same to you, like $142 per PO). Multiply that by the no. of incidents per year(count up all the RUSH orders), and you will get a respectable sum.

Thanks Vee,
Just ranting but sometimes I need this to blow-off steam. My next focus is the IMC-2006, I attended the IMC-2004 and some of my staff the IMC-2005. They were quite eyeopeners!!

Hey everyone, I have been travelling so unable to reply until now.
Frankly I think your companies all have got it wrong (and 99% of the industry)!

You see companies spend time and energy (read money) focusing on $40 battery clamps and think that this is managing their inventory. The reality is that 80% of the $ value tied up in MRO inevntory will be in less than 20% of the parts. The bean counters don't really care about parts, they care about money. So, if you want to have an impact on your inevntory and create the 'headspace' to stock the battery clamps then have a look at the top 20% by value. You then apply the '7 Actions for Inventory Reduction' and you will have a lean inventory that stocks everything you need and nothing you don't.
(In an unashamed plug you could buy my book Sustainable Inventory Reduction at www.InitiateAction.com - this explains the whole process)

This moves me onto squirrel stores. I believe that there are two reasons why people hold squirrel stores. First, they don't trust that the main store will hold the part or that they will find it when they are in there. Second, they don't want to walk over there and get the part.

The way that I have fixed this in the past is to first fix the store so that it is reliable and then to rigorously police the squirrels. You can and will break the habit once the system is trusted. Achieving this requires the cooperation of the store people ('what, there is nothing wrong with my store!') and your more senior trades people. So step one is to get them on board.

Now my third hobby horse. I presented on MRO inventory reduction at IMC05 and soemone else presented at the EAM Conference in 06. Terry O now feeels that there is little interest in MRO inventory in the maintenance community (I am putting words into Terry's mouth, sorry). Clearly this thread tells us otherwise. So, if you want more information on MRO inventory reduction at IMC06 then let Terry know. I will start another thread at which you can post messages to Terry. If I have this wrong then let me know.

quote:

The way that I have fixed this in the past is to first fix the store so that it is reliable and then to rigorously police the squirrels

You were privileged to control the stores
Ours is fortified like Fort Knoxx.

That brings me to another aspect, there are two movements in stores control.
One the stores are in domain of finance. The other, the stores are in control of technical services.
I suspect that the first option is dominant in Europe, while the second option is preferred in the USA. Maybe I am wrong but in most books of maintenance management written by americans, this aspect stands out.
Both have their charms, in my case it is the finance domain, but otherwise the maintenance pack-rats would pile up everything.

Actually the first time I cleared the squirrel stores I did not control the stores. They reported through Finance and Accounting. I won't lie to you, it was hard work breaking through that but ultimately worth it.

My approach was to agree with all of their concerns and then to continually paint the picture that reviewing the store was at the center of the solution. In parallel with this we were improving our maintenace programs. This gave us credibility as we were getting results and Finance and Stores were pointing fingers.

I also personally worked with the store guys to address some of their issues of our guys raiding them at night, not doing the paperwork etc.

The key wasn't that I am particularly smart or influential, the key was that I continually spoke from a big picture, company benefit position and not a silo based small picture perspective. Do this and you will ultimately breakthrough.

On the thread I just started seeking feedback to Terry O I was asked about providing an inventory quiz. So for those wanting a quiz try this.

Go to this website http://www.initiateaction.com/ICR_eLearning.htm

This is the page for my e-learning program. Towards the bottom of the page you will see that the first lesson is free! Sign up for this lesson (no credit card required - see it really is free).

Download the workbook and listen to the audio file. The last page in the workbook contains a 14 question quiz about inventory. (Each weekly lesson also contains a quiz.)

Keep the lesson and quiz with my compliments.

Hey everyone,

Let me know, have you all been on vacation or is MRO inventory of no interest?

If it is of interest what aspects of MRO inventory are you most interested in hearing about?

How to properly set up inventory levels in the first place before we have materials to reduce? What is the strategy?

Josh,
Happy to work through the issues with you.
Rather than just type in a whole lot of gratuitous advice how about you tell me about your situation and we can go from there? Is that OK?

I am interested in
What are your specific concerns/issues relating to setting up your inventory?
Do you have any type of spares systems now for cataloguing, controlling etc.?
Is there a lot of spares?
Who is responsbile for the $ value of the inventory - maintenance or finance or someone else?

Personally I have been down this path twice and I will happily share the lessons learned from those experiences.