A Lifecycle Approach to MRO Inventory Management
12 years ago, Xtivity introduced the concept of the “MRO Lifecycle,” a simple model to help frame inventory management challenges and focus improvement plans where they would provide the greatest benefit.
The MRO (Maintenance, Repair and Operations) Lifecycle is founded on the premise that all materials, parts and products go through specific phases during their lives, as described below.
The Maintenance, Repair and Operations Lifecycle
During this stage, tools, products, parts and components are added to inventory to ensure continuity of operations for a number of reasons. This includes the period after new asset commissioning, due to safety initiatives, because of engineering changes or for any other strategic purpose.
Materials, components, tools and products are considered to be in the active phase when they are in regular use, have an established consumption pattern, and have forecasted future requirements.
End of Use Phase
Equipment, products and parts are in the end of use phase when they have no future demand, are technically obsolete, and must be phased out.
The MRO Lifecycle: An Invaluable Ally in Supply Chain Management
Using the MRO Lifecycle model makes it clear that different decisions, policies, and processes are required at each stage to ensure the overall health of your parts inventory. Gaps at any stage contribute directly to a number of potential negatives for businesses, including:
- Inflated inventory
- Space constraints
- Suboptimal working capital allocation
- Stock availability issues
This model, in conjunction with advanced data analytics, has proven invaluable over the years in helping our clients focus action where it matters most to drive short, and long-term inventory improvements.
Breaking Down the MRO Lifecycle
In order to understand how the model works and it’s contribution to improved Inventory Management, we have to break it down. We’ll do this by establishing the focus of each stage, the key questions to be asked, and the decisions required to deliver the best outcomes.
The Introduction Phase: A Closer Look
The introduction phase is arguably the most important phase. Unfortunately, this is often the area where the least attention is paid to spare parts. Our research indicates 30% of the parts added to inventory during this phase are never used. Why is that?
Commissioning new equipment or new lines is a complex process, usually executed under extreme time pressure. Spare part requirements are almost always the last consideration. This results in overly conservative decisions, both in terms of the breath of catalogue additions and volume of parts added to inventory.
Including clear responsibility for spare parts inventory management as an integral element in every capital project can make things easier for everyone, helping to achieve uptime goals while minimizing incremental cash commitments.
The appropriate stocking strategy is highly contingent on things like equipment maintenance plans, asset criticality and the role third parties will play in the ongoing maintenance.
Introductory Phase Key Considerations include:
Master Catalogue Additions – Just because the asset is new, doesn’t mean you don’t already have a functionally equivalent part in inventory. Overlooking the existing Master Catalogue can often lead to duplications and overstock.
Asset Bills of Material (BOMs) – Asset BOMs are not only an invaluable job aid to Maintenance Planners, but also help ensure requisitions run smoothly through the supply chain, and that unique part inventory is identified. Early identification of unique part relationships not only informs stocking strategies but can help a company at later stages in the life cycle, providing early identification of inventory obsolescence as equipment is taken out of service.
Material Planning Approach – It’s a common assumption that parts identified as a “recommended spare” by the manufacturing company that supplied them should be put into inventory. Not so! Considerations such as vendor agreements, lead-time, asset criticality and part failure modes all play a role in determining if a part actually needs to be inventoried. Inventory additions should be considered a last resort, rather than as a default conclusion.
Part Criticality – If a part is unique to a critical asset, fails immediately, has a long lead time and is supplied by a specialist vendor — then the decision regarding the relative criticality of the part becomes quite clear. For the majority of spare parts however, the answer is less so.
If Maintenance will be drawing from an existing catalogue of parts in order to maintain a newly commissioned critical asset, then perhaps a review of this parts criticality ranking is warranted. Establishing the relative criticality for new parts, and maintaining criticality values for the entire catalogue is an invaluable input, informing not just stocking decisions but also maintenance strategy and financial treatment decisions.
Initial Ordering Values – It is not always clear what the initial Min./Max. values should be on a new item. However, the chances are high that the right quantities will not simply be those recommended by the Original Equipment Manufacturer (OEM). Overstocks can take years to run down, assuming they remain fit for purpose for the duration, otherwise write-offs necessarily follow.
Considerations such as the state of the existing parts catalogue, the material management approach, the maintenance strategy, the forecasted consumption levels and part criticality all play a role in determining the right answer. In many cases, it’s a question OEMs simply can’t answer for you.
If policies and procedures are in place to ensure these elements are taken into consideration as part of the asset commissioning process, then it is simply a matter of ensuring compliance.
Unfortunately, this is the exception rather than the norm, resulting in the perpetuation of business practices that contribute to poor working capital utilization and systemic risk to ongoing operations.
The Active Phase: A Closer Look
An active parts inventory is one that has an established pattern of consumption and replenishment. This is where ongoing inventory management activities are generally focused, monitoring ordering values and ensuring inventories remain reflective of the needs of operations and market supply/demand conditions.
While the easiest lifecycle stage to describe, the Active Phase is also the one that commands the most attention and requires the most ongoing effort.
Active management of ordering values (Min./Max. or ROP/ROQ) is key to ensuring they continue to reflect the needs of operations as well as changes in supply conditions that require constant vigilance.
Active Phase Key Considerations include:
Changes in Demand – Deviations from maintenance strategy, seasonal impact of operating conditions, and increased asset utilization all contribute to changes in part usage rate, and must be considered.
Changes in Supply – Demonstrated supplier performance issues (such as delays or short shipments), disruptions to logistics, internal delays in procurement, or receiving cycles all impact part availability and need to be factored into stocking decisions.
Part Criticality – Changes in the nature of how a part is being used needs to be periodically reviewed to reflect its relative criticality, ensure target service levels are accurate and availability metrics can be achieved.
Tools such as Xtivity’s Pulse Inventory Optimization cloud-based software play a key role ensuring the right balance is struck between inventory availability and effective working capital management. How? By providing inventory planners with appropriate recommended ordering values, exception-based reports and work queues that help them focus their time where it matters most.
The End of Use Phase: A Closer Look
The best way to deal with Obsolescence is to avoid it in the first place. Building the right processes, policies and procedures into the Introduction Phase makes the single biggest contribution to minimizing obsolescence across systems.
However, even with the best practices in place through the Introduction and Active phases of the MRO Lifecycle, a certain level of obsolescence is still inevitable. But you can ensure that obsolescence doesn’t sneak up and surprise you.
As parts of every category move through their lifecycle, there are leading indicators that, if tracked, can provide early insight. These insights can prompt cross-functional questions that allow for planned drawdown strategies and detection of discontinued items while they still have some residual value.
While Obsolescence may not be entirely avoidable, the impact it has on a company’s bottom line can certainly be minimized.
End of Use Key Consideration Include:
Management of Change – Changes to a vendor specification, supply network, maintenance strategy, third party repair contract or asset renewal plan can all have a material impact on what is stocked as well as the quantities required. The sooner such changes are identified the more options are available to mitigate obsolescence risk.
Tracking Reports – Robust reporting plays a central role in identifying changes in usage patterns, as well as when material on hand is approaching the end of its usable life. The only thing worse than not having a spare part is thinking you have one, only to discover it is unfit for use.
Cross Functional Collaboration – As with the Introductory Phase, cross-functional collaboration and communication is important to the effective management of End of Use systems. Business processes and discussion forums need to be in place to align on emerging risks and improve mitigating activity.
Establishing A Starting Point
Having established a context through the MRO Lifecycle model and key considerations of each stage, the obvious question that follows is often “Where should we start?”.
The appropriate starting position and focus is often determined by the greatest source of benefit – and that varies by organization. However, it is universally true that a clear business case supported by robust analytics is central to any effective improvement program.
With this in mind, Xtivity offers a comprehensive data-driven MRO Health Check aimed at helping you not only identify priorities, but quantifying the associated benefits, greatly compressing program approval cycle times.
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