The goal of MRO inventory optimization is to utilize the products and materials held on or across sites as effectively as possible. Ensuring that you have what you need available when required helps eliminate excess stock and reduce inventory carrying costs. How do you achieve this? By using data to make decisions and develop strategies about how much is the right amount of inventory for your organization.
Start with the data
Knowing what and how much stock you already have is a crucial part of the inventory optimization process. For this, you need data. If you lack data, accurate data, you lack insight – and this can have major consequences. As corporate finance and consulting giant KPMG argues, “The starting point – and critical enabler – for any business process optimization is high-quality data.”
Peter Olejniczak, General Manager for Operations in North America at RS Integrated Supply, a global Maintenance, Repair and Operations (MRO) supply chain solutions provider, agrees. It is essential when working with a new client, he argues, to establish a clear picture of the situation as it stands. This first step is “to capture the current state,” he says, “which will document how much waste there is in the process.”
The figure can be enormous. An international chemical manufacturer, for example, commissioned RS Integrated Supply to cleanse and standardize its MRO catalogue of 562,000 items held on 33 different sites. By verifying more than 200,000 items, RS Integrated Supply identified 172,000 duplicate or obsolete pieces of stock, allowing the manufacturer to reduce inventory holdings by more than $1 million.
Reduce the risk of downtime
“When you’re not managing your inventory efficiently, you’re going to experience more downtime, and that is expensive,” continues Olejniczak. “We can improve that by managing the optimization of inventory levels – there’s no question about that.” At a life sciences company, for instance, poor data meant 15% of materials were out of stock when needed. This led to additional expenses, such as expedited freight to avoid extended downtime, that could have been avoided.
A more efficient and effective approach is to ensure that you have what you need when you need it. RS Integrated Supply, therefore, focuses on ensuring inventory accuracy on an ongoing basis. That accuracy is developed through best practices such as consistent cycle counting. As a site manager based at a food manufacturing plant explains, “Everything gets counted at least once a year and the fast-moving items get counted multiple times. It’s important that the inventory we have is accurate.” This would be impossible without data analytic tools because the process would be too labor intensive. “There’s no way ten people could go through 8,000 items every day,” he adds.
Successful inventory optimization doesn’t depend on accurate data alone, however. Keeping downtime to a minimum means understanding whether the amount of available stock meets requirements. “The plant runs 24/7,” says the site manager. “When a line goes down, they want it and need it back up quickly, as they can’t make enough of the product, and they don’t want to lose any sales. What do we need, therefore, to keep the plant running? How many of these items do we want to keep in stock and what is the cost of that versus the cost of the line being down if it takes a day to get hold of the spare part?”
The concept of rightsizing
As these comments indicate, keeping stock on site comes with its own costs. According to professional services firm Deloitte, the cost of carrying inventory, including expenses such as warehousing, typically comes to between 7% and 16% of the weighted average cost of capital. Obsolete inventory (stock that is not used or no longer needed) can also amount to 3%-5% of a company’s static inventory levels.
As a result, the concept of rightsizing is central to inventory optimization. Rightsizing means carrying an appropriate amount of stock to maintain operations – not too much, but not too little either. It is a delicate balance.
Rightsizing inventory levels using data that tracks what you have and what you need boosts savings without increasing risk. With the right data, for example, you can understand variables such as usage and lead times to establish the minimum and maximum levels of inventory needed to run at peak efficiency and effectiveness – and then introduce automated replenishment to maintain those levels.
At one food manufacturing site, this strategy has generated savings of $100,000 per year. For a health and beauty manufacturer with no visibility of what parts it needed or when, bringing in RS Integrated Supply to optimize the MRO program, with an emphasis on rightsizing inventory, led to savings of $3 million.
Strategies for continuous improvement
The ability to make data-based decisions enables those responsible for inventory optimization to continuously introduce strategies that save both time and money. Centralizing inventory in one location can, for instance, help with stock rationalization because it reveals duplicate and very similar products. It can also lead to other efficiency improvements too. For example, in a 30-story office building, more than 6,000 SKUs were stored in different locations with no tracking or visibility beyond specific employee knowledge of what parts existed and where. Team members spent an average of 90 minutes per day looking for parts in the various storage areas. The RS Integrated Supply program of inventory optimization delivered more than $675,000 of savings in the first year, with time savings for maintenance staff equating to more than $300,000.
Basing strategy decisions on data demonstrates that there isn’t a one-size-fits-all approach to inventory optimization. While centralizing inventory worked well in the high-rise office building, the opposite is more effective at a life sciences firm. Here preventative maintenance, repairs, and upgrades such as installing new equipment take place during periodic shutdowns. Any delay in deliveries during these shutdowns could stop production resuming on schedule and, ultimately, impact profits. To minimize the risk, RS Integrated Supply developed a $1 million plus kitting strategy where materials are catalogued and stored in designated areas around the 15,000-square-foot warehouse until needed by the client maintenance team. Exactly the right stock needed, available right where needed, available right away when needed.
This example shows inventory optimization at its best. Its central tenets are not a mystery, but obtaining and analyzing data to achieve peak results does require expertise and experience. Working with an integrated supply partner can help your business to get to that point more quickly – and generate major cost savings in the process.
That’s inventory optimization at its best.