Inventory Spare Parts Reduction

Why is Inventory Spare Parts management important?

One of the main things impacting Cash Flow of a company is the variation of working capital. Working capital is mainly impacted by accounts payables, accounts receivables and inventory. Inventory itself comprises of the stocks of raw material intermediates and finished goods; but it also consists of the MRO: Maintenance, Repair and Overhauls spare parts. These parts directly support the production process but are not included as part of a finished product. Therefore, the reduction of Inventory spare parts is linked to cash need/increase for the group.

This page gives insights on having a structured approach to optimize MRO in warehouses.

1. Principe and Definitions

1.1. Principle

The framework for the MRO optimization relies on the “10 boxes model”. This model is based on the split of spare parts SKUs into different categories based on their consumption over the past 8 years and the variability of demand. 

*The % is the probability to get the spare parts once you make the request, this % is incorporated into  the safety stock calculation

This method enables the identification of potential targets for improvement and to be able to focus resources on the most important levers for improvement. 

1.2. Definitions

MRO: Maintenance, Repairs and Overhauls activities spare parts.  It refers to parts, materials, tools and equipment used in the maintenance process.

Spare Parts (SP): Stands for MRO + Consumables (fuel, lubricants, paper, printer ribbons, bulk fasteners, cleaning materials and forms that are exhausted during maintenance.)

SKU: Stock Keeping Unit, a warehouse inventory management term for an individual stock item carried in inventory.

Material Requirement Planning (MRP): MRP is a production planning, scheduling, and inventory control system used to manage manufacturing processes. MRP is designed to answer three questions: What is needed? How much is needed? When is it needed?"

Segmentation of SKU’s: Volume segmentation based on the average spend per year (calculated over the last 8 years)

• A regroups articles that have consumed 80 % of spend
• B regroups articles between 80 and 95 %
• C regroups articles above 95 % but still with some spend
• D are the articles without spend

Demand variability: Segmentation on the stability of the demand. The segmentation is based on the following formula:

A figure lower than 50% indicates a stable demand, a figure higher than 100% indicates a high variability.

Safety stock: The safety stock is calculated by the following formula:

• With K: the multiplication factor required to reach expected service level 
• Average lead time of supplier
• Standard deviation of lead time is often not known. In that case take 10 % of lead time.

Reordering: Reordering will happen when inventory reaches following point  

This targeted number of orders per year will be 12 for A products, 4 or 6 for B products, it can also be adapted to the standard quantities agreed with the supplier.

Target inventory, Mini and maxi inventory: 

A visualization of the definitions above can be found in the graph below:

2. How to best manage your MRO

2.1. Applying the “10 boxes model”

The “10 boxes model” is ideally run by site, but requires upfront collection of coherent data. Once this is done, the data can be analyzed to create a dashboard (which should ideally be consolidated by GBU). The project team should then identify the target: what are the items to review and the potential impact on the site (usually measured in cash that can be “released” over a certain period of time and the write-offs linked to inventory scrapping. 

The success factors for proper implementation of this model includes:

• Clear governance (a GBU MRO project manager, minimum local core team, clear objectives)
• Right mindset (combining approach with 5S in warehouses, agreeing with all levels of the organization on importance and scope)
• Setting up the right project (clear communication channels, clear prioritization, implementation of routines in SAP, follow-up of a limited number of simple KPIs)
• Keep sustainability in mind (prepare teams for a long term project, ensure that forums are in place to listen to sites and reinforce best practices sharing / documentation)

Additional resources exist to explain in more detail the “10 boses model”:

• Template 10 boxes
• Link with  SAP PM  work order
• 10 Boxes formulas explanation
• How do we calculate the target stock
• How do we manage our dead move segmentation

To give an indication of the importance of measuring and managing these categories appropriately, pilot done in SA&D shows that:

•  Truly “Active” spare parts represents only 15% of MRO inventory;
• “Slow” spare parts represents 25% of MRO inventory;
• “Inactive” and “Dead” spare parts are worth 60%.

2.2. Prioritization of an MRO optimisation project

In order to run a successful MRO optimization project, the following steps should be followed:

1. Build a project charter with governance, include it in the site TIP/improvement plan.
2. Management and control: purchase what you need, avoid surplus, check your Materials Requirement Planning (MRP) proposal for new purchase order and take the opportunity to change the parameters.
3. Start to review the top potential items, spend first more time on Active and Slow which represent ~10% of your SKU/items but 80% of your yearly consumption.
4. Review the supplier lead time which has a huge impact on the quantity you need in your warehouse.
5. Get rid of what you don't need, take the opportunity to launch 5S in your warehouse and storage locations.
6. Sustain your effort: make a self assessment using the 22 questions  with Solmax warehouse & spare parts management and close the gap.

3. KPIs

The main KPIs that can be used to monitor progress and support forecasts are:

• Lagging Indicator: Inventory Value (vs. target). This showcases the final outcome of the project and is linked to the cash that it can deliver.
• Leading Indicator: Overview of Max stock, Min stock, Reorder point and real value. This enables project managers to challenge the sites during the project and create new targets.
• Lean Indicator: Number of SKUs in each “10 box model” category.

Detailed KPIs can be found in the Maintenance Dashboard Standard which defines precisely all of the KPIs linked to maintenance. Within these Maintenance Performance Indicators, two are specific to spare parts. These KPIs are benchmarkable across sites and are reported in the Maintenance Dashboard Standard.

This KPI compares the Value of Stores MRO and the Replacement Asset Value, with a target of not having this value exceed 1.2% of the RAV.

This KPI gives an indication of the overall “age” of the MRO in stock as it compares their real cost vs. the current accounting value of the MRO in stock (depreciated between year 4 and 8). The higher the value, the more recent the average MRO is, which means turnover in store is higher.

Note: the inputs needed for these KPIs are native to SAP.