Increase Productivity and Competitiveness
Contributed by: David A DeCastro (Salvador, Brazil).
In traveling the world in search of excellence in MRO Materials Management (indirect materials / spare parts), I noticed two curious facts. First, even in developed countries, both the industrial companies and providers of ERPs (enterprise management systems) are often technologically quite backwards outside the realm of their product specialization. Secondly, those typically smaller companies or subject matter experts who have developed differentiated technology, tend to keep it as a safe and guarded trade secret, failing to commercialize their brilliance.
In this long journey of many years, I have had the opportunity to meet renowned experts on visits to specialized companies, and to make contact with professors of institutes and universities: Cornell, Duke, MIT and Stanford (USA), Calgary (Canada), Erasmus (Netherlands), Royal Institute of Technology (Sweden) and Salford (UK). All this exposure resulted in considerable accumulation of knowledge and expertise, and a unique set of observations and conclusions which feel compelled to share with the concerned MRO community.
Is There Complexity in the Management of MRO Materials?
Unfortunately, a reductionist and misguided view still prevails in industry, where everything boils down to manually assigning Min / Max to items in an inventory. Managing spares for maintenance like you are managing inventory for a major retailer like Walmart simply cannot work. Our demands and stock movement are far less and the consequence of a stock-out is much higher.
I could write dozens of pages explaining what is the real dimension and complexity of the discipline (risk analysis, economics, logistics, mathematics, statistics, reliability engineering, theory of constraints etc.). However, as there is no room for extended explanations in a blog article, I will give this illustrative example:
Suppose that we have an inventory of just 1,000 items (a thousand stock codes). Even if we set a maximum stock level of 1 (allowing just 2 options between 0 and 1 for each item), there are 21,000 distinct inventory positions. In a larger inventory the possibilities of what you do and do not have on hand becomes an astronomical number of possibilities.
The question that then arises is: Among these possibilities, which one or ones would be the best? Is it better to acquire and stock item A, or B, or …? As it can be seen, a reasonable level of complexity exists and certainly cannot be approached without the support of advanced analytical tools that, despite being available in the marketplace for quite a long time, are largely unused. In fact in most companies the supply chain personnel responsible for MRO inventory either do not know about them, do not understand them, or do not use them. They rely on simplistic calculations more suited to fast moving consumer goods in retail operation.
What is the Real Impact of MRO Materials in the World Industry?
Companies often find themselves with too much of what they don’t need, not enough of what they do need, and overall inventory levels that tend to be higher than necessary. This leads to financial loss with working capital tied up to inventory. Additionally, there is an inexorable fact: every lack of material (stockout) causes some sort of an operating expense (production loss, product downgrade or loss, cost with operating and maintenance maneuvers to keep the plant running, expedited freight, overtime, and lower labor productivity, among others). Maintainers, often held accountable if downtime for repairs exceed perceived limits of acceptability, will take matters into their own hands and begin to stock items in their own “off the books” stashes. In severe cases, the value of this shadow inventory can actually exceed what is officially kept on hand in the store room. Building those stashes is accounted for on various maintenance work orders where “direct purchasing” is used and the costs may even be recorded against the wrong equipment. For accountants, working capital and investment in spares are understated and maintenance and repair costs are overstated.
Moreover, an ineffective spares management process can result in at least 20% – 35% of machine down time, often due to the lack of necessary parts and materials to perform repairs correctly and quickly the first time. The ensuing rush to buy what’s needed adds substantially to the downtime experienced. The side effect is lower availability and, consequently, lower production volume, lower revenue and lower profit.
The most paradoxical is that, despite the often significant production losses that can be caused by lack of spare parts, those losses are actually accepted by management. It’s not unusual to hear that any production loss can easily be recovered with overtime, additional production line speed, etc. without impacting the production plan. It is as if that make-up is free!
Excluding spare capacity caused by a lack of demand in the market for the products, then if there is always room to “recover production losses”, then those production assets must be programmed to operate with considerable capacity float. In addition to allowing for inherent reliability problems (i.e.: breakdowns), the excessive and “unavoidable” delays caused by lack of materials become part of the justification for being able to make up for losses. In simplistic terms, the production bar is set very low indeed and other failings to deliver reliable operation and rapid repairs are tolerated.
We can do better. There are many articles in this blog series about reliability and maintenance efficiency. In the area of MRO materials, we can be far more scientific and precise if we work well with maintenance planning, understand how material demands arise and then model them effectively with the tools that are available, yet still largely unknown.
About David A DeCastro
David A deCastro is president of Brasman Engenharia, in Salvador, Brazil. He is a registered consulting engineer with an MSc degree in mechanical engineering. David has more than 40 years experience in maintenance and reliability engineering with large corporations and on-the-job training in Germany, Italy, Spain Switzerland, the UK and the USA. He has authored more than 30 technical papers on maintenance engineering and MRO materials.
For the past 20 years, David has specialized in scientific inventory control of MRO materials and spare parts. The work has involved developing advanced analytical tools jointly with international renowned experts and implementing innovative best to process facilities all over Brazil.