The amount of stock that you should hold in your maintenance, repair, and overhaul (MRO) inventory will be a level that will balance the risk and cost of running out of parts against the resources needed to store and manage additional parts. Many different equations and processes can help you identify the right level of MRO inventory for your particular business. Here are a few for you to consider.
Top quartile facilities with sophisticated maintenance systems typically calculate their MRO inventory value as a percent of replacement asset value (RAV). They aim to keep this number at to 1.5 percent or lower. Why so low? These world-class facilities keep their MRO inventory low because they can anticipate their needs for materials extremely well. They have strong purchasing processes that predict the usage of MRO supplies and save the facility time, labor, money and stress in both managing and restocking their MRO inventory.
If you hold too much MRO inventory, you buy items you do not need immediately and incur extra costs from labor to manage that inventory. According to Supplychain247, if you don’t hold enough MRO inventory, maintenance emergencies can be difficult or impossible to address. This may lead to additional downtime or high overnight shipping costs to source emergency supplies.
Remember that the maturity of your maintenance and reliability systems must be taken into account before setting and working toward specific MRO inventory reduction goals. Like all metrics, this is not a stand-alone measure of world-class reliability. It is, on the other hand, one way to help you compare your facility to others, indicate progress in inventory management, and then set the next benchmark for overall improvement.
MRO Value as Percent of RAV
Companies with sophisticated maintenance systems typically calculate their MRO inventory value as a percent of replacement asset value (RAV).
World-class facilities keep their MRO inventory low because they can anticipate their needs for materials extremely well. They have strong purchasing processes that accurately predict the usage of MRO supplies, which save the facility time, labor, money, and stress in managing and restocking MRO inventory.
To use this calculation, total up your MRO inventory including the value of your supplies in stock. This should include vendor-managed and consignment materials, all inventory regardless of storage location, all materials in inventory assets accounts and pooled spares, and an estimate for inventory that is not tracked formally. Raw materials and finished products should be excluded.
Divide this comprehensive MRO parts value total by your RAV. RAV should include all the costs necessary to replace the production capacity of your current assets. Finally, multiply by 100 to calculate the percentage value. Best practices recommend this number stay at 1.5 percent or lower.
Economic Order Quantity
Calculating your economic order quantity (EOQ) is another way to determine the optimal MRO inventory level for your organization. The EOQ is the number of units a business must add to its inventory with each order to minimize overall inventory costs. Inventory costs include the resources required to hold, order, and store material. To use this process, you must continually review your inventory system and determine the optimal fixed quantity that you should order each time your inventory reaches a certain level.
For instance, if you order a large amount of items, you’ll increase your holding costs. However, more frequent smaller orders will decrease holding costs and increase order costs. Applying the EOQ model helps you find the optimal quantity in order frequency to minimize these costs.
To calculate EOQ, take your holding costs per year and multiply it by the quantity ordered each time. Divide that total by two. This number should equal the product of the fixed cost of each order, multiplied by the total number of units purchased per year, divided by the quantity ordered each time.
If you’d like to see how your facility compares to the world-class standard, total up your MRO inventory. You should use the value of your supplies in stock, which includes both vendor-managed and consignment materials. Three things you should be sure to include are:
Do not include raw materials or finished products.
Divide this comprehensive MRO parts value total by your RAV. RAV should include all the costs necessary to replace the production capacity of your current assets. Finally, multiply by 100 to calculate the percentage value.
In equation form,
[Stocked MRO Value ($) / Replacement Asset Value ($)] x 100 = % MRO Inventory Value per RAV
In some cases, you may be able to identify proprietary simulation tools for more specific inventory analysis.
For example one such tool called MAROS is used for RAM analysis. This tool looks at both capital spares and operational spares for an organization’s critical assets. This data will break down failure modes of the assets to a component level, and then model different ways to manage spare parts.
For instance, you may determine that certain parts should be ordered and stores at the asset location, which allows immediate replenishment. However, other parts may need to be stored at an off-site warehouse or even ordered on demand. Each of these locations has an impact on costs, availability, and impact on production.
Optimizing Your Inventory Data
The final way to set optimal levels of MRO inventory has to do with maximizing your current centralized computer system. Start by ensuring your inventory records are centralized, comprehensive, and accurate. Then, be sure you have a dedicated team member who’s responsible for overseeing stock levels. Be sure that your inventory data is integrated into your EAM, ERP, or computerized maintenance management system (CMMS) system.
In addition, it's important to simplify your work order processes so that they are constantly updating your inventory levels. Finally, be sure that your inventory control procedures are well understood by relevant team members and that spare parts are easy to locate.