Why MRO Inventory Optimization Doesn't Optimize

(Part 1)

So, you have finally got hold of that software you have been looking for. The boss has been on your back about inventory and wants your assurance on availability while also reducing the cash investment. You researched the market and decided on a program of inventory optimization. Optimization, surely that is what you need, after all optimization is the ultimate outcome, is it not? Optimization means that everything is working at maximum efficiency, right? Wrong.

Optimization is probably the most overused word in management today. But what is optimization? The Concise Oxford Dictionary defines optimization as: “the most favorable condition; the best compromise between opposing tendencies; best or most favorable”. Before exploring the implications of that definition let’s go back and understand MRO inventory.

MRO inventory includes all the maintenance spares carried for responding to both breakdowns and scheduled maintenance, it covers all the operating supplies carried to keep the process running, it covers all the inventory held by OEMs (Original Equipment Manufacturers) to service the equipment they sell, it covers all the inventory held by suppliers that becomes your inventory (such as bearing suppliers). It is a very wide field.

For all types of inventory there are only three reasons why you purchase and hold onto inventory:

1. To enable supply in a timely manner. This means that when you need the part you need it faster than it can be supplied from your suppliers. You need the part and you need it now!

2. Project or shutdown work. With project work and shutdowns you have the uncertainty of what might be needed, perhaps the timing of when it might be needed and a workforce and timelines that can’t wait. You must hold some inventory.

3. Purchasing and manufacturing efficiencies. Sometimes it is just not economic to buy spares on a piece-by-piece basis. Therefore you buy the minimum economic quantity and have a spares inventory investment.

But if this was all there was we would all hold only as much inventory as we really need right? Yes, that’s right but this is not all there is! You see sometimes we end up holding excess inventory because there have been changes since we last determined our appropriate holding (yes, we may have calculated the wrong inventory level in the first place but I’ll let that go for now.)

Some of the changes you might experience that will change your inventory requirements include:

• Improvements in reliability (note that carrying spares doesn’t improve reliability it only reduces repair time but improved reliability results in reduced demand for spares)

• Changes in the criticality of the equipment due to market or technology changes

• Changes in the capability of suppliers as they have improved their systems

 And this is where optimization comes in. Using the definition of optimization from the Concise Oxford Dictionary, typical optimization programs calculate the ‘compromise between the opposing tendencies of cost and availability’. This is achieved by recalculating the required holding and safety stock. Sometimes, optimization is presented as identifying excess or potentially excess holdings through a review of slow moving stock.

The fact that optimization programs base their calculations on ‘hard data’, such as your usage history, makes the approach particularly appealing. With this kind of solid input the results must be right - right? Sorry, wrong.

There are two problems with the ‘data only’ approach. First, historical data, no matter how accurate and ‘clean’ it is, only tells us what ‘has been’. When it comes to your inventory investment you are more interested in what ‘could be’.  Second, the data more often reflects the behaviours of your team rather than the actual demand for your inventory. Who among us can say that our team members don’t take some ‘just in case’ items that distort the usage data?

As a result you are forced to make assumptions (sometimes implicitly) about the characteristics of both demand and supply for your parts. These assumptions are: that what happened in the past will happen in the future, and that you cannot change these outcomes or the behaviours influencing them. This approach forces you to work within constraints that may or may not be real.

And this is why optimization doesn’t truly optimize, it only recalculates within a set of assumed constraints, it doesn’t challenge those constraints.

In Part 2, I will tell you what you can do about this!

Click here for Part 2

About The Author

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash Release^TM System - ICR^®06, a world’s best practice approach to inventory management and reduction. For more information visit his website at http://www.InitiateAction.com.

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