By Doug Wallace
PART THREE: YOU HAVE INFORMATION IN YOUR SYSTEM, BUT IT’S NOT BEING USED EFFECTIVELY
Even with a well-organized storeroom and a fully functional CMMS/EAM system, ineffective data collection and management will negatively impact your materials management operation. Things like lack of standardized descriptions, incorrect inventory data, incomplete or inaccurate supplier information, incorrect or missing locations, incomplete or inaccurate bills of material, missing or inaccurate lead times, reorder points, and reorder quantities, or missing parametric data (e.g. critical spares, repairable items, ABC classifications, cycle count frequencies, etc.) all contribute to inefficiency, material delays, and increased costs.
These data integrity issues could be the result of poorly defined processes, improper training, inadequate resources, or simply lack of accountability for entering data into the system. It could be due to the inability to easily report data from the system to track key metrics such as usage history, asset-related maintenance cost information, and spending trends. Additionally, a CMMS/EAM system without configurable, easy-to-use analytical tools and packaged inventory KPIs could render your data practically useless.
As you have learned in the first 2 papers in our series, by now you should have at least the basic transactional processes functioning (e.g. receiving, stocking, issuing, requisitions, purchasing, returns, and even kitting). You should also have something in place to ensure that you are capturing the right information from those processes and that the information is accurate.
Once you have your CMMS/EAM in place to work with your processes, it will take at least 3-6 months to build an adequate database of transaction history that you can use to effectively manage your inventory. However, at this point you should have the ability to report and track it. The storeroom supervisor should be able to run a report from the CMMS/EAM that reflects the total value of the MRO inventory on a daily basis. At least monthly, this information should be published up through the Plant Manager, which the CMMS/EAM’s analytics tool should be able to accomplish automatically. This is particularly important for companies that carry their inventory as an asset on the books (as opposed to expensing it) so that site leadership can assess the impact of the inventory on carrying costs and other plant financials.
These first few months are also a good time to start collecting key infrastructure information that will be used in conjunction with that transaction history down the road, such as equipment bills of material (BOM), spare part criticality, and material lead times.
As more and better quality data is captured – particularly usage history – you can begin to implement processes that are designed to optimize your inventory in line with anticipated requirements. For example, estimated demand, lead time, and part criticality can be used to establish and verify stocking plans (min/max levels) that support expected service levels while minimizing inventory and associated carrying costs.
Once the right stocking plans are in place, the auto-replenishment capabilities of your CMMS/EAM should be used to ensure that the right quantity of parts are ordered at the right time to maintain the appropriate inventory levels on a part-by-part basis. Any excess inventory can easily be identified and plans developed to reduce or eliminate it over time. With this process working, your stock-out situations, which are often a significant contributor to extended asset downtime, should begin to dwindle.
At the end of the initial 3-6 month data collection period, it’s a good time to start calculating inventory turnover. Simply put, turnover reflects how many times during a given year the inventory is used and replenished. Turnover is calculated by taking an annualized dollar value of material issues and dividing it by the total value of the inventory. World class turnover is between 2.0 and 3.0 turns per year. Another way to think of this is that in a world class organization, the value of the inventory is roughly 1/3 to 1/2 of total annual material disbursements.
With a year or more of history, you can add a number of additional processes that are designed to help manage inventory. The first is an ABC classification, which essentially prioritizes your inventory based on an 80/20 rule that makes it easier to focus your attention on the most important items. Turnover can be tracked by ABC class to help narrow down inventory challenges to the right set of items where the biggest problems lie.
The ABC classifications can be used to establish different cycle counting frequencies to ensure the long-term accuracy of your inventory and associated investment. They can also be used to identify items for possible consignment, vendor stocking arrangements or free Issues that will help reduce your inventory, therefore increase inventory turnover, while assuring availability of required parts. After several years, the usage history (or lack thereof) can be used to identify non-moving items for potential obsolescence.
To sum up, data reliability provides the foundation for effective inventory management. Without it, you will be making uninformed or misinformed decisions about your inventory and other aspects of your operation that will increase your costs. With the right data and the right processes in place, you can manage your inventory to minimize total cost of ownership while assuring a continued supply of required materials.
ABOUT THE AUTHOR
Doug Wallace is a materials management subject matter expert, providing assessment, process re-engineering, implementation, training, coaching, and other management consulting services to identify areas of opportunity for process improvement, increased productivity, and cost reduction. His primary focus is on implementation of best practices in procurement; materials management; warehouse operations; inventory optimization; and utilization of associated business and information systems.
Doug has more than 35 years of combined practical and consulting experience in the semiconductor, cement, refining, mining and metals, specialty chemical, pharmaceutical, shipbuilding, and other manufacturing industries. He is APICS certified and is a PROSCI certified Change Management Professional. He can be reached at firstname.lastname@example.org.