Inventory And Purchasing Add Value To Maintenance Departments
EP Editorial Staff | September 2, 2006
Best practices in the way these departments serve the maintenance organization can provide significant payback. Are yours measuring up?
Inventory and Purchasing departments. . .a “necessary evil” to most organizations. . . almost as big a drain on profit as the maintenance department. . . right? At least that’s what a large number of organizations seem to believe. They don’t look on maintenance as a profit center—the way it should be viewed. The same is true with Inventory (Warehouse/Storeroom) and Purchasing (Procurement/ Contracts). These support departments have the potential to significantly improve your bottom line.
How so? What methods can Inventory and/or Purchasing employ that would reduce cost to an organization, thereby improving profitability? What can be done to recognize whether the Inventory and/or Purchasing departments are declining or improving in the service they provide? Consider the following practices. They can provide payback.
1.Create item descriptions that make a difference. A best practice is to take care in ensuring that the data is “well kept” and is in a standard format. Standards should be set in the naming of inventory. This will reduce the chance of adding items more than once (a common problem), and will allow users to more easily search for items, saving time. Most of the asset management systems available today use domains or areas to limit choices of an item, thereby enforcing consistency, and use classifications to build itemspecific descriptions.
In other words, a description that uses classifications and domains is more likely to be searchable and will keep end users from describing items different ways (i.e. free-form text is inconsistent as 4 inch could be described many different ways: 4″ or 4 in. or 4Inch, four inch, FoUr in. etc.), making searches, inventory management and item master maintenance difficult or impossible. It is a best practice to use your own internal item number based on a defined standard (using the inherent ability to automatically generate the item number, if that functionality is available). Other numbers, such as a federal stock or vendor’s catalog number, should be separate entries and attached to a vendor. It is a further best practice for a large organization to use a single item master across entities in order to negotiate pricing and reduce duplicate items.
2. Set up processes that ensure inventory accuracy. One of the best practices for inventory accuracy involves ABC analysis in inventory.Again, most asset management systems are flexible enough to allow the customer to determine its own ABC points. The standard, however, is that “A” items represent 20% of the items that represent 80% of the inventory value (Pareto’s principle); “B” items are 30% of the items that represent 15% of the remaining inventory value; “C” items are the 50% balance of the items that represent 5% of the inventory value.
The “A” items—and even a majority of the “B” items—may be considered “insurance spares,” or those parts that a company hopes it never has to use, but keeps in inventory because they are engineered items or because the lead time is too great and if a critical asset failed and a spare part weren’t immediately available, too much revenue would be lost. The ABC analysis lets the storeroom personnel focus their attention on items that have higher inventory turnover (meaning they are issued, ordered, received and issued) and have a greater potential for causing maintenance delays. “A” items are inventoried (physically counted) once each year. “B” items are inventoried every six months.”C” items are inventoried quarterly or even monthly, depending upon the service level expectations of the maintenance department for which the storeroom is providing service.
(The reason this is considered an industrywide best practice is because, when using the formulas outlined above, you are managing 95% of the value of your inventory and conducting a physical count of the items once or twice a year. That frees up resource time for other, more mundane, inventory-related tasks and, theoretically, reduces cost while improving efficiency.)
3.Understand and set up reorder information. It is a best practice to enter correct reorder information. When a work order is planned properly, planned materials are reserved and the correct entry of data on the reorder screen supports a lean but robust replenishment strategy. It is a best practice to analyze, define and periodically update the “set points” for replenishment, including Reorder Point (ROP), Economic Order Quantity (EOQ), Safety Stock (SS) level, etc. Properly completed vendor information gives you valuable information that supports reorder and replenishment decision-making.
4. Assign vendors, manufacturers, associated cost & lead time information. There can be no doubt that having all the appropriate information to facilitate smooth and speedy item reorder, whether to replenish stock or for special order needs, is a best practice. Identifying the correct vendor that is most commonly used to obtain the item will accelerate any order process, be it the requisition phase or the actual purchase order. Being able to provide the vendor with a manufacturer and any manufacturerrelated information will certainly give the needed data to allow supplying of the part or its exact equivalent.
With an accurate cost history of the item being ordered, you are in a better position to quickly recognize when a vendor may be “misquoting” the price that should be provided to your organization. The ability to rapidly compare costs to quotes gives you the opportunity to verify that the vendor is quoting the same item as supplied the last time, too.While prices have a tendency to increase over time, a significant price difference in a short period of time should raise a red flag and encourage you to question what is being quoted and why there is such a price difference.
Lastly, how many times has your purchasing department assigned an order to a vendor with the promise that “everything is in stock and will be delivered by XXXX” (where XXXX stands for a specific day or date)?Your maintenance department is counting on receiving all five widgets in order to perform the requisite maintenance, yet only three show up; the other two are backordered— delaying performance of the maintenance. What if not performing the maintenance leads to a failure in the asset, and maintenance costs are increased because of additional downtime and/or more expensive components are needed to return the asset to optimal operating condition? Knowing the true lead time of a reordered item–and having confidence the vendor actually will deliver within that time without backorder— is a cornerstone for providing “world-class” service to the maintenance department.
5. Identify alternative parts for items, etc. Inventory and purchasing departments can further satisfy the needs of the maintenance department by capturing and maintaining MSDS information, item inspection when received (to the level both appropriate and necessary), add an item as a spare part to an asset (Bill of Material), etc.
It is a best practice to make use of available functionality regarding vendor and/or manufacturer- related information by recording pertinent data such as vendor catalog or manufacturer model numbers. Capturing the known pricing for an item that may be available from multiple vendors or manufacturers, as well as items that can be used as an alternate, further increases the value of the Inventory and Purchasing departments to an organization.
This level of support provides personnel with important information “at their fingertips” and can help in the management of vendor relationships. In turn, everyone involved saves time and prolonged asset downtime can be avoided. The benefit comes from being able to quickly identify a needed part, or its exact equal, when a machine is down and an item is out of stock. Having the proper information that identifies an alternate item that is in stock would eliminate expensive lost production, as well as expensive shipping costs, overtime, etc.
Measuring for success Six Sigma is a long-term, forward-thinking initiative designed to fundamentally change the way corporations do business. It has provided a few related guidelines that impact our ability to identify success. They are:
- You don’t know what you don’t know.
- You can’t do what you don’t know.
- You don’t know until you measure.
- You don’t measure what you don’t value.
- You don’t value what you don’t measure.
Those five related guidelines pretty much sum up the value of measuring for success.You cannot be successful if you don’t measure. That means developing some sort of measurement system.And the basic purpose of any measurement system is to provide feedback, relative to your goals, that increases your chances of achieving these goals efficiently and effectively. Measurement gains true value when used as the basis for timely decisions.
The ultimate aim of implementing a performance measurement system is to improve the performance of the department.When you get your performance measurement right, the resulting information will tell you where you are (a baseline), how you are doing, and where you are going (trending).
A performance indicator is any of a group of statistical values which, taken together, give the state or express briefly the health of or manner in which a mechanism functions. That mechanism could be a physical asset or a process. Therefore, it is necessary to develop Performance Indicators that will enable you to measure the success of the processes associated with your Inventory and/or Purchasing departments. It is possible that you will develop a list of indicators you will measure, some being more important than others.
Those indicators that you develop and you consider to be the most significant to the success of the program, or are considered instrumental or deciding factors, are referred to as “key.” The most significant of these are referred to as Key Performance Indicators, or KPIs. Some Key Performance Indicators that could be used to support the strategies discussed in this article are:
Inactive Stock with No Movement in the Previous 12 Months—the input being the number of items that have not been issued from the storeroom in the previous 12 months divided by the total number of items in inventory. The smaller the number, the less opportunity for improvement as those items that are identified represent potential opportunities for reduction of inventory, in both volume and value. If you elect to measure volume, it is the physical number of items not issued versus total number of items. If the election is value, the measurement becomes the value those items not issued represents when compared to the total value of the inventory.
There is an inherent weakness to this indicator— it does not differentiate between disposable or consumable spare parts and those parts that are “insurance” spare parts discussed earlier in the article. Therefore, it is necessary that an organization have its ABC analysis established and that the resulting information applies only to disposable or consumable spare parts.
Annual Inventory Turnover–contrary to initial thought, this indicator does not measure how many times any single item may be issued, reordered and received during the course of a year. It does, however, measure the value of the inventory that is issued, reordered and received during the course of any year. Be consistent to measure from the same beginning and end dates for each year. You determine this indicator by dividing the total annual inventory consumption by the average value of the inventory for the same time period. The lower the number, the greater the potential for reducing inventory, lowering the overall average value of the inventory, and retaining the capital in working funds (rather than unnecessary inventory in stock).
The two indicators, Inactive Stock with no movement in the previous 12 months and Annual Inventory Turnover, are complementary to one another.
Do not forget the “invisible” additional cost to maintaining inventory that could be reduced, if not eliminated, by tracking the previous two indicators. There is a cost of money (for investing on inventory in stock), of the warehouse (to store the inventory), of insurance (equal to the value of the inventory), for maintaining the inventory (cycle or physical counting by employees to ensure accuracy), taxes (unless tax-exempt), and utility expense for lighting, air conditioning or heating, etc.
Volume of Rush Purchase Orders—this indicator identifies the number of reactive type purchase orders that are issued. Reactive purchase orders are necessary when immediate and last-minute needs are identified. Typically, those needs are driven by reactive maintenance or improper maintenance planning. The lower the value of the indicator, the more proactive the maintenance organization and the more balanced the Inventory & Purchasing departments are in maintaining the correct inventory. Do not be confused and use this indicator as one identifying proper inventory levels. It is possible to have too much inventory on hand, which could produce a false value on the rush purchase orders indicator.
This indicator is reached by dividing the number of rush delivery purchase orders by the total number of purchase orders issued. The higher the number the more reactive the Purchasing department is in meeting the demand of its customer. Rush purchase orders bring other increased costs to an organization by way of higher freight charges for rapid delivery or missed opportunity for meeting sales orders because the assets may be inoperable.
Volume of Single Line Item Purchase Orders–if the number of single line purchase orders is high, in all likelihood the maintenance department is reactive in nature. Last-minute “got to have it now”orders tend to drive up this type of purchase order, as well as increase cost to the operating expense of the organization.
Do you know what the cost to process a purchase order is within your company? Would you be surprised to know that the cost could range from $75 each for a smaller company to $250+ for larger organizations? Having the capability to combine orders and place one order for multiple items reduces cost. If the maintenance department is proactive with forecasted demands, then multiple items can be consolidated on one purchase order, reducing processing costs.
Inventory and Purchasing departments have the potential to provide significant benefits to the bottom line of an organization. While there are certain methods and strategies that should be employed to achieve the level of success that you wish to attain, remember that the only way you will guarantee success is to measure and monitor the performance of the department(s). MT
Timothy Trout has held a number of positions within MRO Software, and currently serves as project manager within the organization’s Project Management Office. He has considerable experience in asset and maintenance management, including involvement with all aspects of material handling, from managing storerooms to managing procurement departments.