The maintenance spare parts andsupplies management handbook

MROHandbook

Maintenance, Repair and Operations

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by John D. CampbellPartner in Charge, International Centre of Excellence for Maintenance Management,

Coopers and Lybrand

PLANT ENGINEERING AND MAINTENANCE A CLIFFORD/ELLIOT PUBLICATION Volume 22, Issue 2

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MRO Handbook 1

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Authors note

4 MRO: An importantmanagement issue

Introduction

7 Executivesummary

Chapter one

9 Forging linksLinking the maintenance and materials management process The foundation for MRO inventory

What is the impact of materials management on maintenance?

Ownership of the MRO management process and resources

How to link maintenance and materials management

Designing the materials management process

Chapter two

13 Parts purchasingPurchasing parts for the MRO stores Overview of materials procurement process in maintenance

Categorizing materials

Supply strategy

Chapter three

19 Layout and securityStores layout, security and materials handling Benefits of an optimized layout and physical flow

Factors that influence layout optimization

Techniques and tools for better layout and physical flows

Technical trends in storage and material handling

Some examples

Chapter four

25 Information systemsInformation systems for stores inventory management Basic considerations for inventory management system

Integration with other systems

A prerequisite for systems succesidentification of inventoryitems

The challenge of inventory record accuracy

Sustaining accurate inventory data

How to use cycle counting

contents continues...

The maintenance spare parts and supplies management handbook

MROHandbook

Maintenance, Repair and Operations

by John D. CampbellPartner in Charge, International Centre of Excellence for Maintenance Management, Coopers and Lybrand

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MRO Handbook 3

Cc a

MRO Handbook is published by Clifford/Elliot Ltd., 3228 South Service Road., 2nd Floor, Burlington, Ontario, L7N 3H8. Telephone (905) 634-2100. Fax 1-800-268-7977. Canada Post Canadian Publications Mail Product Sales Agreement 112534. International Standard Serial Number (ISSN) 0710-362X. Plant Engineering and Maintenance assumes no responsibility for the validity of the claims in items reported. *Goods & Services Tax Registration Number R101006989.

EDITORTodd Phillipstp@industrialsourcebook.comPRESIDENT/PUBLISHERGeorge F.W. CliffordEDITORIAL DIRECTORJackie Roth

ASSOCIATE EDITORMatt GreenPRODUCTION/OPERATIONS EDITORDavid Berger, P.Eng. (Alta.)

CONTRIBUTING EDITORS

Wilfred ListKen BannisterChuck GriffinART DIRECTIONIan PhillipsNATIONAL SALES MANAGERJoanna Malivoiredistrict sales managerJulie Clifforddistrict sales managerAlistair Orr

PRODUCTION MANAGERChristine ZulawskiEDITORIAL PRODUCTION COORDINATORNicole Diemertassistant ART DIRECTORPat WalkerCIRCULATION MANAGERJanice ArmbrustREADER INQUIRY COORDINATORMaggie Millsgeneral managerKent Milford

Chapter five

29 Inventory controlsInventory statistical control: optimizing the investment for parts Which techniques and tools can be used for effective

replenishment of materials?

ABC analysis

How to decide order levels and timing

How to decide order quantity

Do we have to apply the same techniques and tools for all thematerials? How can we identify material types and what is thebest way for each material type?

How to decide whether the materials are obsolescent

Chapter six

37 Managing repairablesManaging the repairables queue to minimize investmentand maximize availability Effective planning and scheduling methods for better cost

efficiency and inventory availability

Methods for handling repairables from usage to re-usage

Chapter seven

45 Capital projectsHandling direct charge and capital project items What material types should be treated in different

wayscapital, direct charge, inventory?

Definition of capital spares and direct charge

Which materials are best classed as direct charge?

How to handle direct charge materials

What is a capital project Item?

How to handle capital project items

Chapter eight

47 Improve serviceStrategic inventory cost reduction and service level improvement How to reduce inventory cost while maintaining service levels

How to improve service levels

Chapter nine

53 Managing personnelOrganizing and managing stores personnel What is the best organization structure for better materials

management?

Key considerations in human resources management

Chapter ten

61 Outsourcing storesOutsourcing stores: MRO distributors vs. integrators What can we outsource?

How can we outsource effectively?

Chapter eleven

69 Benchmarking performanceMeasuring and benchmarking inventory and stores performance What should be measured as key performance indicators?

How to measure them?

Best practices in key performance indicators

76 Conclusion

PPLANT ENGINEERING AND MAINTENANCE A CLIFFORD/ELLIOT PUBLICATION Volume 22, Issue 2 March 1998

CONTENTS

MRO: An important management issue

But the general mismanagement ofparts and supplies is costing usdearly in terms of direct cash, andin lost productivity and capacity.

When you look at your maintenancemanagement costs, you will likely findthat about 40 percent of costs arelabourthe trades, apprentices,helpers and janitorsanother 20 per-cent management, shop and technicaloverhead, and a full 40 percent partsand supplies. And most of these are is-sued through the MRO stores.

Further, if you think back over thepast year, youll probably remember

that of the downtime your operationsuffered, much was due to not havingthe right part at the right time in theright place.

When the issue of MRO stores con-sumes this much of the budget, andrepresents a major factor in productiondowntime, it should always commandour attention. Why doesnt it? Thereare three common reasons: First of all, the stores often reports or-ganizationally up through the purchas-ing and finance departments. Althoughthe maintenance and production de-

partments have the most to lose if thestores are mismanaged, historically ithas been an offshoot of purchasing. Se-nior financial managers are also con-cerned that if maintenance runs thestores, the value on-hand would sky-rocket; Secondly, if your inventory account islike most, it is a separate item on thebalance sheet, not on the income state-ment. Most maintenance and produc-tion people are measured onprofitabilitycosts and revenue, not onthe value of the companys assets; Finally, many organizations dont con-

sider the MRO stores as a professionaldiscipline, requiring a customer serviceattitude, functional knowledge andparts training. When a position opensin the stores, we often put someonewho may not have the right attitude,parts knowledge or specialized trainingin inventory and stores management,but rather an employee who is near re-tirement, disabled or has the seniorityin another part of the organization towin the job posting bid.

In this special reportthe MROHandbookyou will have an opportu-

nity to explore many aspects of storesmanagement and inventory control.

A number of my colleagues haveprovided input to this handbook, basedon their experience helping manyclients in a wide variety of industries. Inparticular I would like to thank Y J Kimwho did much of the research, andcontributors Jim Picknell, Len Middle-ton, Bard Critoph, Monique Petit andBen Stevens at the Centre. Thanks alsoto Doug Cudlip of our materials man-agement practice for his final technicalediting of this handbook, and to PEMeditor Todd Phillips and his staff at Clif-ford/Elliot for their editing and graph-ics. We hope it will provide you withsome reminders of the basic principles,as well as some fresh ideas on how tomake your inventory investment workharder. e

When we are focused on the exciting advances in maintenance management happening today, such as

total productive maintenance, reliability centred maintenance, the technology around condition-based

maintenance and the new computerized maintenance management systems, its hard to get too excited

about a management issue as mundane as the MRO stores.

author s note

4 Plant Engineering and Maintenance

John D. Campbell, Partner in ChargeInternational Centre of Excellence in Maintenance Management, Coopers & Lybrand

When you look at your maintenance management costs, you

will likely find that about 40 percent of costs are labourthe

trades, apprentices, helpers and janitorsanother 20 percent

management, shop and technical overhead, and a full 40

percent parts and supplies.

Executive summary

W e have indicated current trendswhich illustrate the next hori-zons to be achieved but for themost part we have tried to keep our com-ments practical and pertinent to the pre-sent state of development of most MROsolutions we have seen.

We have looked at 11 key areas foreffective maintenance parts and sup-plies management:

The maintenance / materials linkMaintenance and materials manage-ment are business processes that arejoined at the hip. There is a critical in-terdependence between the functionsthat seems to have become a source ofconflict rather than teamwork. If youhave a comprehensive maintenance

planning process, purchasing will havethe opportunity to do effective sourcingand competitive buying; if the storeshas a systematic process for receiving,stocking and issuing, maintenanceworkloading and execution will bemore productive.

A great start is recognizing that if ei-

ther the maintenance or stores tries tooptimize their own function, this maycompromise what is in the best interestsof the organization as a whole.

Purchasing for storesThe purchasing department typicallybuys for production, for engineeringand for maintenance, including capital,direct charge (charged directly to a de-partment or account code) and storesinventory account items. These last twonormally represent the bulk of pur-chase order line items, and most are formaintenance. Stores purchasing shouldbe a simple process, with few approvalsand triggered by the on-hand quantityin inventory. The role and focus of pur-chasing is shifting toward sourcing

strategy while empowering storespersonnel and the computer system toexecute the transactions.

Layout and materials handlingWhen setting up the stores, you wish toavoid congestion, convoluted materialflows, low storage density and multiple

material handling. An optimized layoutwill consider the customers require-ments, mobile equipment movement,security, zoning and overall materialflow. We present a specific approach tohelp you arrive at an optimized layout,and describe some of the technicaltrends in storage and materialshandling.

Information systemsInventory management systems are ei-ther part of the general accounting,maintenance or enterprise-wide infor-mation management system. The criticalissue is integration. The maintenanceplanner must have a view first, as to whatis on the bill of materials for the equip-ment, and secondly, the on-hand quanti-ty in the stores. An important systemrequirement is inventory analysis andperformance reporting, to ensure thatthe inventory investment is productive.

Statistical control and scientificinventory managementCompanies will typically have 10,000 to100,000 stock keeping units (SKUs) orline items in their stores. Basic statisti-cal analysis is essential to make sure youare giving the right attention to theright SKUs, that you are carr yingenough inventory to last during the re-order process despite uncertain de-mand. Computer systems provide toolsto ensure that obsolescence is caught

The MRO Handbook 7

in troduct ion

Maintenance and materials management are business

processes that are joined at the hip. There is a critical

interdependence between the functions.

This MRO Handbook is presented for both the maintenance and materials specialist. Our hope is that

you will be able to use it both as a guide and a reference to cost-effective stores management: the

overall aim being to ensure excellent customer service at a reasonable cost.

early to avoid a constant inventor ygrowth and expensive write downs ofstock items.

RepairablesParts that are repairable and can bereused must be managed differentlythan consumables. They are in a virtualqueue from the time they are purchasednew, through to issuing and installation,failure or on-condition removal, over-haul, re-stocking and reissue. For com-

panies that have many critical or expen-sive repairables, replacement decisionand spares modelling becomes an eco-nomic necessity to optimize the totalnumber in the queue.

Capital and direct charge itemsCapital items for major projects areoften handled completely separatelyfrom the MRO stores, at the project lo-cation. Minor capital items ordered onengineering work orders, and direct

charge items for production and main-tenance, often present a special chal-lenge to the stores manager. Receiving,storage location space, security, notifi-cation of receipt to the customer, issu-ing and returns must be handledoutside the normal stores inventoryprocess. The degree of item trackingvaries by end use and value of the item.

Cost reductionInventory and stores cost reduction iseasydoing it and maintaining or im-proving service levels and managing riskis another matter. Whereas receiving,stocking, issuing and delivery cost re-duction can be managed by the storesfunction, inventory cost reduction mustbe led by the customers, primarily main-tenance. Inventory carrying costs aretypically 20-30 percent of the on-handvalue; therefore there is an added incen-tive to reducing this on-hand quantity.

Organizational issuesAs suggested earlier, each function inan organization has a slightly differentspin on the stores and inventory man-agement. Maintenance may wish tomaximize on-hand SKUs and quanti-ties, stores may want total security andlarge spaces, Finance may want mini-mum value of stock, Engineering maywant perfect fit for purpose designs,and operations may not have a view, aslong as they get maximum equipmentuptime. You need the process opti-mized and automated before organiza-tion arrangements can be designed.

OutsourcingOutsourcing part or all of the MRO is arapidly growing phenomenon, and forgood reason. Many have found that itnot only reduces overall costs, but alsoimproves service level as well. We pre-sent a six-step approach to outsourcing,beginning at determining whether out-sourcing is a viable alternative for you,and concluding with hints on negotiat-ing the deal.

Measures and benchmarkingWe act like were measured! MROstores exist to serve the customer, so thefirst set of measures should relate to ser-vice level. MRO consumes company re-sources, so cost measures for thisservice are next. Finally, measurementsinternal to the stores and inventorymanagement process are required tohelp us continuously improve. Bench-marking helps to set realistic targets ofperformance, and more importantly,introduces you to the methods forachieving superior results. e

8 Plant Engineering and Maintenance

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Forging LinksLinking the maintenance andmaterials management process

The foundation for MRO inventory

The beginning of MRO investmentoccurs when the process equip-ment is selected. The raw materialsspecifications, and the maintenance re-strategy and related spare parts plan establish the fundamental materi-als needs of the business. Supply strate-gyto stock or notthen fixes themacro level of investment in inventory. The inventory control scheme and theeffectiveness of teamwork betweenmaintenance, production, engineeringand materials functions determineshow well the inventory investment ismanaged for the business. The criticalinterdependencies between core func-tions (Figure 1) are explored in the restof this handbook.

The steps in the materials andmaintenance processesThe simplest maintenance process is re-sponding to emergency breakdowns;none of the more complex is preventivemaintenance development. For break-downs, there is first a discovery step toidentify that something important hasfailed. This fact is communicated tomaintenance, the site inspected, partsand materials are obtained and the re-pair completed as quickly as possible.

For normal planned maintenance,planning and scheduling steps areadded, and usually some reporting andjob analysis. For PM development,there are further steps to ensure that all

the preventive actions taken addresssome likely failure mechanism, and thatthe manufacturers recommendationsand equipment history are taken intoaccount. Further, we will want easy ac-cess to the materials and parts the main-tenance trades always use for thisregularly scheduled activity.

Materials management involves pur-chasing, transportation, materials han-dling, stores management andinventory control. Once the specifica-

tions for an inventory item are deter-mined by engineering or maintenance,the item is sourced, the price, deliveryand terms are negotiated, the orderplaced with the successful vendor, it isshipped, received, stocked, controlledand issued. When we see that most or-ganizations will have between 10,000and 100,000 separate line items or stockkeep units (SKUs), we note the im-portance of having an up-to-date plantlayout or equipment configuration, as

The MRO Handbook 9

To be effective for the overall success of any organization, the maintenance and materials management

business processes must be highly integrated and managed with the common goal of assuring plant

capacity and reliability at an acceptable cost. Both begin with the identification of a need and end with

that need being fulfilled. Because these two processes often fall under different managers, there can

easily be a conflict in goals, objectives and performance measures, causing a less than ideal situation

for the organization as a whole.

chapter one

Customerorder

Product & marketdevelopment

Qualitymanagement

Vendormanagement

Maintenanceengineering

MRO

Procurement

Maintenance

Manufacturing Orderfulfillment

Productand processengineering

Figure 1: Linked business processes

well as a bill of materials (BOM) foreach asset or piece of equipment we aremaintaining.

The linkage is critical. Figure 2 illus-trates the information flows as a typicalwork request is processed. A mainte-nance planner has a work order initiat-

ed by an operator, to repair a pump. Hepulls up the asset on his maintenancemanagement system, sees the pumptype for that location, and checks outthe parts that make up the pump. Hethen accesses the MRO system for thoseparts, sees the on-hand quantity in

stores, and if they are available, is ableto include this work order in the avail-able for scheduling backlog.

If there is no on-hand stock due to alack of inventory control, or if a specialpart not normally stocked in the storesis required, the item may become an ur-gent purchase requisition. We can seehow condition-based monitoring wouldgive a long term warning of impendingfailure, stretching the time that the pur-chasing department has to source andprocure it.

When the stores is well managed,maintenance can run more smoothly;when maintenance is proactive, thestores can run its function more effec-tively e.g. establishing qualified supplysources in advance. Real teamworkmeans performance gains and cost op-timization.

Ownership of the MRO management process and resourcesThe basic materials issue in any compa-ny is the needs/comfort scalemain-tenance needs a duplicate plant downthe road while corporate would preferto have nothing on the shelf.

Each function strives to define andsolidify their own goals. To that end,

20 Plant Engineering and MaintenanceWrite #14 on the Reader Express Card

Figure 2: MRO Management process

the owner of stores will have an im-pact on the day-to-day business (and thereplenishment) of MRO. There aregenerally three scenarioseach withtheir own unique problems, as isdemonstrated in Figure 3.

Designing the materials management processA good start at designing (or redesign-ing) the materials management processis to write down the business purpose ofthe process, its customer requirementsand key success measures.

The next design step is to map eachactivity, who does it and how long it usu-ally takes. Then look at each activity andidentify which ones add value (e.g. partidentification, issue recording), andwhich are non-value adding, (e.g. copy-ing, filing, multi-levels of approvals, 100percent receipt inspection).

With a little help from benchmark-ing of best practice, and informationtechnology, a new streamlined processcan be designed to meet the needs ofthe customers, materials managementand the finance department. In ourconclusion section we outline some ofthe state of the art purchasing/payables process ideas now being im-plemented.

Write #15 on the Reader Express CardThe MRO Handbook 21

Figure 3: Ownership of MRO management process

Owner Pros Cons

Maintenance

Purchasing and stores

Enterprise department(general manager or finance, etc.)

Quick to accommodatechanges to stock as they arecloser to the source ofproblems and the resultsof decisions.

Concentrate more closelyon analyzing and implementing cost-effectivereplenishment and maximizing the vendor relationship.

Stores decisions are basedon whats best for thecompanynot for the department.

Tend to overstock if theplanning function is weak(they will stock all items ona bill of material instead ofonly the critical items toensure that parts are available to start a job instead of pre-planning thejob and buying only whatis required just-in-time.)

Not always quick to re-spond to new maintenancedemand because of theneed for discussion, collabo-ration and subsequent negotiation for new setupsor change in materials. Con-servative stocking of itemsand tight control levels (i.e.minimum safety stocks) andbuy cheap vs meet specs.

Stores now have three interests to mediate andbalance, which can complicate decision-makingand responsiveness.

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Parts purchasingPurchasing parts for the MRO stores

Purchasing process

T he typical purchasing process (Fig-ure 4) is composed of several steps,from obtaining the specification ofneeds through supply base research(sourcing), to selecting appropriatevendors, transforming the requirementto a purchase order, and finally receiv-ing the materials and delivering themto the requester.

While this may seem like a simplelinear process all in the hands of pur-chasing, there are a number of criticalpoints where the original requestermust play his role: defining the specifi-cations, prequalifying products or ven-

dors, vendor selection, receiving in-spection, and product/vendor perfor-mance evaluation and invoice approval.

If the teamwork breaks down at anyone of these points, the end user suf-fers the results of inferior supplies,poor vendors and a drawn out frustrat-ing purchasing experience. A goodprocess that is well understood by alldisciplines makes for good businessperformance.

Purchasing should be managed tomaximize service to its customers whilereducing the total long-term acquisi-tion costthe total cost of ownership(TCO). This means incorporating sup-

ply chain thinking with the mainte-nance management understanding ofprobable materials consumption rates.The consideration of factors that driveTCO, shapes the sourcing strategy andinventory stocking plans. Alternate ser-vice delivery (outsourcing, co-sourcing)possibilities and repair strategy shouldbe done periodically to ensure that thearrangements are still applicable formajor categories of MRO items.

We return to this topic in a few para-graphs, but first we look at the procure-ment process. To reduce the cost of theprocess itself, start by reducing the timeinvolvedand that means taking out allthe unnecessary or non-value addingactivities from identifying the needs,getting approvals, evaluating bids andproducts, to receiving.

Process mapping is an effective diag-nostic procedure to help reshape thepurchasing sequence. In the typicalprocess map, you can see that there aremany steps. Shaded boxes representsteps that really dont add much value,even if we must do some of them.

There are really only three usefulsteps: identifying needs, informing thevendor and paying for the goods. Howcan we minimize those other steps andsimplify the process? We need to thinkabout different demand characteristicsof materials.

Tactics for various classes of MRO itemsMRO materials may be classified intoseveral categories according to criticali-ty, dollar value and volume; then, ap-propriate purchasing, stocking andreplenishment processes can be set upfor each category.

For example, if you purchase a stan-dard material with low annual dollar

The MRO Handbook 13

In the previous section, the high level aspects of the MRO management process were introduced. In this

section, we discuss the purchasing function in more detail, why different purchasing patterns are used

for differing material types, and the optimal process for each.

chapter two

Figure 4: Typical purchasing process

usage, you dont need the identifying needs, preparing pur-chase request and selecting vendor activities each time anorder is placed. You dont have to do much. The computer-ized inventory management system will generate replenish-ment orders automatically by predetermined order timingand quantity, and the pre-selected vendor will replenish or-dered materials.

There are several inventory control schemes, that set the re-order timing and quantity; some are simple and low cost e.g.two bin system, while others require advanced statistical calcula-tions. The control scheme options and their parameter deter-mination methods are introduced in detail in a later section.

Categorizing materialsA few simple questions will help quickly categorize materialsfor purchasing. You can put them on one of eight cells on thebox shown in Figure 5: How critical is it for the operation? If not available, willthere be an immediate adverse effect on production, safetyor the environment? What are the risks? How secure is thesupply chain? How much is its annual dollar usage? Does this represent asignificant cost for the organization? Perform an ABC classi-fication to see where the unit volume and dollars are spent. Is it used continuously or infrequently or periodically? Is itpart of the PM program, or an OEM (original equipmentmanufacturers) part rarely required? Is the item used indi-vidually or in sets? How predictable is the demand? How many vendors can you buy it from? Again, is it anOEM part that is linked to the warranty, or basically a com-modity item?

Answer these questions for every material or materialgroup, and you can put them on one of eight cells of the boxshown. It has three axes representing criticality for opera-tion, annual dollar usage and repetitiveness (predictable pat-tern) of usage. The number of vendors is consideredseparately as a supply side issue.

Supply strategyEver y cell of thebox has a differentsupply strategy,which is describedbelow.

High criticalityand usage withhigh repetitiveness(predictability ofdemand)

The materialsin this categor yshould be treat-ed very carefully.They are your Aitems because theyhave the biggest

strategic importance in terms of impact on production andcost, the supply strategy should be focused on security andcontinuity, hence inventory stocking on site or just-in-time(JIT) supply from a vendor inventory near by with fast re-plenishment of consumption. The predictability of demandenhances the likelihood of success, but vendor relationshipswill tend toward alliances or partnerships with only one ortwo suppliers for each item.

Reducing cost in this category can be achieved by reduc-ing reordering process (transaction) costs and inventory car-

The MRO Handbook 15

Figure 5: MRO material category

rying cost. The vendor relationships must be well managed toavoid creeping material costs and the vulnerability of a nar-row supply base.

High criticality and low usage with highrepetitiveness (predictability of demand)The materials in this category hold a relatively small portionof the total cost, but critical to the businessthe B items.The supply strategy should be focused on simplifying man-agement efforts and reducing indirect cost while retaining ahigh certainty of supply. Because volumes are low and pre-dictable low inventory levels can be set.The important issue issupply lead time and avoidance of an interruption in replen-ishment.

Low criticality and high usage with high repetitivenessEven though the materials in this category have low criticali-ty, they still hold a large portion of the total cost, sominimizing investment in inventory is the key. Most C itemsfall into this category.

Some stock outs are acceptable in the short term so thecontrol scheme can be simple. The supply strategy should befocused on reducing the direct material cost. To achieve this,annual based supply contracts may be applicable. In the caseof bulk material, visual control techniques such as a two-binsystem are often used and even vendor managed inventoryarrangements are possible.

Low criticality and usage with high repetitivenessEven though the materials in this category are used in rela-tively low volumes (C and D items), they are less criticaland their usage value is relatively small, so special efforts arenot normally necessary for them. Generally, these materialshave a lot of variation in specifications because nobody isconcerned about them. The only recommendation for thiscategory is to simplify their variety, that is, to reduce the num-ber of line items or SKUs by standardization.

Low repetitiveness (unpredictable demand)Regardless of their criticality and usage value, the materialswith unpredictable demand are often unique to the opera-tion and are needed as a result of a breakdown. The supplystrategy is often on-site inventory supported with predeter-mined vendors identified for back up stock or service parts.

Maintenance bills of materials should define these parts;the maintenance planning process and condition-basedmonitoring are two other strategies to cope with the unpre-dictability of demand.

In summary, there are four main supply strategies in pop-ular usage depending on the impact on the business and therisk of supply difficulties (availability or price exploitation).Proactive establishment of the appropriate supply strategyand corresponding vendor arrangements are fundamental tokeeping the materials flow on track with operations andmaintenance requirements. e

The MRO Handbook 17

If you purchase a standard material with low

annual dollar usage, you dont need the

identifying needs, preparing purchase requests

and selecting vendor activities each time an

order is placed. You dont have to do much.

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Layout and securityStores layout, security and materials handling technology

F or these reasons you should follow asystematic approach to layout opti-mization and the application ofnew warehousing technologies.

Benefits of an optimized layoutand physical flowThe importance of an efficient layoutcannot be overstated. The benefits areavoidance or minimization of typicaloperational problems such as: Insufficient inbound and outboundstaging space, resulting in congestedaisles, multiple handlings, and unsafepersonnel and property conditions; Convoluted material flows betweenfunctional areas within the stores oper-ation, results in bottlenecks, time-con-suming travel distances, deteriorationof location controls and potential dam-age to materials;

Degradation of slottingdisciplines resulting in lowstorage density and loss inpicking materials andparts efficiencies, lost ma-terials, and lower invento-ry record accuracy; Inappropriate use of con-veyors results in excessivetravel due to blocked ac-cess to designated storagelocations; Excessive storage depthin bulk floor storage areasresults in multiple han-dling of materials andparts.

An efficient stores lay-out is considered the foun-dation for all subsequentimprovements to the oper-ation involving automa-tion and/or information systems.

Techniques and tools for betterlayout and physical flowYou can undertake the actual process ofoptimizing a layout with the simplest oftools and within a relatively short periodof time. Even the inexperienced design-er can achieve significant benefits fromthe exercise. First, we set out the generalapproach then describe some of thetools and techniques used to develop agood design solution.

Approach The following describes a standard ap-proach (Figure 7)to layout redesignand optimization that has been used

successfully in many applications. Theapproach follows two major series of ac-tivities relating to requirements and tospace analysis.

Materials and parts informationIt is important that a thorough under-standing of the materials and parts in-formation is obtained through adetailed analysis of the database. As aminimum, the following informationshould be summarized: Range of SKUs volumes by warehouseactivity i.e. number of SKUs receivedper day (minimum, average, maxi-mum); number of SKUs issued per day(min., avg., max.) over a time period (6months);

The MRO Handbook 19

There are six main factors (Figure 6) that influence the layout of a stores operation, all of which are

interrelated. These include: the degree of required inventory; control and security; the number and types

of locations; use of kitting; job site delivery; complexity of stores and information technology to be applied.

chapter three

Figure 6: Factors that influence layout optimization

Figure 7: Standard approach for layout optimization

Volume range of SKUs on hand i.e.weekly inventory level by class of SKUover a 6-month period; Range of SKUs inventory on hand asabove but expressed in cube and weightvalues; Daily, weekly and monthly issue activi-ties (Figure 8) i.e., lines, units and or-ders by material group and customer; Receiving frequency and volumes bySKU class and by numbers of suppliersreceived per day or week.

Slotting criteria and equipmentrequirementsThe term slotting criteria refers to therules by which materials and parts willbe located by warehouse zone and stor-age equipment type. The criteriashould be defined and agreed to at theoutset of the project so that classifica-tion of materials according to storageand handling characteristics can bedone properly.

Characteristics such as temperaturecontrol, security, traceability, weightand cube, hazard rating, (WHMIS) re-quirements, shelf life control, activityrate (usage), substitutions, segregation,etc. are important and unfortunatelytime consuming to analyze. Moderncomputer databases make this job easi-

er once the basic data has been en-tered. Sorrythere are no real shortcuts at this stage except to work by someattribute grouping scheme.

The development of slotting criteriais very much a function of the charac-teristics of the items specific storage re-quirements and the material handlingequipment needed. The proper selec-tion of equipment ultimately requiresan understanding of the relationshipbetween capital cost, operational effi-ciencies and flexibility.

These parameters vary by materialclass. Note that in many stores opera-

tions, significant operational efficien-cies can be attained by optimizing theslotting plan within the existing storageequipment, and thereby delaying oravoiding unnecessary capital invest-ments. You just have to decide to do theanalysis.

Material flowThe material flow rates between func-tional areas determine the space alloca-tion and proximity relations thatprovide a workable if not optimal lay-out. Those functional areas typically in-clude:

20 Plant Engineering and Maintenance

Figure 8: Distribution of lines per day

receiving staging; receiving processing; returns processing; inspection; quarantine; bulk/reserve storage; forward pick; order wicket; shipping processing and staging.

The preparation of a simple materialflow diagram that illustrates and quanti-fies the material flows between function-al areas will assist in the development ofalternative block layouts within thewarehouse structure or base plan.

Base planA scale drawing of the facility is essen-tial to provide an appreciation of theconstraints within which the revised lay-out must comply. The base plan shouldbe updated to include the following in-formation: the location of all building columns; all existing walls, doorways, docks andoffices and access controls; overhead obstructions such as light-ing and piping, sprinkler systems, heat-ing and ventilation, security zones andsurveillance cameras viewing angles; the current location of storage andmaterial handling equipment.

Space requirementsOne of the solutions to small partsstorage requirements is the automat-ed carousel which is a special layoutsituation (Figure 9) combining opera-tor workstations and control panels as

well as part storage.Typically, the largest amount of

space within the store is required forstorage. Therefore the acceptable aislewidths and overall storage heights willhave the most significant impact on the

The MRO Handbook 21

Figure 9: Carousel workstation layout

22 Plant Engineering and Maintenance

total required space.Second in importance is space for

forward picking i.e. kitting of materialsfor delivery to a work site or issue tomaintenance crews.

It is recommended that the opera-tional requirements for all employeeworkstations within each functionalarea are summarized as a basic equip-ment set so that the numbers and sizeof work spaces are allocated within thefinal layout. More specifically, the fol-lowing criteria for each workstationshould be considered: workstation equipment required, i.e.,desk, shelving, lamp, computer, printer,warehouse supplies (labels, packaging)etc.: single or multi-worker occupancy; material handling equipment re-quired, i.e., forktruck, hoist, etc., in-cluding service bays; staging space for inbound and out-bound materials and parts; accumulation areas for garbage andrecyclable materials.

Analytical toolsThe tools you require for a layout anal-ysis need not be sophisticated; however,as a minimum requirement prior totackling a layout redesign, the designer: must be comfortable producing andinterpreting simple scale drawings; should have experience with the ma-nipulation of inventory databases; must have an understanding of thestores activities at a detailed level.

The ultimate success of the layoutoptimization process will typically belimited only by the following: physical constraints of the existing fa-cility; budget constraints; creativity of the designer.

Techniquesblock layoutsThe purpose of developing block lay-outs is to experiment with as many lay-out options as is feasible withoutexpending the effort required produc-ing detailed scale drawings (Figure 10).

The block layouts are compared andevaluated with consideration given tothe overall material flow and the prox-imity requirements between functionalareas.

Final layout and description of operationsAfter the block layouts have been evalu-ated, the final layout can be detailed toshow the space allocation by materialcategory and will include all worksta-tions and workstation equipment. Atthis time, all column and overhead ob-structions should be checked and veri-

fied. Warehouse personnel should beinvolved in critiquing the proposed de-sign for practical operational aspects.

A complete description of the pro-posed operations should also be pre-pared, particularly if new equipment orsystems are involved.

Trends in storage and material handlingTechnical trends in storage and materi-al handling can be classified in themajor categories of storage density, au-tomation and information technology.As previously mentioned, it is alwaysrecommended that the physical aspectsof the operation be optimized prior toautomating the information side of thebusiness.

Storage densityOngoing advances in material handlingtechnology have resulted in ever in-creasing storage densities within storesoperations. This is of particular signifi-cance for expanding operations withlimited available space; however, inmany cases due to the physical con-straints of the facility, i.e., roof heightand column spacing, increasing thestorage density may not always be a fea-sible option.

Methods for achieving increasedstorage density include the following: narrow aisle equipment: The ratio ofstorage space to aisle space can be in-creased through the use of narrow aisleequipment such as swing-reach fork-trucks for full pallet handling and oper-ator-up order picking equipment fornarrow-aisle high-bay shelving; push back rack, double deep rack andpallet flow rack: Use of this type of pal-let storage greatly increases the overallstorage density; however, its inappro-

priate use can result in serious opera-tional inefficiencies so check carefully.These solutions are good for stock rota-tion control but are not a good solutionfor high volume items; increasing storage height: Full palletstorage of 100 feet or more has beenachieved in a number of AS/RS (auto-mated storage and retrieval systems) witha very high resulting storage density.

Usually, high volume distributioncentres can justify AS/RS systems butnormal MRO warehouses have to useless costly solutions.Your existing facil-ity may have unused head room thatcan be exploited with high lift fork-trucks; carousels: High storage densitiescan be achieved but retrieval timescan be unacceptable if slotting is notdone by item velocity. Often, multipleslots are used so that there is morethan one pick face of a fast movingitem in each rotation. Random rota-tion systems are more costly than aunidirectional system but give fasteraccess. More on carousels under thenext topic.

AutomationThe capital costs associated with auto-mated equipment combined with theinherent reduction in operational flexi-bility has generally resulted in the rele-gation of highly automated materialhandling systems to large and complexoperations like distribution centres.These systems must be fully cost justi-fied by means of operational, through-put and/or service improvements priorto consideration over more convention-al methods. Several of the more com-mon trends in material handlingautomation include: carousels: Carousels are capable of

Figure10: Block layout alternative A

achieving very high pick rates, i.e., inthe order of two to three times that ofmanual picking from shelving. Thisequipment is commonly found inapplications with a large number ofSKUs of small parts such as automotivespares, electronic supplies and hospitalsupplies; conveyor sortation: Conveyor sorta-tion systems allow for orders to bepicked simultaneously throughoutmany zones in the warehouse withoutthe problems associated in consolida-tion of the orders at the shipping dock.

Information technologyOver the past decade there has beengreat interest in the application of sys-tems technology to provide automated

real time control over information col-lection and reporting, task manage-ment, operations planning, locationmanagement and ser vice tracking.There are now many types of ware-house management systems available,with varying levels of functionality.

RF (radio frequency) and bar codetechnology: RF and bar code technolo-gy provides for efficient, accurate andreal time tracking of the movement ofmaterials and parts throughout a storesoperation. Typical applications of thistechnology include: receiving of goods against ASNs (ad-vance shipping notices) by scanning ofstandardized bar coded shipping labels; productivity tracking in real time byindividual and/or function by monitor-

ing the RF transactions as they are gen-erated; tracking of order completion status inreal time; positive verification of shipping con-tents; effective warehouse management sys-tems.

Warehouse management systemstend to be quite problematic duringtheir implementation due to the com-plexities of typical stores and ware-house operations and the resultingrequirement for customized functional-ity. However, experience has shown thatif these systems are implemented in aphased approach, the probability of re-alizing all of the anticipated benefits isgreatly increased. e

The MRO Handbook 23

INFO

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ATIO

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Information systemsInformation systems for stores inventory management

In the MRO environment, fast re-sponse to material requirements isnecessary for effective maintenance.Studies show that much of the standardmaintenance day is consumed by inef-fective materials control. Reducedmaintenance effectiveness directly im-pacts production output. And finally,MRO inventory typically represents asignificant investment for most compa-nies. The underlying problem is: man-aging the information flows that governthe availability of physical materials.

Basic considerations forinventory management systemThe inventory management system isrequired to provide a wide range of in-formation for effective management aslisted below. Which items are we using? When andhow many? How many do we have on hand? Whatare the substitute items? Where are they located? Who supplies them? Who are the al-ternative vendors? How long does it take to replenishthem? What is their cost? Which equipment rely on them? When were the quantities last veri-fied?

This is just the basic informationthat the inventory management systemshould have. Using this, the systemshould be able to provide some value-added information for right decisionmaking. Some of useful information issummarized in the following points:

Demand pattern (average demand?standard deviation of demand?) for de-termining the replenishment methodto be used and safety stock quantity; Usage value over a certain period(normally annual) for the classifica-tion; Major performance data in quality,cost, delivery and service.

Modern systems solutions have recog-nized the important dependencies be-tween MRO materials management,maintenance planning, production opera-tions, engineering, and finance functions.Hence the dominance of the integratedsystem (Figure 11) which we discuss next.

Integration with other systemsA stand-alone computerized inventory

management system can providetremendous benefit to a company whouses a card system or has no system atall. The critical point to make here isthat a stand-alone system usually doesnot provide an attractive return on in-vestment. This is because the invest-ment in a stand-alone system in termsof converting your data and trainingyour staff leaves lots of interface issues(often operated manually) between op-erating functions. The real benefit orROI comes from integrating the infor-mation flows within the company sothat the multiple interests in MRO in-ventory and its performance can workwith the same data sets and analyticaltools to make optimal decisions in theright time windows.

The MRO Handbook 25

For better inventory management, a large amount of accurate data is required and can no longer be

provided by manual methods. It must be analyzed in appropriate ways, and must be easily

accessiblevisible for the respective users.

chapter four

Figure11: Major links with other information systems

A prerequisite for systemssuccessidentification ofinventory itemsAccurate identification of an MRO itemis an essential precondition for manag-ing the investment and reducing costs.Both the physical identification (on theparts or on the storage location) andthe computer system identification areessential. The two critical identifiers arethe part number and the material de-scription. A unique part number is obvi-ous but cross reference numbers tovendors catalogue numbers often addcomplexity to a system. Think carefullyabout the trade-offs in system effort ver-sus ease of communication to suppliers.The description has additional impor-tance. If done properly, meaningful de-scriptions enable the following benefits: Allow you to purchase by contractgeneric parts (based on corporatestandards) from wholesalers ratherthan marked-up parts from equipmentmanufacturers; Allow you to reduce the occurrence ofduplicationreduces investment; Allow fast and automatic replenish-ment (usually through contract) thusreducing order costs; Ensure that the right part is availablefor future usecontributes to mainte-

nance effectiveness;To reduce the instance of duplica-

tion you need to remember the follow-ing design principles in establishing theidentification system: Unique and consistent item codesshould be used throughout a company(i.e. all locations). This allows fastrecognition of the item and cross-refer-encing among sites; Only one source should have respon-sibility and authority to create orchange item codes; Item codes should be as short as possi-ble and also allow room for the addi-tion of new items; Use other descriptive fields to containattributes of the item that facilitategrouping for spend analysis, storageplanning, vendor consolidation, etc.

The constant challenge ofinventory record accuracyAlthough a materials managementcomputer system is designed to providevarious kinds of data very quicklyre-member the saying, garbage in meansgarbage out. The consequences of badinformation are: time lost in locatingparts; issuing the wrong parts; reorder-ing the wrong items; accumulation ofobsolete stock (and reduced storage

space for the material you really need).The two primary causes of bad infor-

mation in a computer system are: poorcontrol of item master data (setting upnew items or modifying existing infor-mation, i.e. file maintenance) andtransaction reporting errors (late re-porting or incomplete or wrong partnumbers). Those are the most impor-tant factors for effective use of an inven-tory management system.

Sustaining accurate inventory dataIn most systems, physical inventory willnot balance with the system recordsover time. This is usually due to inher-ent flaws in the transaction reportingprocesses. Not all inaccuracies are disas-trous but error levels above two percentare a warning sign that system integrityis deteriorating.

Planning and inventory replenish-ment systems entirely rely on recordeddata, so it is very important to keep ac-curate record balances all the time. Thestrategy is to implement a good rootcause problem solving and correctiveaction process. Inaccuracy is almost al-ways caused by the lack of adequatetraining of enterprise personnel. Allsymptomsbreech of security, inaccu-

26 Plant Engineering and Maintenance

rate transaction processing, poor loca-tion procedure and clean-up can al-most completely eliminated by staffselection, solid leadership and exten-sive sincere training.

The best run warehouses are thosewhere personnel clearly understand theimplications of everything that they do(or dont as the case may be) andhave consistent disciplined leadership.To overcome the risks of inaccuracy, thephysical count process (described later)is used. Think of physical counting asthe quality assurance process for yourinventory records. There are two com-mon methods used for verifying inven-tory record data.

One of them is periodic total physi-cal count, and the other is cycle count-ing. Many companies use periodicphysical count, backed up by cyclecounting. The periodic physical count istypically performed annually, and isconcentrated into a couple of days (usu-ally a weekend). On the other hand,cycle counting is performed continu-ously with a few items counted everyday.

It is almost impossible to maintainthe accuracy as 100 percent, but 99 per-cent accuracy can be maintained by useof a hybrid strategy of opportunisticand planned cycle counting. Planned

cycle counting, is done more frequentlythan annual or semi-annual physicalcount, hence, errors are discovered andcan be repaired promptly; overall accu-racy, therefore gradually improves.

Cycle counting rarely however un-covers the causal reasons for the dis-crepancy. This is where the role ofstrong functional leadership and soundroot cause problem solving contributeto long-term success. Often weaknessesin understanding reporting proceduresand lack of discipline to those proce-dures cause record accuracy problems.

How to use cycle countingTo determine when and which items youcount, here are some useful options: By ABC classificationThis is themost common way. The rule is that Aitems should be counted more fre-quently than B items and B itemsmore frequently than C items; When reorder point is indicated Ifthe system shows that inventory levelreaches at reorder point, you couldcount those items; When the inventory record indicateszero or negative balanceit shouldbe verified anyway; Whenever transactions occurthisshould be considered with the volume

of work. If the transactions occur fre-quently, this is not practical.

Ideally, count an item when the costis the lowest and accuracy is highest.When is that? Just before a receipt is putaway or when the inventory balance iszerothe last issue. It takes no time tocount a zero stock level; there is noerror in the count; and the recordsneed to be updated right away so that areordering decision can be made. Youwill still have to investigate discrepan-cies but at least you can quickly repairthe record information in the system.

Minimum features of modern com-puter systems for inventory control multi-control modes; forecasting and demand analysis: fore-cast management; direct data collection; auto replenishment; electronic output; ABC; cycle counting; slow and obsolete; critical spares; vendor supplied databases; spend analysis; user browse; project planningpegging to workorders; cross reference tables. e

The MRO Handbook 27

INV

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Inventory controlsInventory statistical control: just the facts

Basic classification: ABC analysis

A BC analysis is a very useful andsimple method for classifyingand analyzing inventory. Mostcompanies have used it for a long timeon finished goods and production ma-terials, but many of them havent usedit to its full potential for MRO invento-ry. The ABC method is based on Pare-tos rule, which is also referred to as the80-20 rule which identifies the impor-tant few from the trivial many.

The Paretos rule correlates the ex-perience that approximately 80 percent

of total value is held by 20 percent ofthe items, or that 80 percent of themovement is with 20 percent of theitems. In most cases, those approxi-mately 20 percent of items are identi-fied as A and the other 80 percent areas B and C.

The significance of the classificationis that A items deserve closer and per-haps more costly inventor y controlwhereas simpler and cheaper controlschemes can be applied to B and Citems.

Use of ABC classificationABC classification focuses on the de-gree of control concept. It is commonsense that managers should be moreconcerned with a few high cost itemsrather than many low cost ones. You

may use ABC classification in the fol-lowing areas: engineering: Engineering parts ratio-nalization efforts should be focused onitems with high usage value rather thanon items with lower value; procurement: Purchasing activitiesshould concentrate on items with high-er usage value for sourcing and negoti-ating. More sophisticated supplyarrangements are applied to A itemswhile B and C items can even beconsider for outsourcing; inventory replenishment: Sometimes

the classification scheme may influencethe inventory replenishment controlmethod. It might be more economicalto control some C items with a simpletwo-bin system. Scientific managementtechniques are applied to A items; Inventor y cycle counting: Whenchecking inventory record accuracyusing cycle-counting method, A itemsshould be verified more frequentlythan B or C items; Security: Although absolute unit pricemight be a better guideline than usagevalue, ABC analysis may also be used asan indicator of which items should bemore tightly secured in locked stock-rooms.

ABC calculationIf the data is available and can be pro-

cessed by a computer, you can do theABC classification easily. All the datayou need is: unit price and annualusage. Ideally, the usage figures shouldrepresent the future usage (forecast)for each item. However, the past usagedata is usually what is readily availableso most people work with historicaldata. Once the data is prepared, youcan calculate and classify them by fol-lowing these steps: multiply usage by unit price to deter-mine annual usage value in dollars; rank items by annual usage value fromhighest to lowest (sort the spreadsheetif you are using a PC with standard of-fice software); calculate cumulative percentage oftotal annual usage value; assign ABC categories by predeter-mined guidelines (For example, A foritems holding 80 percent from the top,B for the next 15 percent and C forothers); refine the categories by experiencedjudgment, but not too much.

Many of the new information man-agement systems do these calculations,and provide both customized and stan-dard reports.

Scientific inventory management The two basic questions for inventorymanagement are: when to replenishand how much to buy. The combina-tions of control schemes are: fixed time inter val; fixed reorderquantity (not too common except foritems with very predictable and lowvariance of demand); variable time interval; fixed reorderquantity; variable time interval; variable re-

The MRO Handbook 29

The efficiency of MRO inventory management impacts operating and administrative areas throughout the

business. This chapter introduces the control scheme options and related concepts and techniques for

better inventory management. The topics covered include methods for classifying inventory, determining

replenishment order timing and quantity, and detecting and handling obsolete inventory items.

chapter f ive

Maintenance personnel are pack rats by nature

and see value in things despite the nil probability

that the item will get used.

order quantity; fixed time interval; variable reorderquantity.

There are several methods used fordetermining the timing of replenish-ment orders of inventor y items.Among those methods, the reorderpoint system (variable time-fixed quan-tity) and the Min-Max (variable timevariable quantity) system are the mostpopular ones. Both systems are based

on a common principle. If inventorylevel reaches a certain point (the re-order point) the replenishment ordersare triggered.

The only difference between thetwo systems is the order quantity. Thereorder point system uses predeter-mined quantity in every order. On theother hand, in the Min-Max system, theorder quantity may be varied whenever

orders are issued because the rule is:order enough to restore inventory tothe Max level.

The Min-Max system works like thefurnace thermostat in your house.When the temperature gets below theMin, the furnace is turned on untilthe temperature gets to the Max. Thequantity of heat put in to the housedepends on how much the tempera-ture dropped below the Min and how

much heat is consumed during thelead time to restore room tempera-ture. You wouldnt want the thermo-stat to work as a reorder point systemwhich would put a fixed quantity ofheat into the house; a fixed quantitymay not restore the temperature tothe set point and you would soon needto put the furnace on again. The timeintervals between orders of furnace

operation vary more in the reorderpoint control scheme than in the MinMax scheme.

More informal methods, using visu-al reviews, are also based on thoseprinciples.

The reorder point system in practiceThe reorder point system works best ifdemand is reasonably predictable, i.e.follows a relatively steady pattern. Donot use reorder point for items with in-frequent or lumpy demand.

Lets think about an example of thebasic reorder point model during threedifferent demand situations.The basicsetting is: the inventor y level hasreached the reorder point and a replen-ishment order has been issued. We arenow awaiting the arrival of theorderhopefully before we run out ofstock.

In the first situation, demand is ex-actly the same as expected when the re-order point was calculated (more onthis later). Consumption continuesduring the time (lead time) it takes toplace the order and receive the ship-ment from the vendor. The result: nostock out; good inventory control; no-body gets nervous.

30 Plant Engineering and Maintenance

The Paretos rule correlates the experience

that approximately 80 percent of total value is held by

20 percent of the items, or that 80 percent of the movement

is with 20 percent of the items.

In the second situation, demand ex-ceeds the average use during the lead-time, resulting in a stock out. Theresult: poor inventory control; next re-order interval is shorter than previ-ousyou get nervous. Why? Reorderpoint too low? Not enough safety stock?Actual vendor lead time varies fromwhat the system used? Failure to expe-dite effectively? Poor demand forecast-ing? All of these reasons need to bechecked so the system can be tuned forbetter performance.

In the third situation, demand is lessthan forecast, so that some inventorystill remains when the replenishmentorder is received. The result: someextra stock for a while; and the intervalto the next reorder is longer than be-foreonly the vendor gets nervous.

How do we deal with var ying de-mand patterns and limitations in theability to forecast with enough accura-cy? We include provisions for safetystock in the reorder point calculation.

The amount of safety stock is deter-mined by the degree of desired servicelevel (probability of a stock out) and anacceptable inventory investment. Wediscuss the topic of safety stock and sta-tistical inventory control in more detailunder the section: Dealing with unpre-dictable demand.

Min-Max systemIn the Min-Max system, the order quan-tity is varied by order. The timing oforder is triggered by inventory reach-ing the Min level (same as ROP), andthe order quantity is determined as thegap between the on-hand quantity atthe point of order (this might be lessthan Min level) and Max level.

Which control scheme do youchoose? The biggest disadvantage ofthe Min-Max scheme is the manual pa-rameter maintenance that should be

done but most often isnt. So, for mostitems, use the reorder point with sta-tistical demand forecasting (as dis-cussed in the systems section). Then,the parameters of safety stock and eco-nomic order quantity are maintainedby the system and only need periodicreview by the materials managementteam.

Economic order quantityThe reorder point (ROP) and the Min-Max system were described as methodsto trigger replenishment ordersthewhen to order part of inventory re-plenishment. Next we address the ques-tion about the order quantity: Howmuch to order?

Lets think about two extreme poli-cies: an acquisition of a whole years

supply at one time; and, a resupply pol-icy of one order per week. For the ma-jority of items only one order per year isnot reasonable because of larger spacerequired for the inventory and the biginvestment of buying so much at once.For low cost small items semi-annual orannual ordering makes sense. Well ex-plain how to make a simple calculation(the economic order quantity) so youcan decide what the right order quanti-ty is.

On the other hand, an order perweek probably seems like too frequent.It causes lots of transaction paperworkand excessive receiving and handlingwork. For high cost predictable usageitems, continuous replenishment eachweek may be the best solution.

The economic order quantity(EOQ) modelWhat should the order quantity be?How do you determine this for eachitem. Its starting to look like a lot ofwork even if the calculation is simple.Every order quantity decision, evenwhen done intuitively, is based on thecomparison of two competing costdriversthe cost to carry the inventoryversus the cost to place orders.

The cost of carrying inventory in-cludes the cost of storage facilities, storepersonnel for inventory handling, in-surance and tax, allowance for obsoles-cence due to engineering changes,allowance for loss due to pilferage orspoilage, and the time value of money(the lost opportunity for alternative in-vestments).

The cost for placing orders includesthe cost of the whole transaction pro-

The MRO Handbook 31

The Min-Max system works like the furnace thermostat in

your house. When the temperature gets below the Min,

the furnace is turned on until the temperature gets to the Max.

cess, from purchasing to material receiving.The ordering cost is inversely related to the carrying

cost(Figure 12). If you order only as required or in smallquantities, the inventory will be smaller and the carrying costwill be minimized. On the other hand, larger lot sizes willneed fewer orders, and may come with a discount. The opti-mum order quantity should be the one that minimizes thetotal cost. This is called the economic order quantity (EOQ),and it is calculated by the formula:

EOQ =

Where:A: annual usageS: cost per orderC: unit pricei: percentage annual carrying cost

Managing the risks of unpredictable demandIn the previous section, safety stock was mentioned brieflyas a necessary element in the determination of the reorderpoint quantity and Min level. The time to reorder is set bythe inventory level where we have just enough on hand tocover consumption during the lead time to receive thenext order.

If the reorder point is too low, there is not enough stock tomeet the demand during lead time; we placed our replenish-ment order too late. Consequences that might result fromstock out of MRO parts are clear and serious. When a ma-chine is stopped, and a necessary part to repair the machineis not available, it causes longer repair time, longer down-time, loss of production, poor crew efficiencies and finallyloss of sales. We dont want this to happen if we can avoid it ata reasonable cost.

To avoid the negatives of a stock out, you should carrysafety stock to protect against excess demand during leadtime or for variations in lead time from the vendor. Moresafety stock will result in fewer incidents of stock outs butthe carrying cost of inventory will increase. Again we meeta cost trade offthe cost of a stock out versus the cost ofmore inventory.

However, the formula to calculate safety stock quantity isnot so easily derived as EOQ. First, the stock out cost is diffi-cult to quantify to everyones satisfaction because there aremany subjective elements that have to be estimated, such asthe cost of poor customer service. Second, predicting the ex-pected occurrences of a stock out is based on the laws of

32 Plant Engineering and Maintenance

Figure 12: Order quantity vs. cost

probability. In other words, the amount of safety stock car-ried should be proportional to the probability of a stock out.

Fortunately, a lot of operations research has been appliedto analyzing the safety stock problem and todays good com-puter systems do all the hard mathematics for us.

Determination of safety stockTo calculate the theoretical safety stock amount for an itemmost systems use basic statistic theory. To keep the analysisreasonably simple, we assume that variations in demand fromone week to the next are distributed symmetrically around anaverage (Figure 13). So if we work with average demand weknow that some weeks the actual will be higher and someweeks it will be lower.

If the actual demand is less than the average we have as-sumed in our reorder point calculation, no stock out willoccur. A stock out occurs only when demand exceeds the av-erage during the lead-time.

Thus we need to estimate the probability that a demandvariation will be greater than our average. Fortunately, statis-ticians have done all the calculations and all we have to do islook up a table in a mathematics text book.

This also makes it easy for a computer to work out the an-swer. All we have to decide is the acceptable risk or probabil-ity of a stock out that we can tolerate and afford. The servicelevel is the name given to the percentage of time we want tohave protection against excessive demand variations.

Typically, a 96 percent service level would mean we areprepared to live with stock outs four percent of the time, orroughly one week of the year.

One of the periodic activities of materials management isto review the service levels of all items and make adjustmentsto the service level targets. Usually this review is done by ABCclassification. Remember, we arent expecting 100 percentservice levels except on our most critical spares. So, expectsome stock outs, no matter how frustrating they may be.

Inventory obsolescenceInventory obsolescence is the subject that financial manage-ment must keep an eye on at least once per year. Identifyingobsolete inventory and its disposal, is a frequently neglectedissue in every organization. Good computer systems provide

34 Plant Engineering and Maintenance

Figure 13: Safety factor

the analyses to make the job easier andmore routine so the build up of deadinventory is minimized and action istaken in time to recover much of theresidual value.

Reasons for obsolescence and how to detect themInventor y can become obsoletethrough engineering changes to prod-ucts or process equipment, throughtechnical obsolescence, spoilage, de-fects, lack of demand, and so on.

The primary method for detectingobsolescence is to examine the last timethat an item has been used, or with-drawn from inventory. If there has beenno activity for the past 12 to 24 months,the item is a candidate for obsolescenceassessment.

There are often legitimate reasonsfor non-usage, and the need for the in-ventory might still be valid. We find thatmany companies carry a 30 percentlevel of items with no usage in 24months.

Not all of these items are criticalspares which we want to have no usagefor long periods of time.

However, we find that a lot of the 30percent are just dead items and shouldbe disposed.

Helpful hints for disposing ofyour obsolete inventoryThere is a natural reluctance to admitthat an inventory item is actually obso-lete and therefore is in need of dispos-al. Maintenance personnel are packrats by nature and see value in thingsdespite the nil probability that the itemwill get used.

Disposition of obsolete inventoryusually results in a perceived loss of se-curity for maintenance, and inevitablywriteoffs on the financial statements.Nevertheless, it is better to face themusic and cut your losses but at a delib-erate pace.

Dont try to flush out all your obso-lete inventory in one aggressive clean-up campaign. The accountants may notwant to take a big one-time hit unlessthey can shelter the impact with offset-ting windfall profits.

The best strategy for disposition isthe continuous review of obsolete in-ventory, scheduling writeoffs in smallincrements and on a regular basis. Dis-position of obsolete material is often aresponsibility of the purchasing depart-ment. It may be possible to salvagesome value from disposition by sale toscrap dealers, resellers, or re-manufac-turers. e

The MRO Handbook 35

MA

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Managing repairablesManaging the repairables queueto minimize investment and maximize availability

Planning and scheduling for spares

Spare parts are required only to re-place machines that break down orthose that require regular compo-nent replacement. Some parts are con-sumed because it is either impossible oruneconomical to repair them. On theother hand, some parts are both physi-cally and economically repairable.

Replacement decision modelsThe decision to repair, upgrade or re-place equipment or repairable sparescan be taken: at the design stage for a new system; at a point in the equipment life cyclewhere a breakdown has occurred, or; at a time when obsolescence becomesevident.

This decision requires knowledge ofthe total life cycle costs of the item forthe remaining portion of its life cycle.Total equipment or item life cycle in-cludes all of the time from its acquisi-tion to its eventual disposal. All costs forinitial purchase, installation, repair, re-placements, upgrading, movement toand from repair facilities, removal fromser vice, dismantling and disposal

should be considered.Repairable items have an additional

consideration. Is the item physically re-pairable? Again, this decision can betaken using economic considerationsbut it isnt always necessary for thatrigour. For complex items the answer isusually yes and for many componentitems (i.e. those with only one smallpart) the answer is clearly no.

In some instances however, the deci-sion is not so clear cut. Large singlepiece engineered components likeshafts, impellers, rotors and machinecasings are very expensive. Repair mayprove to be more economical than ei-ther a discard or replacement. If it isknown that the original equipmentmanufacturer no longer makes theitem and there is no known substitute itis often necessary to repair the item.You may also wish to elevate the deci-sion to the level of replacement of thenext higher assembly versus repair ofthe unserviceable item.

If you decide to repair a spare youshould also make a decision regardingthe most economical repair crew to uti-lize. The cost of repair using in-houseresources should be compared with the

cost of shipping the item to and from acontractor for repair. Again, this deci-sion may be trivial if the in-house re-sources simply do not have thecapability to perform the repair.

The best time to make replacementdecisions for repairable items is duringthe design phase of the equipmentslife cycle. Much of the informationneeded to make the decision is readilyavailable from the equipment supplierand cost information is available fromrecent purchase orders and supplierspare parts list recommendations. Yearslater, the information becomes moredifficult to acquire.

Repair costs can be requested fromthe supplier and from repair facilitiesrecommended by the supplier for com-parison with your own in-house esti-mates. Failure rate (or sparesreplacement rate) data will be necessaryto predict the frequency of repair for atotal life cycle cost calculation. Again,this will be easier to obtain at the time ofequipment purchase although it maynot be as accurate as your own failurerecords will be years later. In the ab-sence of manufacturer failure data, it ispossible to use generic data from indus-

The MRO Handbook 37

Spare parts inventories must be available to be useful. Being available means on hand for immediate

use and in functioning condition. In general, spares inventory quantities must be sufficient to meet the

demands that will arise during equipment maintenance and servicing. For repairable spares the quantity

stocked must be sufficient to fulfill normal demand rates during the time that used spares are out being

reconditioned or repaired. This chapter introduces the concepts of spares modeling to ensure adequate

spares are available and provides methods for managing the repairable pipeline.

chapter s ix

trial failure rate and reliability databasesor your own experienced judgment.

The total life cycle cost of an itemconsists of the sum of its acquisition, op-eration, support and disposal costs.Each of those can have several compo-nent costs. CLCC = CAcquisition + CInvestment + CO&S +CDisposal

Acquisition costs are often fixed.They include the design, evaluation,engineering and project management

costs. Initial investments costs may dif-fer when comparing repairable versusnon-repairable designs. In particular,the costs of initial sparing may vary sig-nificantly, depending on whether ornot the spares are repairable. If sparesare repairable, the costs of those repairsmust be considered as part of the oper-ation and support costs. If the sparesare not repairable their replacementsmust be added to the costs.

Support equipment for the trou-

bleshooting, repair and testing of theitem being considered. Support equip-ment can include anything from specialpurpose tooling to computerized diag-nostic equipment and its customizedprogramming. Also, the cost of techni-cal documentation required to supportrepair activities should be considered.It is often more expensive to acquire de-tailed documentation than to acceptthe manufacturers standard operationand maintenance manuals.

Operation and support costs in-clude: the costs of consumable itemsused in the repair and operation of theitem, replacement spares costs, invento-r y carr ying costs, repair personnelcosts, repair facilities costs, direct main-tenance costs, packaging, handling andstorage costs, technical support costs,and the costs of potential future modifi-cations or upgrades.

The costs of disposal may also be in-fluenced if competing design optionsrequire special handling or disposal ar-rangements or waste management pro-visions. It is within the operation andsupport cost category that special atten-tion is required. The costs, which mustbe taken into account, include: repair in-situ; removal, discard and replacementwith spares; removal, replacement with spares, re-pair and return of repaired item to in-ventory; which repair agent carries out thework.

Repair in-situ means repairing theequipment without the use of replace-ment spares. This can often make therepair time and associated labour costsincrease and result in less operationaltime for the system in which the equip-ment is installed.

The replacement of failed assemblieswith spares often requires less time outof service but does require the stockingof the spares for those repairs. Stockinglevels must be decided upon in advanceand the stock represents an investmentthat generates the need to expend car-rying costs. Carrying costs include thecost of the space required for the partswarehouse and the cost of capital tiedup in inventory. The amount of stock tocarry can be calculated using various de-cision models. Inputs to those modelsgenerally consist of: parts costs; item costs for the initial purchase ofthe item being supported; number of systems being supported; number of locations being supported(i.e.: the number of different siteswhere the item is being installed);

38 Plant Engineering and Maintenance

number of items being analyzed thatare installed per system; costs of support equipment, its main-tenance, technical documentation, andtraining; Carrying costs which are usually ex-pressed as a percentage of item cost peryear; support time in years (i.e.: how longyou expect the item to be in service); failure rate for the item; repairability of the item (i.e.: a per-centage of the repair events that you an-ticipate the item can be repairedsuccessfully). This can also be ex-pressed as an attrition rate; repair time for the repairable item; repair costs; repair lead times, including shippingand handling and administrative times; packaging, handling and shippingcosts; removal and replacement time; hourly costs for labour; number of personnel required for re-moval and replacement; resupply time to replace the re-pairable item when it cant be repaired(usually a long time); resupply costs; restocking time to replace expendedspares that are not normally repaired(usually a short time); restocking costs; target availability for the item.

Computerized decision models canbe used to calculate the number ofspares needed in stock to achieve aspecified target availability. They alsouse that calculation to compare thecosts of repair and replace options.Those costs are calculated so that an in-formed decision can be made on themost economical approach to use.

The target availability for the item isusually dictated by the availability or re-liability calculations for the system orplant being acquired. High availabilitytargets and failure rates will drive themodels towards high level of sparing.These are the two inputs to which spar-ing models are generally most sensitive.

For repairable items, the quantity ofspares will cover anticipated attritionfor the specified support time or lifecycle. If upgrades to equipment tech-nology are anticipated over the lifecycle of the item, it is best to specifyshort support times to avoid over-spar-ing of soon to be obsolete repairables.

Spares models typically base theircalculations on a probability distribu-tion function.

Most failure distributions can bemodeled using the Weibull distribu-tion, but for simplicity most use the ex-

ponential distribution which is a specialcase of the former.

Modelling of various options, in-cluding repair on failure or time-basedreplacement can be done using thesame models by varying the inputs. Forexample, a time-based replacement hasa failure rate which is calculated usingthe replacement frequency only. For arepairable, the repair success rate, or anattrition rate is used to indicate that theitem is not always repaired successfully.

Failure mechanism has little do withreplacement decision economics, but itdoes impact on the appropriate courseof action to take. Reliability centredmaintenance logic is used to deter-mine the appropriate technical actionto take depending on the actual failuremechanism.

For example: truly random failurescant be predicted or prevented and cantbe eliminated by time-based replace-ment. Nonetheless it is necessary to de-

The MRO Handbook 39

cide on how to handle the random event. If the random failure starts small

and progresses to some point where theequipment is rendered unserviceable itmay be possible to used time-based orcontinuous condition monitoring tech-niques to identify the failure before it

progresses too far. A replacement deci-sion can be made depending on thecondition of the equipment. Many ran-dom failures follow this pattern and canbe handled this way.

The economic decision about repairor replacement is needed to determinethe most cost effective action to take for

the failed components that are re-moved. Other failures, like those involv-ing wearing mechanisms, cyclical stressor thermal reversals, are dependent ontime or usage and lend themselves toreplacement without condition moni-toring on a timed basis. Again, the deci-

sion to repair or replace is based on aneconomic analysis as described above.

Spares modellingThe Poisson distribution is commonlyused to calculate the number of sparesto maintain a system or equipment oversome interval of time. For example, the

turnaround time required to repair afailed component. A formula, devel-oped for use with conventional spread-sheet software, approximates thePoisson equation and has been used inour modeling spreadsheets. The formu-la employs a constant that relates thesupply availability desired to the num-ber of spares required.

The approximation of the Poisson,in its final form, is given by:

Where:Q = quantity of items of like type (number ofitems per equipment multiplied by thenumber of equipment occurrences);

= failure rate of items in failures per1,000,000 hours;t = the time for a repair turn around of adefective item;

= a value derived from a table based onthe chosen P;

= a value derived from a table based onthe chosen P.

Other calculations are performed fordetermining safety stock levels, reorderpoints and economic order quantities.

Assumptions used in the set-up of models:1. If annual demand is zero, a failurerate must be assumed. Often there is no

40 Plant Engineering and Maintenance

The best time to make replacement decisions for repairable

items is during the design phase of the equipments life cycle.

Much of the information needed to make the decision is

readily available from the equipment supplier and cost

information is available from recent purchase orders and

supplier spare parts list recommendations. Years later,

the information becomes more difficult to acquire.

demand rate information. It is necessary to use some reason-able value.

2. If the safety stock works out to be zero in the calculationthen a value of one is often used to ensure that items arestocked in at least the absolute minimum quantity to cover evenunlikely failure incidents. This is often necessary to keep themaintainers happy that they will be supported, even if the num-bers do not result in a required stock quantity.

Handling repairablesRepairable items must be returned to stock as rapidly as possi-ble in order to minimize the number of spares needed. Thequantity required on hand and in working order is directly re-lated to the time it takes to replace those used and the de-mands that can be expected to arise for the spares in that time.

Repairable spares are often expensive and complex. It istheir expensive price and complexity that often makes themboth economical and practical to repair. Extremely compl