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Leveraging MRO Inventory Optimization in the

OilLNS TestIndustry
& Gas Template

Right now the oil and gas industry is

faced with significant uncertainty. Pric-
es have fallen to roughly 50% of previ-
ous highs and have behaved some-
what erratically as global events like
problems in the Ukraine, ongoing con-
flict with ISIS in Syria and Iraq, and
Ensuring the right repair parts
high Saudi production rates continue
to have alternating positive and nega- and suppliers are available
tive effects on prices. In the face of when needed without carrying
this some producers in extraction segments like oil sands and some fracking costly excess is one of the fast-
operations have seen margins severely decline or disappear, challenging con- est paths to improved APM per-
tinued operations. formance.

Even refiners that have benefited from lower crude prices are still facing profit
pressures as demand softens due to newer fuel-efficient vehicles becoming
more prevalent, and as conservation awareness becomes more ingrained in de-
veloped countries. Oil and gas producers are both looking at how to improve op-
erational margins, maintain production volumes, and comply with both safety and
environmental mandates. In an industry where the norm is 7X24 operation, asset
availability has become a key path to achieving these goals, so oil & gas firms
have adopted aggressive Asset Performance Management (APM) programs to
address these challenges.
An often-overlooked element of an APM program is MRO: Maintenance, Repair
and Operations (or Overhaul, as it is referred to in some industries) inventory opti-
mization. Ensuring the right repair parts and supplies are available when needed
without carrying costly excess inventory is one of the fastest paths to improved
APM performance. Oil and gas enterprises should not overlook this straightfor-
ward but powerful APM tool in their quest to improve profitability.

LNS Research Model for Operational Excellence

In every industry the pursuit of Operational Excellence has become the dominant
issue of the day. Regardless of the industry’s profitability, the drive is to manage
operations in order to achieve optimal business performance processes in all as-
pects of running the company. In APM “improved operational performance” was
the number one strategic objective driving APM investment, as shown in Figure 1
on the following page.

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Research Spotlight

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Figure 1: What is the number 1 strategic objective for improving asset performance in your
organization?

For asset intensive industries

like oil & gas, there are five core
activities or business areas that
an enterprise must focus on:
Quality, Manufacturing, Opera-
tions, Energy, Asset Perfor-
mance, and Environment,
Health & Safety.

This response was from a wide range of businesses across the globe, of all siz-
es, and in all industries as illustrated in the demographics figures below.
Figure 2: What is your job title?

More than half (57.3%) of respondents were from North America, followed by
Europe (22.1%) and Asia/Pacific (11.6%). Companies came from a wide range
of industries including Industrial Equipment (13.1%), Automotive (11.4%), Elec-
tronics (9.0%), Oil & Gas (8.3%), Pharmaceuticals (7.7%), A&D (7.6%) and oth-
ers. Nearly half of companies had less than $250 million in revenue (46.0%),
39.8% from $1 billion or more, and 14.3% from medium sized companies.

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Research Spotlight

Leveraging MRO Inventory Optimization in the Oil & Gas Industry

Defining Operational Excellence

This leads to the question then of, “What is Operational Excellence?” LNS
Research considers Operational Excellence to be akin to business process
excellence as it relates to those activities that are fundamental to the creation
of an enterprise’s goods and services. This implies that an enterprise must
achieve operational excellence in multiple dimensions. For asset intensive
industries like oil & gas or most manufacturing companies there are five core
activities or business process areas that an enterprise must focus on:
 Quality
 Manufacturing (or industry specific terms such as Mining Operations
Management or Refinery Operations Management)
 Operations
 Energy
 Asset Performance
 Environment, Health & Safety (EHS)
Figure 3

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Research Spotlight

Leveraging MRO Inventory Optimization in the Oil & Gas Industry

Some enterprises may have additional Operational Excellence pillars such as

New Product Design and Introduction. In those cases the additional pillar(s)
should be in balance with the rest. All pillars or business process areas need
to be managed equally; if issues are not addressed in a particular area,
Operational Excellence pursuits may well crumble as illustrated in Figure 4.

Figure 4

LNS Research considers APM

to encompass all activities
associated with ensuring the
physical assets used to pro-
duce and deliver the goods
and services that are the pri-
mary function of the business.

APM and MRO Inventory Optimization

There are multiple definitions of Asset Performance Management in use to-
day. Some are fairly narrow and limit APM to the activities associated with
Predictive Maintenance (PdM) based on asset condition, though may include
the principles of Reliability Centered Maintenance (RCM) as well. Others are
broader.
LNS Research considers APM to encompass all activities associated with
ensuring the physical assets (including software that is used by those assets)
used to produce and deliver the goods and services that are the primary
function of the business. Practically, this means that everything from the
instrumentation and data in the manufacturing process measuring equipment

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Leveraging MRO Inventory Optimization in the Oil & Gas Industry

health up to the Enterprise Asset Management (EAM) or Computerized

Maintenance Management System (CMMS) that schedules the maintenance
activities and holds the asset register are within the realm of APM as well.

Industrial Internet of Things and Smart Connected Assets

The Industrial Internet of Things (IIoT) is changing the way in which the data
associated with APM is collected and shared. LNS Research believes that the
next generation of APM will include Smart Connected Assets, which have in-
herent IIoT technology that will lead to improved APM performance. Smart
Connected Assets have a combination of capabilities as shown in Figure 5.
Figure 5

For these Smart Connected Assets to deliver maximum value they, like to-
day’s assets, will need to be properly maintained. This means that ensuring
the parts and materials needed to operate and maintain this equipment are
always available when needed. These materials and parts are referred to as
MRO inventory when used to maintain, repair, and operate (one definition of
the “O”) or overhaul (an alternative definition of the “O”) the plants assets.
The challenge many enterprises face, particularly in industries with challeng-
ing economics, such as oil & gas today, is pressure to minimize inventory to
free up both capital and operating expense dollars while ensuring that there

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Leveraging MRO Inventory Optimization in the Oil & Gas Industry

are always MRO parts and supplies available to minimize downtime. The fail-
ure to have a needed repair part when a piece of critical equipment fails can,
at the least, create an economic hit on profitability, and at the worst, cause a
prolonged shutdown that could even potentially damage production equip-
ment and require capital expenditure to restore, or cause a safety issue that
threatens lives.
Also, original equipment suppliers (OEMs) often specify spare parts lists
based on “best guess” failure rates and stand to profit when users overbuy
spares “just in case,” so bloated inventory levels are not uncommon. The car- MRO inventory prevents high
rying costs of excess inventory are just one aspect of why inventory bloat can startup costs in mothballed fa-
be a drag on maintenance department operational costs. Excess floor space, cilities by ensuring that organi-
excessive time to locate parts, and the potential wastage from parts that age zations have the necessary
and become unusable all can occur when inventory is excessive. So while parts and supplies in a timely
excess inventory may not have the dire consequences that a lack of parts fashion while avoiding excess
does, it certainly can have a significant negative impact. inventory levels and carrying
parts that may never be used.
This is exacerbated in enterprises that go through regular shutdown or turn
around cycles. It can be a serious issue in the oil & gas industry, where facili-
ty shutdowns are occurring as operating margins decrease due to low prices.
Shutting down or mothballing a facility with a large MRO inventory can result
in excess inventory that much be disposed of, driving up the cost to shut
down the plant. In the case of a mothballed facility having excess inventory
can result in numerous parts aging beyond their expected service life during
the shutdown, resulting in extremely high startup costs if the plant is brought
online later.
MRO inventory optimization solves this problem with a number of activities
that work together to ensure that organizations have the necessary parts and
supplies in a timely fashion while avoiding excess inventory levels and carry-
ing parts that may never be used. This task is not as simple as it might seem
at first glance. It involves more than just figuring out part consumption rates
based on past history. To properly optimize inventory multiple activities must
occur. One of the initial steps is to cleanse inventory data. It should be en-
sured that the MRO inventory does not have identical parts cataloged under
multiple part numbers and names.
Next, the usage of past parts needs to be understood in the context of pro-
duction activity. Knowing how the equipment was used and which parts spe-
cifically can help predict future usage based on planned equipment perfor-

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Research Spotlight

Leveraging MRO Inventory Optimization in the Oil & Gas Industry

mance, not just historical. Organizations also need to examine the frequency
of inspection and periodic maintenance activities as well as planned overhaul
cycles. Classic inventory management issues such as delivery times and min-
imum order quantities must also be factored in.
Finally, risk assessments must be performed to understand the true cost of
downtime for each critical piece of machinery in the context of sourcing parts
that are not stocked. Only by performing all of these activities can MRO in-
ventory really begin to be optimized.
Regardless of whether a pro-
Currently MRO inventory optimization tends to be the domain of specialist
duction segment is facing eco-
solution providers. As EAM and Cloud solution providers expand their analyt-
nomic pressures, regulatory
ics capabilities they will begin to offer some capabilities in this area, but for
compliance issues, or just seek-
the near-term the most effective solutions come from specialists.
ing to pursue Operational Excel-
lence, MRO inventory, optimiza-
Impact of Poor MRO Inventory Management in Upstream tion is a wise investment today.
Operations
The exploration and production operations in the oil and gas industry, com-
monly referred to as Upstream Operations, have their unique set of operation-
al challenges.
With oil prices down to a level that is less than 50% of past highs, some ex-
traction operations, particularly bitumen sands, and some fracking operations
are at or are approaching economic loss points. As such they are under in-
tense pressure to reduce operating expenses. At the same time the risks of
an environmental disaster (such as the BP Deepwater Horizon accident in
2010) are ever-present.
The temptation to run with minimal spares to reduce costs presents a risk that
good MRO inventory optimization solutions can mitigate. By properly seg-
menting assets, identifying failure rates and criticality, and assigning costs to
downtime and quantifying risks, oil & gas producers can achieve their eco-
nomic goals.
For operations in risk of shutdown as margins decrease it is an imperative to
perform inventory optimization now in case further declines in prices occur.
Avoiding disposal of excess MRO inventory by consuming it now can reduce
the cost of shutdown significantly. It is important to act before it is too late.

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Leveraging MRO Inventory Optimization in the Oil & Gas Industry

Impact of Poor MRO Inventory Management in

Downstream Operations
Refining and other production operations, commonly referred to as Down-
stream Operations, face the same issues as the midstream sector from a
safety and environmental perspective, but currently in most operations have
the least economic pressure.
Given the higher margins due to the slightly more favorable economic situa-
tion now is the time to invest in MRO inventory optimization. For those opera- MRO inventory optimization
tions that are running at or near capacity downtime poses a significant risk requires analytics capabilities,
and with good MRO inventory optimization the risk of outages due to a lack of strong modeling and simulation
parts availability can be minimized. Refineries and chemical plants are also functionality, and a deep under-
the types of facilities most likely to require periodic overhaul activities and en- standing of operational risk as-
suring proper parts and supplies are on-hand to minimize outage time is criti- sessment and management.
cal.

Summary
MRO inventory optimization is an often overlooked but essential element in
any APM effort. From an APM perspective Operational Excellence cannot be
achieved unless MRO inventory optimization is part of a day-to-day APM pro-
gram.
The key to Operational Excellence lies in guaranteeing that the right parts
and supplies are available to achieve maximum uptime, while ensuring ex-
cess inventory does not create excessive costs.
MRO inventory optimization requires analytics capabilities, strong modeling
and simulation functionality, and a deep understanding of operational risk as-
sessment and management.
This is currently the domain of specialist suppliers, although the emergence
of Cloud and Big Data Analytics is opening up this area up to a growing num-
ber of solution providers.
Regardless of whether a production segment is facing economic pressures,
regulatory compliance issues, or just seeking to pursue Operational Excel-
lence, MRO inventory optimization is a wise investment today.

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Research Spotlight

Leveraging MRO Inventory Optimization in the Oil & Gas Industry

How to Implement MRO Inventory Optimization Elements

to an APM Program
 Make the decision and commitment to implement an MRO inventory op-
timization program
 Clean up the MRO catalog
 Identify the critical equipment associated MRO items
 Collect performance and failure rate data on critical equipment
 Implement an MRO inventory optimization packaged solution
 Dispose of excess inventory whether through attrition or outright dispos-
al
 Track inventory reductions, downtime, and economic returns

Distribution of this report made possible by:

LNS Research provides advisory and benchmarking services to
help Line-of-Business, IT, and Industrial Automation executives
make critical business and operational decisions. LNS research
focuses on providing insights into the key business processes,
metrics, and technologies adopted in industrial operations.
Author: Dan Miklovic, Principal Analyst,
dan.miklovic@lnsresearch.com

www.oniqua.com

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