P

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

PURCHASING
PARTS
AND SECURITY
MRO
LAYOUT
INFORMATION
SYSTEMS
Maintenance, Repair and Operations

INVENTORY
CONTROLS
Handbook
REPAIRABLES
MANAGING
The maintenance spare parts and

PROJECTS
CAPITAL
supplies management handbook
IMPROVE
SERVICE
PERSONNEL
MANAGING
OUTSOURCING
STORES

by John D. Campbell
BENCHMARKING
PERFORMANCE

Partner in Charge, International Centre of Excellence for Maintenance Management,

Coopers and Lybrand
MRO
FORGING
LINKS
PURCHASING
PARTS
AND SECURITY
Maintenance, Repair and Operations

LAYOUT
Handbook

INFORMATION
SYSTEMS
The maintenance spare parts and supplies management handbook

INVENTORY
CONTROLS
by John D. Campbell
Partner in Charge, International Centre of Excellence for Maintenance Management, Coopers and Lybrand

REPAIRABLES
MANAGING
CONTENTS

Author’s note Chapter three

4 MRO: An important
management issue 19 Layout and security
Stores layout, security and materials handling

PROJECTS
CAPITAL
■ Benefits of an optimized layout and physical flow
■ Factorsthat influence layout optimization
Introduction ■ Techniques and tools for better layout and physical flows

7 Executive
summary
■ Technical trends in storage and material handling
■ Some examples

IMPROVE
SERVICE
Chapter one Chapter four

9 Forging links
Linking the maintenance and 25 Information systems
Information systems for stores inventory management
materials management process ■ Basic considerations for inventory management system
■ The foundation for MRO inventory ■ Integration with other systems
PERSONNEL
MANAGING

■ What is the impact of materials management on maintenance? ■ A prerequisite for systems succes—identification of inventory
■ Ownership of the MRO management process and resources items
■ How to link maintenance and materials management ■ The challenge of inventory record accuracy

■ Designing the materials management process ■ Sustaining accurate inventory data

■ How to use cycle counting
OUTSOURCING

contents continues...
STORES

Chapter two

13 Purchasing parts for the MRO stores

Parts purchasing

■ Overview of materials procurement process in maintenance

■ Categorizing materials
BENCHMARKING

■ Supply strategy
PERFORMANCE

MRO Handbook 1
 FORGING
LINKS
CONTENTS

Chapter five Chapter eight

29 Inventory statistical control:

Inventory controls
47 Improve service
Strategic inventory cost reduction and

PURCHASING
optimizing the investment for parts service level improvement

PARTS
■ Which techniques and tools can be used for effective ■ How to reduce inventory cost while maintaining service levels
replenishment of materials? ■ How to improve service levels
■ ABC analysis
■ How to decide order levels and timing
■ How to decide order quantity

AND SECURITY
Chapter nine
■ Do we have to apply the same techniques and tools for all the
53 Managing personnel

LAYOUT
materials? How can we identify material types and what is the
best way for each material type? Organizing and managing stores personnel
■ What is the best organization structure for better materials
■ How to decide whether the materials are obsolescent
management?
■ Key considerations in human resources management

INFORMATION
Chapter six

SYSTEMS
37 Managing repairables
Managing the repairables queue to minimize investment
Chapter ten

and maximize availability 61 Outsourcing stores

Outsourcing stores: MRO distributors vs. integrators
■ Effective planning and scheduling methods for better cost
■ What can we outsource?
efficiency and inventory availability
■ How can we outsource effectively?
■ Methods for handling repairables from usage to re-usage

INVENTORY
CONTROLS
Chapter eleven
Chapter seven

45 Capital projects
Handling direct charge and capital project items
69 Benchmarking performance
Measuring and benchmarking inventory and
■ What material types should be treated in different stores performance

REPAIRABLES
MANAGING
ways—capital, direct charge, inventory? ■ What should be measured as key performance indicators?
■ Definition of capital spares and direct charge ■ How to measure them?
■ Which materials are best classed as direct charge? ■ Best practices in key performance indicators

■ How to handle direct charge materials

■ What is a capital project Item?
■ How to handle capital project items
76 Conclusion

PROJECTS
CAPITAL
P
PLANT ENGINEERING AND MAINTENANCE

IMPROVE
A CLIFFORD/ELLIOT PUBLICATION

SERVICE
Volume 22, Issue 2 March 1998

CONTRIBUTING EDITORS PRODUCTION MANAGER

Wilfred List Christine Zulawski
Ken Bannister EDITORIAL PRODUCTION
Chuck Griffin COORDINATOR
PERSONNEL
MANAGING

ART DIRECTION Nicole Diemert

Ian Phillips assistant ART DIRECTOR
EDITOR ASSOCIATE EDITOR NATIONAL SALES MANAGER Pat Walker
Todd Phillips Matt Green Joanna Malivoire CIRCULATION MANAGER
tp@industrialsourcebook.com PRODUCTION/OPERATIONS district sales manager Janice Armbrust
PRESIDENT/PUBLISHER EDITOR Julie Clifford READER INQUIRY COORDINATOR
George F.W. Clifford David Berger, P.Eng. (Alta.) Maggie Mills
OUTSOURCING

district sales manager

EDITORIAL DIRECTOR Alistair Orr general manager
STORES

Jackie Roth Kent Milford

C
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.
BENCHMARKING
PERFORMANCE

c a
MRO Handbook 3
 a u t h o r ’s n o t e

MRO:
An important
management issue
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, it’s hard to get too excited
about a management issue as mundane as the MRO stores.

B
ut the general mismanagement of partments have the most to lose if the nity to explore many aspects of stores
parts and supplies is costing us stores are mismanaged, historically it management and inventory control.
dearly in terms of direct cash, and has been an offshoot of purchasing. Se- A number of my colleagues have
in lost productivity and capacity. nior financial managers are also con- provided input to this handbook, based
When you look at your maintenance cerned that if maintenance runs the on their experience helping many
management costs, you will likely find stores, the value on-hand would sky- clients in a wide variety of industries. In
that about 40 percent of costs are rocket; particular I would like to thank Y J Kim
labour—the trades, apprentices, ■ Secondly, if your inventory account is who did much of the research, and
helpers and janitors—another 20 per- like most, it is a separate item on the contributors Jim Picknell, Len Middle-
cent management, shop and technical balance sheet, not on the income state- ton, Bard Critoph, Monique Petit and
overhead, and a full 40 percent parts ment. Most maintenance and produc- Ben Stevens at the Centre. Thanks also
and supplies. And most of these are is- tion people are measured on to Doug Cudlip of our materials man-
sued through the MRO stores. profitability—costs and revenue, not on agement practice for his final technical
Further, if you think back over the the value of the company’s assets; editing of this handbook, and to PEM
past year, you’ll probably remember ■ Finally, many organizations don’t con- editor Todd Phillips and his staff at Clif-
ford/Elliot for their editing and graph-
ics. We hope it will provide you with
When you look at your maintenance management costs, you some reminders of the basic principles,
as well as some fresh ideas on how to
will likely find that about 40 percent of costs are labour—the make your inventory investment work
harder. e
trades, apprentices, helpers and janitors—another 20 percent
management, shop and technical overhead, and a full 40
percent parts and supplies.

that of the downtime your operation
suffered, much was due to not having
the right part at the right time in the
right place.
When the issue of MRO stores con-
sumes this much of the budget, and
represents a major factor in production
downtime, it should always command
our attention. Why doesn’t it? There
are three common reasons:
■ First of all, the stores often reports or-
ganizationally up through the purchas-
ing and finance departments. Although
the maintenance and production de-
sider the MRO stores as a professional
discipline, requiring a customer service
attitude, functional knowledge and
parts training. When a position opens
in the stores, we often put someone
who may not have the right attitude,
parts knowledge or specialized training
in inventory and stores management,
but rather an employee who is near re-
tirement, disabled or has the seniority
in another part of the organization to
win the job posting bid. John D. Campbell, Partner in Charge
In this special report—the MRO International Centre of Excellence in
Handbook—you will have an opportu- Maintenance Management, Coopers & Lybrand

4 Plant Engineering and Maintenance

 introduction

Executive
summary
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.

W
e have indicated current trends
which illustrate the next hori-
zons to be achieved but for the
most part we have tried to keep our com-
ments practical and pertinent to the pre-
sent state of development of most MRO
solutions we have seen.
We have looked at 11 key areas for
effective maintenance parts and sup-
plies management:
The maintenance / materials link
Maintenance and materials manage-
ment are business processes that are
joined at the hip. There is a critical in-
terdependence between the functions
that seems to have become a source of
conflict rather than teamwork. If you
have a comprehensive maintenance
Maintenance and materials management are business
processes that are joined at the hip. There is a critical
interdependence between the functions.
planning process, purchasing will have
the opportunity to do effective sourcing
and competitive buying; if the stores
has a systematic process for receiving,
stocking and issuing, maintenance
workloading and execution will be
more productive.
A great start is recognizing that if ei-
ther the maintenance or stores tries to
optimize their own function, this may
compromise what is in the best interests
of the organization as a whole.
Purchasing for stores
The purchasing department typically
buys for production, for engineering
and for maintenance, including capital,
direct charge (charged directly to a de-
partment or account code) and stores
inventory account items. These last two
normally represent the bulk of pur-
chase order line items, and most are for
maintenance. Stores purchasing should
be a simple process, with few approvals
and triggered by the on-hand quantity
in inventory. The role and focus of pur-
chasing is shifting toward sourcing
strategy while empowering stores
personnel and the computer system to
execute the transactions.
Layout and materials handling
When setting up the stores, you wish to
avoid congestion, convoluted material
flows, low storage density and multiple
material handling. An optimized layout
will consider the customers’ require-
ments, mobile equipment movement,
security, zoning and overall material
flow. We present a specific approach to
help you arrive at an optimized layout,
and describe some of the technical
trends in storage and materials
handling.
Information systems
Inventory management systems are ei-
ther part of the general accounting,
maintenance or enterprise-wide infor-
mation management system. The critical
issue is integration. The maintenance
planner must have a view first, as to what
is on the bill of materials for the equip-
ment, and secondly, the on-hand quanti-
ty in the stores. An important system
requirement is inventory analysis and
performance reporting, to ensure that
the inventory investment is productive.
Statistical control and scientific
inventory management
Companies will typically have 10,000 to
100,000 stock keeping units (SKUs) or
line items in their stores. Basic statisti-
cal analysis is essential to make sure you
are giving the right attention to the
right SKUs, that you are car r ying
enough inventory to last during the re-
order process despite uncertain de-
mand. Computer systems provide tools
to ensure that obsolescence is caught

The MRO Handbook 7

early to avoid a constant inventor y
growth and expensive write downs of
stock items.
Repairables
Parts that are repairable and can be
reused must be managed differently
than consumables. They are in a virtual
queue from the time they are purchased
new, through to issuing and installation,
failure or on-condition removal, over-
haul, re-stocking and reissue. For com-
8 Plant Engineering and Maintenance
panies that have many critical or expen-
sive repairables, replacement decision
and spares modelling becomes an eco-
nomic necessity to optimize the total
number in the queue.
Capital and direct charge items
Capital items for major projects are
often handled completely separately
from the MRO stores, at the project lo-
cation. Minor capital items ordered on
engineering 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 retur ns must be handled
outside the normal stores inventor y
process. The degree of item tracking
varies by end use and value of the item.
Cost reduction
Inventory and stores cost reduction is
easy—doing it and maintaining or im-
proving service levels and managing risk
is another matter. Whereas receiving,
stocking, issuing and delivery cost re-
duction can be managed by the stores
function, inventory cost reduction must
be led by the customers, primarily main-
tenance. Inventory carrying costs are
typically 20-30 percent of the on-hand
value; therefore there is an added incen-
tive to reducing this on-hand quantity.
Organizational issues
As suggested earlier, each function in
an organization has a slightly different
“spin” on the stores and inventory man-
agement. Maintenance may wish to
maximize on-hand SKUs and quanti-
ties, stores may want total security and
large spaces, Finance may want mini-
mum value of stock, Engineering may
want perfect fit for purpose designs,
and operations may not have a view, as
long as they get maximum equipment
uptime. You need the process opti-
mized and automated before organiza-
tion arrangements can be designed.
Outsourcing
Outsourcing part or all of the MRO is a
rapidly growing phenomenon, and for
good reason. Many have found that it
not only reduces overall costs, but also
improves 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 benchmarking
We act like we’re measured! MRO
stores exist to serve the customer, so the
first set of measures should relate to ser-
vice level. MRO consumes company re-
sources, so cost measures for this
service are next. Finally, measurements
internal to the stores and inventor y
management process are required to
help us continuously improve. Bench-
marking helps to set realistic targets of
performance, and more importantly,
introduces you to the methods for
achieving superior results. e
 FORGING
LINKS
chapter one

Forging Links
Linking the maintenance and
materials management process
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.

The foundation
for MRO inventory

T
he beginning of MRO investment Product
occurs when the process equip- and process
ment is selected. The raw materials
engineering
specifications, and the maintenance re- Vendor Quality Product & market
strategy and related spare parts management management development
plan establish the fundamental materi-
als needs of the business. Supply strate-
gy—to stock or not—then fixes the Order
Procurement Manufacturing Customer
macro level of investment in inventory.
fulfillment order
The inventory control scheme and the
effectiveness of teamwork between
maintenance, production, engineering MRO
and materials functions determines
how well the inventory investment is
managed for the business. The critical
interdependencies between core func- Maintenance
tions (Figure 1) are explored in the rest
of this handbook.

The steps in the materials and Maintenance

maintenance processes
The simplest maintenance process is re-
sponding to emergency breakdowns;
none of the more complex is preventive
maintenance development. For break-
downs, there is first a discovery step to
identify that something important has
failed. This fact is communicated to
maintenance, the site inspected, parts
and materials are obtained and the re-
pair completed as quickly as possible.
For normal planned maintenance,
planning and scheduling steps are
added, and usually some reporting and
job analysis. For PM development,
there are further steps to ensure that all
engineering
Figure 1: Linked business processes
the preventive actions taken address
some likely failure mechanism, and that
the manufacturer’s recommendations
and equipment history are taken into
account. Further, we will want easy ac-
cess to the materials and parts the main-
tenance trades always use for this
regularly scheduled activity.
Materials management involves pur-
chasing, transportation, materials han-
dling, stores management and
inventory control. Once the specifica-
tions for an inventory item are deter-
mined by engineering or maintenance,
the item is sourced, the price, delivery
and terms are negotiated, the order
placed with the successful vendor, it is
shipped, received, stocked, controlled
and issued. When we see that most or-
ganizations will have between 10,000
and 100,000 separate line items or stock
keep units (SKUs), we note the im-
portance of having an up-to-date plant
layout or equipment configuration, as

The MRO Handbook 9


Figure 2: MRO Management process
well as a bill of materials (BOM) for
each asset or piece of equipment we are
maintaining.
The linkage is critical. Figure 2 illus-
trates the information flows as a typical
work request is processed. A mainte-
nance planner has a work order initiat-
20 Plant Engineering and Maintenance
ed by an operator, to repair a pump. He
pulls up the asset on his maintenance
management system, sees the pump
type for that location, and checks out
the parts that make up the pump. He
then accesses the MRO system for those
parts, sees the on-hand quantity in
Write #14 on the Reader Express Card
stores, and if they are available, is able
to include this work order in the “avail-
able for scheduling” backlog.
If there is no on-hand stock due to a
lack of inventory control, or if a special
part not normally stocked in the stores
is required, the item may become an ur-
gent purchase requisition. We can see
how condition-based monitoring would
give a long term warning of impending
failure, stretching the time that the pur-
chasing department has to source and
procure it.
When the stores is well managed,
maintenance can run more smoothly;
when maintenance is proactive, the
stores can run its function more effec-
tively e.g. establishing qualified supply
sources in advance. Real teamwork
means performance gains and cost op-
timization.
Ownership of the MRO
management process
and resources
The basic materials issue in any compa-
ny is the “needs/comfort” scale—main-
tenance needs a “duplicate plant down
the road” while corporate would prefer
to have “nothing on the shelf.”
Each function strives to define and
solidify their own goals. To that end,
 Figure 3: Ownership of MRO management process
Owner Pros
Quick to accommodate
Maintenance
changes to stock as they are
closer to the source of
problems and the results
of decisions.
Purchasing and stores Concentrate more closely
on analyzing and
implementing cost-effective
replenishment and
maximizing the vendor
relationship.
Enterprise department Stores decisions are based
(general manager or
on what’s best for the
finance, etc.)
company—not for the
department.
Write #15 on the Reader Express Card
Cons
Tend to overstock if the
planning function is weak
(they will stock all items on
a bill of material instead of
only the critical items to
ensure that parts are
available to start a job
instead of pre-planning the
job and buying only what
is required just-in-time.)
Not always quick to re-
spond to new maintenance
demand because of the
need for discussion, collabo-
ration and subsequent
negotiation for new setups
or change in materials. Con-
servative stocking of items
and tight control levels (i.e.
minimum safety stocks) and
buy cheap vs meet specs.
Stores now have three
interests to mediate and
balance, which can
complicate decision-making
and responsiveness.
the owner of “stores” will have an im-
pact on the day-to-day business (and the
replenishment) of MRO. There are
generally three scenarios—each with
their own unique problems, as is
demonstrated in Figure 3.
Designing the materials
management process
A good start at designing (or redesign-
ing) the materials management process
is to write down the business purpose of
the process, its customer requirements
and key success measures.
The next design step is to map each
activity, who does it and how long it usu-
ally takes. Then look at each activity and
identify which ones add value (e.g. part
identification, issue recording), and
which are non-value adding, (e.g. copy-
ing, filing, multi-levels of approvals, 100
percent receipt inspection).
With a little help from benchmark-
ing of best practice, and information
technology, a new streamlined process
can be designed to meet the needs of
the customers, materials management
and the finance department. In our
conclusion section we outline some of
the state of the art purchasing/
payables process ideas now being im-
plemented.
The MRO Handbook 21
chapter two
Parts purchasing
Purchasing parts
for the MRO stores
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.
Purchasing process
T
he typical purchasing process (Fig-
ure 4) is composed of several steps,
from obtaining the specification of
needs through supply base research
(sourcing), to selecting appropriate
vendors, transforming the requirement
to a purchase order, and finally receiv-
ing the materials and delivering them
to the requester.
While this may seem like a simple
linear process all in the hands of pur-
chasing, there are a number of critical
points where the original requester
must play his role: defining the specifi-
cations, prequalifying products or ven-
Figure 4: Typical purchasing process
dors, vendor selection, receiving in-
spection, and product/vendor perfor-
mance evaluation and invoice approval.
If the teamwork breaks down at any
one of these points, the end user suf-
fers the results of inferior supplies,
poor vendors and a drawn out frustrat-
ing purchasing experience. A good
process that is well understood by all
disciplines makes for good business
performance.
Purchasing should be managed to
maximize service to its customers while
reducing the total long-term acquisi-
tion cost—the total cost of ownership
(TCO). This means incorporating sup-
PURCHASING
PARTS
ply chain thinking with the mainte-
nance management understanding of
probable materials consumption rates.
The consideration of factors that drive
TCO, shapes the sourcing strategy and
inventory stocking plans. Alternate ser-
vice delivery (outsourcing, co-sourcing)
possibilities and repair strategy should
be done periodically to ensure that the
arrangements are still applicable for
major 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 the
process itself, start by reducing the time
involved—and that means taking out all
the unnecessary or non-value adding
activities from identifying the needs,
getting approvals, evaluating bids and
products, to receiving.
Process mapping is an effective diag-
nostic procedure to help reshape the
purchasing sequence. In the typical
process map, you can see that there are
many steps. Shaded boxes represent
steps that really don’t add much value,
even if we must do some of them.
There are really only three useful
steps: identifying needs, informing the
vendor and paying for the goods. How
can we minimize those other steps and
simplify the process? We need to think
about different demand characteristics
of materials.
Tactics for various classes
of MRO items
MRO materials may be classified into
several categories according to criticali-
ty, dollar value and volume; then, ap-
propriate purchasing, stocking and
replenishment processes can be set up
for each category.
For example, if you purchase a stan-
dard material with low annual dollar
The MRO Handbook 13
usage, you don’t need the identifying needs, preparing pur-
chase request and selecting vendor activities each time an
order is placed. You don’t have to do much. The computer-
ized inventory management system will generate replenish-
ment orders automatically by predetermined order timing
and 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 materials
A few simple questions will help quickly categorize materials
for purchasing. You can put them on one of eight cells on the
box shown in Figure 5:
■ How critical is it for the operation? If not available, will
there be an immediate adverse effect on production, safety
or the environment? What are the risks? How secure is the
supply chain?
■ How much is its annual dollar usage? Does this represent a
significant 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 it
part of the PM program, or an OEM (original equipment
manufacturers’) 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 an
OEM part that is linked to the warranty, or basically a com-
modity item?
Answer these questions for every material or material
group, and you can put them on one of eight cells of the box
shown. It has three axes representing criticality for opera-
tion, annual dollar usage and repetitiveness (predictable pat-
tern) of usage. The number of vendors is considered
separately as a supply side issue.

Supply strategy
Ever y cell of the
box has a different
supply strategy,
which is described
below.
High criticality
and usage with
high repetitiveness
(predictability of
demand)
The materials
in this categor y
should be treat-
ed ver y carefully.
They are your “A”
Figure 5: MRO material category
items because they
have the biggest
strategic importance in terms of impact on production and
cost, the supply strategy should be focused on security and
continuity, 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 demand
enhances the likelihood of success, but vendor relationships
will tend toward alliances or partnerships with only one or
two 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

If you purchase a standard material with low
annual dollar usage, you don’t need the
identifying needs, preparing purchase requests
and selecting vendor activities each time an
order is placed. You don’t have to do much.
rying cost. The vendor relationships must be well managed to
avoid creeping material costs and the vulnerability of a nar-
row supply base.

High criticality and low usage with high

repetitiveness (predictability of demand)
The materials in this category hold a relatively small portion
of the total cost, but critical to the business—the “B” items.
The supply strategy should be focused on simplifying man-
agement efforts and reducing indirect cost while retaining a
high certainty of supply. Because volumes are low and pre-
dictable low inventory levels can be set.The important issue is
supply lead time and avoidance of an interruption in replen-
ishment.

Low criticality and high usage

with high repetitiveness
Even though the materials in this category have low criticali-
ty, they still hold a large portion of the total cost, so
minimizing investment in inventory is the key. Most “C” items
fall into this category.
Some stock outs are acceptable in the short term so the
control scheme can be simple. The supply strategy should be
focused on reducing the direct material cost. To achieve this,
annual based supply contracts may be applicable. In the case
of bulk material, visual control techniques such as a two-bin
system are often used and even vendor managed inventory
arrangements are possible.

Low criticality and usage with high repetitiveness

Even though the materials in this category are used in rela-
tively low volumes (“C” and “D” items), they are less critical
and their usage value is relatively small, so special efforts are
not normally necessary for them. Generally, these materials
have a lot of variation in specifications because nobody is
concerned about them. The only recommendation for this
category 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 materials
with unpredictable demand are often unique to the opera-
tion and are needed as a result of a breakdown. The supply
strategy 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-based
monitoring 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 the
risk of supply difficulties (availability or price exploitation).
Proactive establishment of the appropriate supply strategy
and corresponding vendor arrangements are fundamental to
keeping the materials flow on track with operations and
maintenance requirements. e

The MRO Handbook 17

 chapter three
Layout
and security
Stores layout, security and
materials handling technology
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.
F
or these reasons you should follow a
systematic approach to layout opti-
mization and the application of
new warehousing technologies.
Benefits of an optimized layout
and physical flow
The importance of an efficient layout
cannot be overstated. The benefits are
avoidance or minimization of typical
operational problems such as:
■ Insufficient inbound and outbound
staging space, resulting in congested
aisles, multiple handlings, and unsafe
personnel and property conditions;
■ Convoluted material flows between
functional areas within the stores oper-
ation, results in bottlenecks, time-con-
suming travel distances, deterioration
of location controls and potential dam-
age to materials;
Figure 6: Factors that influence
layout optimization
AND SECURITY
LAYOUT
■ Degradation of slotting
disciplines resulting in low
storage density and loss in
picking materials and
parts efficiencies, lost ma-
terials, and lower invento-
ry record accuracy;
■ Inappropriate use of con-
veyors results in excessive
travel due to blocked ac-
cess to designated storage
locations;
■ Excessive storage depth
in bulk floor storage areas
results in multiple han-
dling of materials and
parts.
An efficient stores lay-
out is considered the foun-
dation for all subsequent
improvements to the oper- Figure 7: Standard approach for layout optimization
ation involving automa-
tion and/or information systems. successfully in many applications. The
approach follows two major series of ac-
Techniques and tools for better tivities relating to requirements and to
layout and physical flow space analysis.
You can undertake the actual process of
optimizing a layout with the simplest of Materials and parts information
tools and within a relatively short period It is important that a thorough under-
of time. Even the inexperienced “design- standing of the materials and parts in-
er” can achieve significant benefits from for mation is obtained through a
the exercise. First, we set out the general detailed analysis of the database. As a
approach then describe some of the minimum, the following information
tools and techniques used to develop a should be summarized:
good design solution. ■ Range of SKUs volumes by warehouse
activity i.e. number of SKUs received
Approach per day (minimum, average, maxi-
The following describes a standard ap- mum); number of SKUs issued per day
proach (Figure 7)to layout redesign (min., avg., max.) over a time period (6
and optimization that has been used months);
The MRO Handbook 19
■ Volume range of SKUs on hand i.e.
weekly inventory level by class of SKU
over a 6-month period;
■ Range of SKUs inventory on hand as
above but expressed in cube and weight
values;
■ 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 by
SKU class and by numbers of suppliers
received per day or week.

Slotting criteria and equipment

requirements
The term “slotting criteria” refers to the
rules by which materials and parts will
be located by warehouse zone and stor-
age equipment type. The criteria
should be defined and agreed to at the
outset of the project so that classifica-
tion of materials according to storage
and handling characteristics can be
done properly.
Characteristics such as temperature
control, security, traceability, weight
and cube, hazard rating, (WHMIS) re-
quirements, shelf life control, activity
rate (usage), substitutions, segregation,
etc. are important and unfortunately
time consuming to analyze. Modern
computer databases make this job easi-
Figure 8: Distribution of lines per day
er once the basic data has been en-
tered. Sorry—there are no real short
cuts at this stage except to work by some
attribute grouping scheme.
The development of slotting criteria
is very much a function of the charac-
teristics of the item’s specific storage re-
quirements and the material handling
equipment needed. The proper selec-
tion of equipment ultimately requires
an understanding of the relationship
between capital cost, operational effi-
ciencies and flexibility.
These parameters vary by material
class. Note that in many stores opera-
tions, significant operational efficien-
cies can be attained by optimizing the
slotting plan within the existing storage
equipment, and thereby delaying or
avoiding unnecessar y capital invest-
ments. You just have to decide to do the
analysis.
Material flow
The material flow rates between func-
tional areas determine the space alloca-
tion and proximity relations that
provide a workable if not optimal lay-
out. Those functional areas typically in-
clude:

20 Plant Engineering and Maintenance

■ receiving staging; Space requirements well as part storage.
■ receiving processing; One of the solutions to small parts Typically, the largest amount of
■ returns processing; storage requirements is the automat- space within the store is required for
■ inspection; ed carousel which is a special layout storage. Therefore the acceptable aisle
■ quarantine; situation (Figure 9) combining opera- widths and overall storage heights will
■ bulk/reserve storage; tor workstations and control panels as have the most significant impact on the
■ forward pick;
■ order wicket;
■ shipping processing and staging.
The preparation of a simple material
flow diagram that illustrates and quanti-
fies the material flows between function-
al areas will assist in the development of
alternative block layouts within the
warehouse structure or base plan.

Base plan
A scale drawing of the facility is essen-
tial to provide an appreciation of the
constraints within which the revised lay-
out must comply. The base plan should
be updated to include the following in-
formation:
■ the location of all building columns;
■ all existing walls, doorways, docks and
offices and access controls;
■ overhead obstructions such as light-
ing and piping, sprinkler systems, heat-
ing and ventilation, security zones and
surveillance cameras viewing angles;
■ the current location of storage and
material handling equipment. Figure 9: Carousel workstation layout

The MRO Handbook 21

total required space.
Second in importance is space for
forward picking i.e. kitting of materials
for delivery to a work site or issue to
maintenance crews.
It is recommended that the opera-
tional requirements for all employee
workstations within each functional
area are summarized as a basic equip-
ment set so that the numbers and size
of work spaces are allocated within the
final layout. More specifically, the fol-
lowing criteria for each workstation
should 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 and
recyclable materials.
Analytical tools
The tools you require for a layout anal-
ysis need not be sophisticated; however,
as a minimum requirement prior to
tackling a layout redesign, the designer:
■ must be comfortable producing and
interpreting simple scale drawings;
■ should have experience with the ma-
nipulation of inventory databases;
■ must have an understanding of the
stores activities at a detailed level.
The ultimate success of the layout
optimization process will typically be
limited only by the following:
■ physical constraints of the existing fa-
cility;
■ budget constraints;
■ creativity of the “designer.”
Techniques—block layouts
The purpose of developing block lay-
outs is to experiment with as many lay-
out options as is feasible without
expending the effort required produc-
ing detailed scale drawings (Figure 10).
The block layouts are compared and
evaluated with consideration given to
the overall material flow and the prox-
imity requirements between functional
areas.
Final layout and
description of operations
After the block layouts have been evalu-
ated, the final layout can be detailed to
show the space allocation by material
category and will include all worksta-
tions and workstation equipment. At
this time, all column and overhead ob-
structions should be checked and veri-
22 Plant Engineering and Maintenance
Figure10: Block layout – alternative A
fied. Warehouse personnel should be
involved 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 or
systems are involved.
Trends in storage
and material handling
Technical trends in storage and materi-
al handling can be classified in the
major categories of storage density, au-
tomation and information technology.
As previously mentioned, it is always
recommended that the physical aspects
of the operation be optimized prior to
automating the information side of the
business.
Storage density
Ongoing advances in material handling
technology have resulted in ever in-
creasing storage densities within stores
operations. This is of particular signifi-
cance for expanding operations with
limited available space; however, in
many cases due to the physical con-
straints of the facility, i.e., roof height
and column spacing, increasing the
storage density may not always be a fea-
sible option.
Methods for achieving increased
storage density include the following:
■ narrow aisle equipment: The ratio of
storage space to aisle space can be in-
creased through the use of narrow aisle
equipment such as swing-reach fork-
trucks for full pallet handling and oper-
ator-up order picking equipment for
narrow-aisle high-bay shelving;
■ push back rack, double deep rack and
pallet flow rack: Use of this type of pal-
let storage greatly increases the overall
storage density; however, it’s 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 solution
for high volume items;
■ increasing storage height: Full pallet
storage of 100 feet or more has been
achieved in a number of AS/RS (auto-
mated storage and retrieval systems) with
a very high resulting storage density.
Usually, high volume distribution
centres can justify AS/RS systems but
normal MRO warehouses have to use
less costly solutions.Your existing facil-
ity may have unused head room that
can be exploited with high lift fork-
trucks;
■ carousels: High storage densities
can be achieved but retrieval times
can be unacceptable if slotting is not
done by item velocity. Often, multiple
slots are used so that there is more
than one pick face of a fast moving
item in each rotation. Random rota-
tion systems are more costly than a
unidirectional system but give faster
access. More on carousels under the
next topic.
Automation
The capital costs associated with auto-
mated equipment combined with the
inherent reduction in operational flexi-
bility has generally resulted in the rele-
gation of highly automated material
handling systems to large and complex
operations like distribution centres.
These systems must be fully cost justi-
fied by means of operational, through-
put and/or service improvements prior
to consideration over more convention-
al methods. Several of the more com-
mon trends in material handling
automation include:
■ carousels: Carousels are capable of
achieving very high pick rates, i.e., in
the order of two to three times that of
manual picking from shelving. This
equipment is commonly found in
applications with a large number of
SKUs of small parts such as automotive
spares, electronic supplies and hospital
supplies;
■ conveyor sortation: Conveyor sorta-
tion systems allow for orders to be
picked simultaneously throughout
many zones in the warehouse without
the problems associated in consolida-
tion of the orders at the shipping dock.
Information technology
Over the past decade there has been
great 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, location
management 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 code
technology: RF and bar code technolo-
gy provides for efficient, accurate and
real time tracking of the movement of
materials and parts throughout a stores
operation. Typical applications of this
technology include:
■ receiving of goods against ASNs (ad-
vance shipping notices) by scanning of
standardized bar coded shipping labels;
■ productivity tracking in real time by
individual and/or function by monitor-
ing the RF transactions as they are gen-
erated;
■ tracking of order completion status in
real time;
■ positive verification of shipping con-
tents;
■ effective warehouse management sys-
tems.
Warehouse management systems
tend to be quite problematic during
their implementation due to the com-
plexities of typical stores and ware-
house operations and the resulting
requirement for customized functional-
ity. However, experience has shown that
if these systems are implemented in a
phased approach, the probability of re-
alizing all of the anticipated benefits is
greatly increased. e
The MRO Handbook 23
 chapter four

Information
systems
Information systems for stores
inventory management

INFORMATION
SYSTEMS
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
accessible—visible for the respective users.

I
n the MRO environment, fast re- ■ Demand pattern (average demand? management system can provide
sponse to material requirements is standard deviation of demand?) for de- tremendous benefit to a company who
necessary for effective maintenance. termining the replenishment method uses a card system or has no system at
Studies show that much of the standard to be used and safety stock quantity; all. The critical point to make here is
maintenance day is consumed by inef- ■ Usage value over a certain period that a stand-alone system usually does
fective materials control. Reduced (normally annual) for the classifica- not provide an attractive return on in-
maintenance effectiveness directly im- tion; vestment. This is because the invest-
pacts production output. And finally, ■ Major performance data in quality, ment in a stand-alone system in terms
MRO inventory typically represents a cost, delivery and service. of converting your data and training
significant investment for most compa- Modern systems solutions have recog- your staff leaves lots of interface issues
nies. The underlying problem is: man- nized the important dependencies be- (often operated manually) between op-
aging the information flows that govern tween MRO materials management, erating functions. The real benefit or
the availability of physical materials. maintenance planning, production opera- ROI comes from integrating the infor-
tions, engineering, and finance functions. mation flows within the company so
Basic considerations for Hence the dominance of the integrated that the multiple interests in MRO in-
inventory management system system (Figure 11) which we discuss next. ventory and its performance can work
The inventory management system is with the same data sets and analytical
required to provide a wide range of in- Integration with other systems tools to make optimal decisions in the
formation for effective management as A stand-alone computerized inventory right time windows.
listed below.
■ Which items are we using? When and
how many?
■ How many do we have on hand? What
are the substitute items?
■ Where are they located?
■ Who supplies them? Who are the al-
ternative vendors?
■ How long does it take to replenish
them?
■ What is their cost?
■ Which equipment rely on them?
■ When were the quantities last veri-
fied?
This is just the basic information
that the inventory management system
should have. Using this, the system
should be able to provide some value-
added information for right decision
making. Some of useful information is
summarized in the following points: Figure11: Major links with other information systems

The MRO Handbook 25

A prerequisite for systems
success—identification of
inventory items
Accurate identification of an MRO item
is an essential precondition for manag-
ing the investment and reducing costs.
Both the physical identification (on the
parts or on the storage location) and
the computer system identification are
essential. The two critical identifiers are
the part number and the material de-
scription. A unique part number is obvi-
ous but cross reference numbers to
vendors catalogue numbers often add
complexity to a system. Think carefully
about 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 contract
“generic” parts (based on corporate
standards) from wholesalers rather
than marked-up parts from equipment
manufacturers;
■ Allow you to reduce the occurrence of
duplication—reduces investment;
■ Allow fast and automatic replenish-
ment (usually through contract) thus
reducing order costs;
■ Ensure that the right part is available
for future use—contributes to mainte-
26 Plant Engineering and Maintenance
nance effectiveness;
To reduce the instance of duplica-
tion you need to remember the follow-
ing design principles in establishing the
identification system:
■ Unique and consistent item codes
should be used throughout a company
(i.e. all locations). This allows fast
recognition of the item and cross-refer-
encing among sites;
■ Only one source should have respon-
sibility and authority to create or
change 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 contain
attributes of the item that facilitate
grouping for spend analysis, storage
planning, vendor consolidation, etc.
The constant challenge of
inventory record accuracy
Although a materials management
computer system is designed to provide
various kinds of data very quickly—re-
member the saying, “garbage in means
garbage out.” The consequences of bad
information are: time lost in locating
parts; issuing the wrong parts; reorder-
ing the wrong items; accumulation of
obsolete stock (and reduced storage
space for the material you really need).
The two primary causes of bad infor-
mation in a computer system are: poor
control of item master data (setting up
new items or modifying existing infor-
mation, i.e. file maintenance) and
transaction reporting errors (late re-
porting or incomplete or wrong part
numbers). Those are the most impor-
tant factors for effective use of an inven-
tory management system.
Sustaining accurate
inventory data
In most systems, physical inventory will
not balance with the system records
over time. This is usually due to inher-
ent flaws in the transaction reporting
processes. Not all inaccuracies are disas-
trous but error levels above two percent
are a warning sign that system integrity
is deteriorating.
Planning and inventory replenish-
ment systems entirely rely on recorded
data, so it is very important to keep ac-
curate record balances all the time. The
strategy is to implement a good root
cause problem solving and corrective
action process. Inaccuracy is almost al-
ways caused by the lack of adequate
training of enterprise personnel. All
symptoms—breech of security, inaccu-
rate transaction processing, poor loca-
tion procedure and clean-up can al-
most completely eliminated by staff
selection, solid leadership and exten-
sive sincere training.
The best run warehouses are those
where personnel clearly understand the
implications of everything that they do
(or don’t —as the case may be) and
have consistent disciplined leadership.
To overcome the risks of inaccuracy, the
physical count process (described later)
is used. Think of physical counting as
the quality assurance process for your
inventory 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 periodic
physical count, backed up by cycle
counting. The periodic physical count is
typically performed annually, and is
concentrated 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 maintain
the accuracy as 100 percent, but 99 per-
cent accuracy can be maintained by use
of a hybrid strategy of opportunistic
and planned cycle counting. Planned
cycle counting, is done more frequently
than annual or semi-annual physical
count, hence, errors are discovered and
can 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 of
strong functional leadership and sound
root cause problem solving contribute
to long-term success. Often weaknesses
in understanding reporting procedures
and lack of discipline to those proce-
dures cause record accuracy problems.
How to use cycle counting
To determine when and which items you
count, here are some useful options:
■ By ABC classification—This is the
most common way. The rule is that “A”
items should be counted more fre-
quently than “B” items and “B” items
more frequently than “C” items;
■ When reorder point is indicated— If
the system shows that inventory level
reaches at reorder point, you could
count those items;
■ When the inventory record indicates
“zero” or negative balance—it should
be verified anyway;
■ Whenever transactions occur—this
should be considered with the volume
of work. If the transactions occur fre-
quently, this is not practical.
Ideally, count an item when the cost
is the lowest and accuracy is highest.
When is that? Just before a receipt is put
away or when the inventory balance is
zero—the last issue. It takes no time to
count a zero stock level; there is no
error in the count; and the records
need to be updated right away so that a
reordering decision can be made. You
will still have to investigate discrepan-
cies but at least you can quickly repair
the 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 planning—pegging to work
orders;
■ cross reference tables. e
The MRO Handbook 27
 chapter five
Inventory controls
Inventory statistical control:
just the facts
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.
Basic classification: ABC analysis
A
BC analysis is a very useful and
simple method for classifying
and analyzing inventor y. Most
companies have used it for a long time
on finished goods and production ma-
terials, but many of them haven’t used
it to its full potential for MRO invento-
ry. The ABC method is based on Pare-
to’s rule, which is also referred to as the
80-20 rule which identifies the impor-
tant few from the trivial many.
The Pareto’s rule correlates the ex-
perience that approximately 80 percent
Maintenance personnel are pack rats by nature
and see value in things despite the nil probability
that the item will get used.
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 most cases, those approxi-
mately 20 percent of items are identi-
fied as “A” and the other 80 percent are
as “B” and “C.”
The significance of the classification
is that “A” items deserve closer and per-
haps more costly inventor y control
whereas simpler and cheaper control
schemes can be applied to “B” and “C”
items.
Use of ABC classification
ABC classification focuses on the de-
gree of control concept. It is common
sense that managers should be more
concerned with a few high cost items
rather than many low cost ones. You
may use ABC classification in the fol-
lowing areas:
■ engineering: Engineering parts ratio-
nalization efforts should be focused on
items with high usage value rather than
on items with lower value;
■ procurement: Purchasing activities
should concentrate on items with high-
er usage value for sourcing and negoti-
ating. More sophisticated supply
arrangements are applied to “A” items
while “B” and “C” items can even be
consider for outsourcing;
■ inventory replenishment: Sometimes
the classification scheme may influence
the inventory replenishment control
method. It might be more economical
to control some “C” items with a simple
two-bin system. Scientific management
techniques are applied to “A” items;
■ Inventor y cycle counting: When
checking inventor y record accuracy
using cycle-counting method, “A” items
should be verified more frequently
than “B” or “C” items;
■ Security: Although absolute unit price
might be a better guideline than usage
value, ABC analysis may also be used as
an indicator of which items should be
more tightly secured in locked stock-
rooms.
ABC calculation
If the data is available and can be pro-
cessed by a computer, you can do the
ABC classification easily. All the data
INVENTORY
CONTROLS
you need is: unit price and annual
usage. Ideally, the usage figures should
represent the future usage (forecast)
for each item. However, the past usage
data is usually what is readily available
so most people work with historical
data. Once the data is prepared, you
can 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 from
highest to lowest (sort the spreadsheet
if you are using a PC with standard of-
fice software);
■ calculate cumulative percentage of
total annual usage value;
■ assign ABC categories by predeter-
mined guidelines (For example, “A” for
items holding 80 percent from the top,
“B” for the next 15 percent and “C” for
others);
■ refine the categories by experienced
judgment, 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 inventory
management are: when to replenish
and how much to buy. The combina-
tions of control schemes are:
■ fixed time inter val; fixed reorder
quantity (not too common except for
items with ver y predictable and low
variance of demand);
■ variable time interval; fixed reorder
quantity;
■ variable time inter val; variable re-
The MRO Handbook 29
order quantity;
■ fixed time interval; variable reorder
quantity.
There are several methods used for
determining the timing of replenish-
ment orders of inventor y items.
Among those methods, the reorder
point system (variable time-fixed quan-
tity) and the Min-Max (variable time
variable quantity) system are the most
popular ones. Both systems are based
The Pareto’s 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.
on a common principle. If inventory
level reaches a certain point (the re-
order point) the replenishment orders
are triggered.
The only difference between the
two systems is the order quantity. The
reorder point system uses predeter-
mined quantity in every order. On the
other hand, in the Min-Max system, the
order quantity may be varied whenever
30 Plant Engineering and Maintenance
orders are issued because the rule is:
order enough to restore inventory to
the Max level.
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. The
quantity of heat put in to the house
depends on how much the tempera-
ture dropped below the Min and how
much heat is consumed during the
lead time to restore room tempera-
ture. You wouldn’t want the thermo-
stat to work as a reorder point system
which would put a fixed quantity of
heat into the house; a fixed quantity
may not restore the temperature to
the set point and you would soon need
to put the furnace on again. The time
inter vals between orders of furnace
operation var y more in the reorder
point control scheme than in the Min
Max scheme.
More informal methods, using visu-
al reviews, are also based on those
principles.
The reorder point system
in practice
The reorder point system works best if
demand is reasonably predictable, i.e.
follows a relatively steady pattern. Do
not use reorder point for items with in-
frequent or lumpy demand.
Let’s think about an example of the
basic reorder point model during three
different demand situations.The basic
setting is: the inventor y level has
reached the reorder point and a replen-
ishment order has been issued. We are
now awaiting the ar rival of the
order—hopefully before we run out of
stock.
In the first situation, demand is ex-
actly the same as expected when the re-
order point was calculated (more on
this later). Consumption continues
during the time (lead time) it takes to
place the order and receive the ship-
ment from the vendor. The result: no
stock out; good inventory control; no-
body gets nervous.
 In the second situation, demand ex-
ceeds the average use during the lead-
time, resulting in a stock out. The
result: poor inventory control; next re-
order inter val is shorter than previ-
ous—you get nervous. Why? Reorder
point too low? Not enough safety stock?
Actual vendor lead time varies from
what the system used? Failure to expe-
dite effectively? Poor demand forecast-
ing? All of these reasons need to be
checked so the system can be tuned for
better performance.
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.
In the third situation, demand is less
than forecast, so that some inventory
still remains when the replenishment
order is received. The result: some
extra stock for a while; and the interval
to the next reorder is longer than be-
fore—only the vendor gets nervous.
How do we deal with var ying de-
mand patterns and limitations in the
ability to forecast with enough accura-
cy? We include provisions for safety
stock in the reorder point calculation.
The amount of safety stock is deter-
mined by the degree of desired service
level (probability of a stock out) and an
acceptable inventory investment. We
discuss the topic of safety stock and sta-
tistical inventory control in more detail
under the section: “Dealing with unpre-
dictable demand.”
Min-Max system
In the Min-Max system, the order quan-
tity is varied by order. The timing of
order is triggered by inventory reach-
ing the “Min” level (same as ROP), and
the order quantity is determined as the
gap between the on-hand quantity at
the point of order (this might be less
than “Min” level) and “Max” level.
Which control scheme do you
choose? The biggest disadvantage of
the Min-Max scheme is the manual pa-
rameter maintenance that should be
done but most often isn’t. So, for most
items, 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 maintained
by the system and only need periodic
review by the materials management
team.
Economic order quantity
The reorder point (ROP) and the Min-
Max system were described as methods
to trigger replenishment orders—the
“when to order” part of inventory re-
plenishment. Next we address the ques-
tion about the order quantity: “How
much to order?”
Let’s think about two extreme poli-
cies: an acquisition of a whole year’s
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 is
not reasonable because of larger space
required for the inventory and the big
investment of buying so much at once.
For low cost small items semi-annual or
annual ordering makes sense. We’ll ex-
plain how to make a simple calculation
(the economic order quantity) so you
can decide what the right order quanti-
ty is.
On the other hand, an order per
week probably seems like too frequent.
It causes lots of transaction paperwork
and excessive receiving and handling
work. For high cost predictable usage
items, continuous replenishment each
week may be the best solution.
The economic order quantity
(EOQ) model
What should the order quantity be?
How do you determine this for each
item. It’s starting to look like a lot of
work even if the calculation is simple.
Ever y order quantity decision, even
when done intuitively, is based on the
comparison of two competing cost
drivers—the cost to carry the inventory
versus the cost to place orders.
The cost of carrying inventory in-
cludes the cost of storage facilities, store
personnel for inventory handling, in-
surance and tax, allowance for obsoles-
cence due to engineering changes,
allowance for loss due to pilferage or
spoilage, and the time value of money
(the lost opportunity for alternative in-
vestments).
The cost for placing orders includes
the cost of the whole transaction pro-
The MRO Handbook 31
 cess, from purchasing to material receiving.
The ordering cost is inversely related to the carr ying
cost(Figure 12). If you order only as required or in small
quantities, the inventory will be smaller and the carrying cost
will be minimized. On the other hand, larger lot sizes will
need fewer orders, and may come with a discount. The opti-
mum order quantity should be the one that minimizes the
total cost. This is called the economic order quantity (EOQ),
and it is calculated by the formula:

EOQ =
Where:
A: annual usage
S: cost per order
C: unit price
i: percentage annual carrying cost

Figure 12: Order quantity vs. cost

Managing the risks of unpredictable demand

In the previous section, safety stock was mentioned briefly
as a necessary element in the determination of the reorder
point quantity and “Min” level. The time to reorder is set by
the inventory level where we have just enough on hand to
cover consumption during the lead time to receive the
next order.
If the reorder point is too low, there is not enough stock to
meet the demand during lead time; we placed our replenish-
ment order too late. Consequences that might result from
stock out of MRO parts are clear and serious. When a ma-
chine is stopped, and a necessary part to repair the machine
is not available, it causes longer repair time, longer down-
time, loss of production, poor crew efficiencies and finally
loss of sales. We don’t want this to happen if we can avoid it at
a reasonable cost.
To avoid the negatives of a stock out, you should carry
safety stock to protect against excess demand during lead
time or for variations in lead time from the vendor. More
safety stock will result in fewer incidents of stock outs but
the carrying cost of inventory will increase. Again we meet
a cost trade off—the cost of a stock out versus the cost of
more inventory.
However, the formula to calculate safety stock quantity is
not so easily derived as EOQ. First, the stock out cost is diffi-
cult to quantify to everyone’s satisfaction because there are
many subjective elements that have to be estimated, such as
the 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

 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 applied
to analyzing the safety stock problem and today’s good com-
puter systems do all the hard mathematics for us.

Determination of safety stock

To calculate the theoretical safety stock amount for an item
most systems use basic statistic theory. To keep the analysis
reasonably simple, we assume that variations in demand from
one week to the next are distributed symmetrically around an
average (Figure 13). So if we work with average demand we
know that some weeks the actual will be higher and some
weeks it will be lower.

Figure 13: Safety factor

If the actual demand is less than the average we have as-
sumed in our reorder point calculation, no stock out will
occur. A stock out occurs only when demand exceeds the av-
erage during the lead-time.
Thus we need to estimate the probability that a demand
variation will be greater than our average. Fortunately, statis-
ticians have done all the calculations and all we have to do is
look 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 service
level is the name given to the percentage of time we want to
have protection against excessive demand variations.
Typically, a 96 percent service level would mean we are
prepared to live with stock outs four percent of the time, or
roughly one week of the year.
One of the periodic activities of materials management is
to review the service levels of all items and make adjustments
to the service level targets. Usually this review is done by ABC
classification. Remember, we aren’t expecting 100 percent
service levels except on our most critical spares. So, expect
some stock outs, no matter how frustrating they may be.

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

34 Plant Engineering and Maintenance

the analyses to make the job easier and
more routine so the build up of dead
inventor y is minimized and action is
taken in time to recover much of the
residual value.
Reasons for obsolescence
and how to detect them
Inventor y can become obsolete
through engineering changes to prod-
ucts or process equipment, through
technical obsolescence, spoilage, de-
fects, lack of demand, and so on.
The primary method for detecting
obsolescence is to examine the last time
that an item has been used, or with-
drawn from inventory. If there has been
no activity for the past 12 to 24 months,
the item is a candidate for obsolescence
assessment.
There are often legitimate reasons
for non-usage, and the need for the in-
ventory might still be valid. We find that
many companies carr y a 30 percent
level of items with no usage in 24
months.
Not all of these items are critical
spares which we want to have no usage
for long periods of time.
However, we find that a lot of the 30
percent are just dead items and should
be disposed.
Helpful hints for disposing of
your obsolete inventory
There is a natural reluctance to admit
that an inventory item is actually obso-
lete and therefore is in need of dispos-
al. Maintenance personnel are pack
rats by nature and see value in things
despite the nil probability that the item
will get used.
Disposition of obsolete inventor y
usually results in a perceived loss of se-
curity for maintenance, and inevitably
writeoffs on the financial statements.
Nevertheless, it is better to face the
music and cut your losses but at a delib-
erate pace.
Don’t try to flush out all your obso-
lete inventory in one aggressive clean-
up campaign. The accountants may not
want to take a big one-time hit unless
they can shelter the impact with offset-
ting windfall profits.
The best strategy for disposition is
the continuous review of obsolete in-
ventory, scheduling writeoffs in small
increments and on a regular basis. Dis-
position of obsolete material is often a
responsibility of the purchasing depart-
ment. It may be possible to salvage
some value from disposition by sale to
scrap dealers, resellers, or re-manufac-
turers. e
The MRO Handbook 35
 chapter six

Managing
repairables
Managing the repairables queue
to minimize investment and
maximize availability
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

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

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

Planning and scheduling should be considered. cost of shipping the item to and from a
for spares Repairable items have an additional contractor for repair. Again, this deci-

S
pare parts are required only to re-
place machines that break down or
those that require regular compo-
nent replacement. Some parts are con-
sumed because it is either impossible or
uneconomical to repair them. On the
other hand, some parts are both physi-
cally and economically repairable.
Replacement decision models
The decision to repair, upgrade or re-
place equipment or repairable spares
can be taken:
■ at the design stage for a new system;
■ at a point in the equipment life cycle
where a breakdown has occurred, or;
■ at a time when obsolescence becomes
evident.
This decision requires knowledge of
the total life cycle costs of the item for
the 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 for
initial purchase, installation, repair, re-
placements, upgrading, movement to
and from repair facilities, removal from
ser vice, dismantling and disposal
consideration. Is the item physically re-
pairable? Again, this decision can be
taken using economic considerations
but it isn’t always necessar y for that
rigour. For complex items the answer is
usually “yes” and for many component
items (i.e. those with only one small
part) the answer is clearly “no.”
In some instances however, the deci-
sion is not so clear cut. Large single
piece engineered components like
shafts, impellers, rotors and machine
casings are very expensive. Repair may
prove to be more economical than ei-
ther a discard or replacement. If it is
known that the original equipment
manufacturer no longer makes the
item and there is no known substitute it
is often necessary to repair the item.
You may also wish to elevate the deci-
sion to the level of replacement of the
next higher assembly versus repair of
the unserviceable item.
If you decide to repair a spare you
should also make a decision regarding
the most economical repair crew to uti-
lize. The cost of repair using “in-house”
resources should be compared with the
sion may be trivial if the “in-house” re-
sources simply do not have the
capability to perform the repair.
The best time to make replacement
decisions for repairable items is during
the design phase of the equipment’s
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.
Repair costs can be requested from
the supplier and from repair facilities
recommended by the supplier for com-
parison with your own “in-house” esti-
mates. Failure rate (or spares
replacement rate) data will be necessary
to predict the frequency of repair for a
total life cycle cost calculation. Again,
this will be easier to obtain at the time of
equipment purchase although it may
not be as accurate as your own failure
records will be years later. In the ab-
sence of manufacturer failure data, it is
possible to use generic data from indus-

The MRO Handbook 37

trial failure rate and reliability databases
or your own experienced judgment.
The total life cycle cost of an item
consists 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
38 Plant Engineering and Maintenance
costs. Initial investments costs may dif-
fer when comparing repairable versus
non-repairable designs. In particular,
the costs of initial sparing may vary sig-
nificantly, depending on whether or
not the spares are repairable. If spares
are repairable, the costs of those repairs
must be considered as part of the oper-
ation and support costs. If the spares
are not repairable their replacements
must be added to the costs.
Support equipment for the trou-
bleshooting, repair and testing of the
item being considered. Support equip-
ment can include anything from special
purpose tooling to computerized diag-
nostic equipment and its customized
programming. Also, the cost of techni-
cal documentation required to support
repair activities should be considered.
It is often more expensive to acquire de-
tailed documentation than to accept
the manufacturers’ standard operation
and maintenance manuals.
Operation and support costs in-
clude: the costs of consumable items
used in the repair and operation of the
item, replacement spares costs, invento-
r y carr ying costs, repair personnel
costs, repair facilities costs, direct main-
tenance costs, packaging, handling and
storage 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 options
require special handling or disposal ar-
rangements or waste management pro-
visions. It is within the operation and
support cost category that special atten-
tion is required. The costs, which must
be taken into account, include:
■ repair in-situ;
■ removal, discard and replacement
with spares;
■ removal, replacement with spares, re-
pair and return of repaired item to in-
ventory;
■ which repair agent carries out the
work.
Repair in-situ means repairing the
equipment without the use of replace-
ment spares. This can often make the
repair time and associated labour costs
increase and result in less operational
time for the system in which the equip-
ment is installed.
The replacement of failed assemblies
with spares often requires less time out
of service but does require the stocking
of the spares for those repairs. Stocking
levels must be decided upon in advance
and the stock represents an investment
that generates the need to expend car-
rying costs. Carrying costs include the
cost of the space required for the parts
warehouse and the cost of capital tied
up in inventory. The amount of stock to
carry can be calculated using various de-
cision models. Inputs to those models
generally consist of:
■ parts costs;
■ item costs for the initial purchase of
the item being supported;
■ number of systems being supported;
■ number of locations being supported
(i.e.: the number of different sites
where the item is being installed);
■ number of items being analyzed that ponential distribution which is a special Failure mechanism has little do with
are installed per system; case of the former. replacement decision economics, but it
■ costs of support equipment, its main- Modelling of various options, in- does impact on the appropriate course
tenance, technical documentation, and cluding repair on failure or time-based of action to take. Reliability centred
training; replacement can be done using the maintenance logic is used to deter-
■ Carrying costs which are usually ex- same models by varying the inputs. For mine the appropriate technical action
pressed as a percentage of item cost per example, a time-based replacement has to take depending on the actual failure
year; a failure rate which is calculated using mechanism.
■ support time in years (i.e.: how long the replacement frequency only. For a For example: truly random failures
you expect the item to be in service); repairable, the repair success rate, or an can’t be predicted or prevented and can’t
■ failure rate for the item; attrition rate is used to indicate that the be eliminated by time-based replace-
■ repairability of the item (i.e.: a per- item is not always repaired successfully. ment. Nonetheless it is necessary to de-
centage of the repair events that you an-
ticipate the item can be repaired
successfully). This can also be ex-
pressed as an attrition rate;
■ repair time for the repairable item;
■ repair costs;
■ repair lead times, including shipping
and handling and administrative times;
■ packaging, handling and shipping
costs;
■ 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 can’t be repaired
(usually a long time);
■ resupply costs;
■ restocking time to replace expended
spares that are not normally repaired
(usually a short time);
■ restocking costs;
■ target availability for the item.
Computerized decision models can
be used to calculate the number of
spares needed in stock to achieve a
specified target availability. They also
use that calculation to compare the
costs of repair and replace options.
Those costs are calculated so that an in-
formed decision can be made on the
most economical approach to use.
The target availability for the item is
usually dictated by the availability or re-
liability calculations for the system or
plant being acquired. High availability
targets and failure rates will drive the
models towards high level of sparing.
These are the two inputs to which spar-
ing models are generally most sensitive.
For repairable items, the quantity of
spares will cover anticipated attrition
for the specified support time or life
cycle. If upgrades to equipment tech-
nology are anticipated over the life
cycle of the item, it is best to specify
short support times to avoid over-spar-
ing of soon to be obsolete repairables.
Spares models typically base their
calculations on a probability distribu-
tion function.
Most failure distributions can be
modeled using the Weibull distribu-
tion, but for simplicity most use the ex-

The MRO Handbook 39

cide on how to handle the random event. the failed components that are re- turnaround time required to repair a
If the random failure starts small moved. Other failures, like those involv- failed component. A formula, devel-
and progresses to some point where the ing wearing mechanisms, cyclical stress oped for use with conventional spread-
equipment is rendered unserviceable it or thermal reversals, are dependent on sheet software, approximates the
may be possible to used time-based or time or usage and lend themselves to Poisson equation and has been used in
continuous condition monitoring tech- replacement without condition moni- our modeling spreadsheets. The formu-
niques to identify the failure before it toring on a timed basis. Again, the deci- la employs a constant that relates the
supply availability desired to the num-
ber of spares required.
The best time to make replacement decisions for repairable The approximation of the Poisson,
in its final form, is given by:
items is during the design phase of the equipment’s life cycle.
Where:
Much of the information needed to make the decision is Q = quantity of items of like type (number of
items per equipment multiplied by the
readily available from the equipment supplier and cost number of equipment occurrences);
= failure rate of items in failures per
information is available from recent purchase orders and 1,000,000 hours;
t = the time for a repair turn around of a
supplier spare parts list recommendations. Years later, defective item;
= a value derived from a table based on
the information becomes more difficult to acquire. the chosen P;
= a value derived from a table based on
the chosen P.
progresses too far. A replacement deci- sion to repair or replace is based on an Other calculations are performed for
sion can be made depending on the economic analysis as described above. determining safety stock levels, reorder
condition of the equipment. Many ran- points and economic order quantities.
dom failures follow this pattern and can Spares modelling
be handled this way. The Poisson distribution is commonly Assumptions used in
The economic decision about repair used to calculate the number of spares the set-up of models:
or replacement is needed to determine to maintain a system or equipment over 1. If annual demand is zero, a failure
the most cost effective action to take for some interval of time. For example, the rate must be assumed. Often there is no

40 Plant Engineering and Maintenance

 demand rate information. It is necessary to use some reason-
able value.
2. If the safety stock works out to be zero in the calculation
then a value of one is often used to ensure that items are
stocked in at least the absolute minimum quantity to cover even
unlikely failure incidents. This is often necessary to keep the
maintainers happy that they will be supported, even if the num-
bers do not result in a required stock quantity.

Handling repairables
Repairable items must be returned to stock as rapidly as possi-
ble in order to minimize the number of spares needed. The
quantity 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 is
their expensive price and complexity that often makes them
both economical and practical to repair. Extremely complex
repairable assemblies can have high failure rates (demand
rates) if they are poorly designed. In those cases the rapid
turnaround of the repairable item from its repair is very im-
portant in keeping the total stock levels down. If the re-
pairable has a very low demand rate the relative importance
of having the repairable returned from its repair is less be-
cause it is far less likely that the parent equipment will fail,
thus creating a demand, during the repair turnaround time.
Some companies opt to repair their own parts. With many
other specialized companies available to provide high quality
repair services this practice should be questioned. What busi-
ness are you in after all? Of course the decision to send this
work out will entail dealing with some difficult issues of what
to do with the staff and equipment that used to do this work.
Of course, there is a significant service level issue to deal
with if considering outsourcing or contracting out these re-
pairs. The turnaround time in repairs must be short enough
to permit you to optimize the level of sparing you will hold in
inventory. The service provider must also be responsive to
emergency demands. That is a service that many companies
who do their own repairs presently take for granted.
Chapter 10 contains a discussion of various outsourcing al-
ternatives. It provides a methodology for determining
whether or not you should be considering outsourcing as op-
posed to self-provision of the repair services.
Whether you opt to repair your own parts or send them
out you must focus on minimizing the turnaround time on
the items with the highest usage or demand rates. Managing
the repair pipeline is a joint responsibility involving mainte-
nance, inventory control, purchasing and sometimes engi-
neering talent.
Maintenance must make sure that the inventory control
folks are aware of the importance of the repairable item.
Maintenance must also provide some indication of the
turnaround time they require for the repairs. Inventory con-
trol should be watching demand rates and rapid
turnarounds. Purchasing will be your contact with the repair
shop. They must ensure that the repair contract serves these
needs at a reasonable price. Engineering may become in-
volved if the repair entails any change to the parts’ configura-
tion (i.e.: form, fit or function).

Tips:
■ Don’t accept delays in promised repair time/deliveries.
Once the repair job is started you don’t want it sidelined while
another job gets done. Your price for the repair was based on
the turnaround times promised. Delays will increase your risk
that a failure will occur while your spare is in the repair shop;

42 Plant Engineering and Maintenance

■ No change to equipment should be
accepted without the agreement of the
maintenance and engineering staff
concerned. Contractors should always
replace parts with identical parts. Sub-
stitutes and alter natives are not
acceptable unless confirmed by engi-
neering and maintenance to be accept-
able;
■ Ensure that there are hold and/or stop
points in the repair process for major re-
pairables. Repair quality for major items
is critical. Don’t rely solely on your re-
pair contractors to provide top quality
for critical and expensive repairs.
There’s nothing like a visit from the cus-
tomer to keep them honest and accurate
in their work. Trying to save money by
avoiding the time and expense of a visit
can be a deadly sin of omission;
■ Don’t accept repair procedures that
you are unfamiliar with unless the con-
tractor or your own shop has proven to
you that the repair will indeed restore
the item to “as new” condition or better;
■ Always review repair procedures for
completeness and technical accuracy
before the repair is started. Don’t ac-
cept vague procedures that provide
plenty of room for the shop to find “ex-
tras.” Those extras will cost you more,
but remember that you may not always
know what is wrong with your re-
pairables when you send them for re-
pair. If that is the case you will need to
provide some leeway;
■ Provide specific targets for delivery
and hold times. Monitor the repair pro-
cess for major items and penalize the
contractors that don’t meet their com-
mitments.
Summary
The concepts described in this chapter
are not basic or simple. Many sparing de-
cisions are made on the sole basis of man-
ufacturer’s recommendations or best
guesses. While this is sometimes ade-
quate, it usually results in a storeroom
containing spares that are under-utilized,
not used at all or in quantities that are
too low to satisfy demand. Manufacturers
make their earnings by selling you what
they manufacture. They seldom operate
the equipment they make and have limit-
ed knowledge of how it actually performs
and fails once in service. Their recom-
mendations should be taken with cau-
tion. Your own experience is a good
teacher but won’t help you much with
new and unfamiliar equipment. More
rigorous approaches are intended to
avoid common pitfalls of over or under
sparing in higher risk situations. e
The MRO Handbook 43
 chapter seven

Capital projects
Handling direct charge and
capital project items
Material type, quantity and the requirements of the groups using the material determine the best
method to handle material, and how and when the material is to be charged. These issues will need
input from the groups responsible for production, materials management, maintenance, purchasing,
accounting/finance, project management and plant engineering. The solution should be an objective
compromise. It should not be a one-sided directive from the most influential group which results in
difficulties for the other groups involved.

Regular stores items (gloves, safety glasses), and small struc- be capitalized and depreciated, or ex-

F
or regular MRO stores inventor y
items that are consumed by multi-
ple users, the material is unloaded
in the receiving area and charged
against the stores inventory account. At
the time required by an authorized
user, the item is issued by stores, and is
charged to the end user’s account or
job work order number.
Direct charge material
tural steel used by maintenance (angle
iron, tubing, rod, flat bar).
Direct charge also eliminates some
of the unit of measure errors that can
result. An example is structural steel
usage which is determined by length,
but is priced based by weight. Charges
for structural steel would require con-
tinuous corrections to the quantities of
material on hand, with little added
pensed depending upon financial ac-
counting objectives.
Small projects
or requisitioned material
Projects generate material management
requirements that can differ consider-
ably from regular inventory material. A
project should have a separate capital
account to accumulate charges for both

PROJECTS
value for the effort. Some direct charge direct purchase items as well as regular

CAPITAL
Direct charge material is ordered and is- materials are often also consigned (e.g. stores issued materials. If project items
sued through the regular stores opera- fasteners, pipe-fittings) and are regular- are received and stored in the stores or
tion, but charged directly against an ly checked by the supplier and automat- receiving area, then it is necessary to en-
account or department at the time re- ically re-stocked. sure the requester/project is informed
of receipt of material, and the material
is tagged or segregated from other ma-
To prevent a large impact to the inventory value, capital terial so that it is available when re-
quired by the requester/project.
spares are not included in value of the inventory, although
Large projects or unusual
for convenience they may be stored in the same area. material requirements
Projects may result in special material
handling requirements due the volume
ceived. This is done because there is Capital spares of material to be received, physical
only one user or because it is not worth Capital spares are high cost components properties of the material (size, weight,
reporting the consumption at each oc- and assemblies being stored as dedicated shape), security issues (ensure it is avail-
currence. A common example is protec- spares for critical equipment. This occurs able when required by project and not
tive personal safety equipment (e.g. when the material delivery lead time is taken by others), and responsiveness in
gloves) charged directly to the produc- unacceptably long. Typical capital spares receiving, unloading, and notifying the
tion department when received, rather are large or expensive: i.e. power trans- project. This may result in the project
than when issued. This reduces record mission equipment, large or non-stan- controlling material handling directly
keeping costs for stores and accounting. dard gearboxes, cylinders, gear-sets. through the use of a contractor or ded-
Materials that are direct charge are To prevent a large impact to the in- icated project workforce, and using a
typically low individual value and used ventory value, capital spares are not in- dedicated storage area. Details for ac-
in large volumes. Some examples are cluded in value of the inventor y, counting on projects depends on the
fasteners, pipe-fittings, and similar although for convenience they may be project requirement (e.g. tracking cash
hardware, personal safety equipment stored in the same area. They may also flow, committed versus actual costs).e

The MRO Handbook 45

 chapter eight

Improve
service
Strategic inventory cost reduction
and service level improvement
Inventory costs are directly dependent upon the inventory levels. An increase in inventory levels
causes an increase in the amount of capital sunk into inventory and the time value of that money.
Another significant cost is the cost of infrastructure for the inventory (e.g. amount of secure
building space, receiving and stores manpower, shelving and bins for storage, and utilities
including electrical power and heat). The infrastructure issues can be a significant constraint
in a congested operating plant.

S
ometimes inventor y holdings re-
sult in multiple stores locations
which reduces manpower effec-
tiveness and efficiency and result in
increased costs. Where companies
can’t justify the infrastructure invest-
ment we most often see crowded
stores areas where it is difficult to
operate effectively with the amount
of clutter and congestion. This chap-
ter is about alter natives to these
dilemmas.
ing. A greater amount of critical
equipment and the greater complex-
ity of equipment increase the parts
that are required on-hand.
A detailed equipment criticality anal-
ysis that determines modes of failure,
impact of those failures and responses
to the failures, will help optimize the in-
vestment in inventory. This needs to be
done with input from production, main-
tenance, plant or reliability engineering
and material management.
handling repairables.)
Standardizing equipment and parts
reduces the number of different parts
needed and will lower the investment
and space required. Reducing the vari-
ety of parts has an added benefit of
simplifying parts identification by
stores and maintenance, and increases
the value of component application
and installation knowledge within
maintenance. Parts standardization
can reduce supplier delivery times, if
parts are standardized to the common

For some complex equipment, it is preferable to hold spare
modules, than repair the modules, rather than keep parts
for all modules. It also speeds up the equipment maintenance
process by replacing out modules, rather than having the
system down while repairing the module.
Reduce inventory costs, while
maintaining service levels
Inventory levels are dependent upon
the ser vice levels required and to
some degree on the inventory record
a c c u r a c y. S e r v i c e l e v e l s d e p e n d
upon the demands associated with
the criticality and complexity of
equipment the inventor y is support-
For some complex equipment, it is
preferable to hold spare modules,
than repair the modules (in-house or
outsource repairs), rather than keep
parts for all modules. It also speeds up
the equipment maintenance process
by replacing out modules, rather than
having the system down while repair-
ing the module. (See Chapter Six on
IMPROVE
SERVICE
ones the suppliers typically stock.
In Chapter Five we discussed obso-
lete parts. They are often a contribu-
tor to lack of storage space, in
addition to being a dead investment.
A similar problem to obsolete parts is
duplicated parts. These parts become
dormant after an initial usage because
the description or part number is mis-
leading. We have seen cases where the
engineering department finds it easi-
er to create a new part number on the
computer system because it is too time
consuming and cumbersome to find
an existing part number. Duplicate
parts can be found by printing the in-
ventor y in a sort by manufacturer’s
part number and then performing a
manual review. A character string
search (i.e. search for a section of the
part number or description) could

The MRO Handbook 47

also be used to check. A structured de- management system is the reduced costs through the use of blanket or-
scription procedure is essential to transaction cost. A modern system ders. The purchase price and delivery
avoiding duplication. A structured de- that does automatic re-ordering of time required can be reduced by im-
scription would use a major descrip- parts, provides for electronic ap- proved contract design. Purchasing
tor, then major physical or application provals, and supplies purchasing in- can also negotiate service levels of sup-
details, then physical properties (e.g. formation (e.g. information on part pliers (i.e. shorter delivery time) to re-
switch, proximity, 18mm dia., 120VAC, source, pricing, and vendors) liber- duce the amount of safety spares
2A, quick connect). ates the purchasing professional from carried that are needed to support the
Purchasing has a strong impact on the drudgery of daily transactions. Re- in-house service levels.
inventory costs both at the item pur- ducing the administrative work will Purchasing can reduce part prices
chase price level and at the vendor ser- leave purchasing with more time to by effective sourcing of parts. This is
often the case where equipment is
purchased through an equipment ven-
Even without a modern computer system, purchasing dor or machiner y builder, and third
party spare parts (e.g. bearings, belts,
can reduce purchase prices, improve supply availability pulley, other power transmission parts
and assemblies) are purchased from
(e.g. suppliers carry material on-hand), and lower purchasing the equipment supplier rather than a
specialty supplier (e.g. bearing supply
and material management transaction costs through house). There is a mark up from the
equipment supplier and additional
the use of blanket orders. time required for the equipment sup-
plier to receive the part, then forward
to the end user.
vice (lead time, back up stock) level. negotiate price and deliver y, source In a later chapter we discuss the
Often purchasing has to spend a great parts, and qualify suppliers. topic of outsourcing where parts inte-
deal of their time with transaction ad- Even without a modern computer grators or distributors may be a viable
ministrative work, rather than system, purchasing can reduce pur- option. Finally, purchasing can im-
strategic activities that add value chase prices, improve supply availabili- prove pricing and ser vice levels
through the use of their specific ty (e.g. suppliers car r y material through effective management of the
knowledge and skills. One significant on-hand), and lower purchasing and existing supplier base (e.g. reviewing
benefit of a computerized materials material management transaction performance) or by finding other sup-

48 Plant Engineering and Maintenance

pliers who may be more effective. See creasing record keeping accuracy. Bar the parts, rather than using higher
Chapter Two for more details on the coding can be used in both receiving cost maintenance trades. Assembling
purchasing process. and issuing activities. Bar coded trans- the parts can be done at times when
action processing will also reduce time the stores area is not busy. This will
How to improve service levels and effort required to perform cycle not reduce materials management
As noted above, service levels need to counts in two ways. First, the counting costs, but instead will reduce the
address the requirements dictated by process is faster and more accurate, maintenance costs and increase main-
equipment criticality. Ser vice levels and secondly with higher record accu- tenance ef fectiveness which con-
can be improved by increasing both racy, counting frequencies can be re- tributes to an overall cost reduction
the inventor y levels and the infras- duced. for the organization.
tr ucture necessar y to support the For preventive maintenance or Secure inventory storage with limit-
higher inventor y levels. There are planned repairs, the material required ed access improves inventory accura-
cy. Unauthorized access can result in
inventory being taken and not record-
Bar coding of inventory by suppliers before shipping material ed. If access is limited and the identifi-
cation of those accessing stores is
will reduce material handling costs by reducing the time known (i.e. through use of optical
reader or magnetic swipe card), track-
required, while increasing record keeping accuracy. Bar coded ing of material is more accurate. In
the situation where someone enters
transaction processing will also reduce time and effort the secure storage area and nothing is
recorded as issued (e.g. emergency
required to perform cycle counts. breakdown on nights and mainte-
nance does not have time to record
material issue, then forgets after the
other methods (Table 1, page 50) that for the work can be “kitted” (i.e. parts emergency), the individual can be
are more cost effective in improving gathered together) prior to the work questioned after to determine if is-
service levels. and delivered to the work site by sued material was forgotten. As well as
Bar coding of inventory by suppli- stores. This has the advantage of max- improving inventory accuracy, the ma-
ers before shipping material will re- imizing the “wrench” time of the terial gets issued against a work order,
duce material handling costs by maintenance people and using lower improving equipment maintenance
reducing the time required, while in- cost resources to assemble and deliver cost tracking.

The MRO Handbook 49

 Outsourcing MRO materials management is a solution
more companies are turning to. Success of this technique de-
pends on the capabilities of the supply base. More on this
topic in Chapter Ten. e

Summary of service level improvement

and cost reduction tactics
Activity Improve Reduce
service costs
Increase inventory levels + --
Analyze equipment criticality
and failure modes ++ ++
Standardization of equipment
and components +++ ++
Eliminate obsolete parts + ++
Eliminate duplicate parts + +
Negotiate to reduce delivery time
and safety stock requirement + ++
Reduce purchasing administrative work ++ +
Automatic re-order stores materials ++ +
Use of blanket orders and negotiating
price and delivery-based upon
annual volumes ++ ++
Effective sourcing of components ++ ++
Bar coding inventory ++ +
Assembling parts for preventive
and planned maintenance ++ +
Secure inventory storage with
tracked access ++ +
Outsourcing = +

50 Plant Engineering and Maintenance

 chapter nine

Managing
personnel
Organizing and managing
stores personnel
There are just about as many organizational structures within stores as there are organizations that have
MRO stock. The way you will man and organize your stores depends on numerous internal factors within
your enterprise. While it is a challenge to define a single “best practices” organizational structure for an
MRO storeroom, there are functional guidelines that can be used to create a workable solution. The
foundation for a good materials management organization structure is the process design itself.

Optimizing the MRO We conclude this handbook with a leap from today’s world, but Internet
management process short summary of the “state of the art” commerce is a reality. Stores personnel
There are a number of conflicting re- process designs that provide a fully elec- will be expected to master an increasing
quirements that an MRO materials tronic transaction capability. The un- number of computer skills and to un-
management process must tr y to ac- derlying assumption is that the derstand the commercial aspects of
commodate. purchasing function has prequalified modern trading practices and vendor
From a maintenance point of view, “state of the art vendors” and has all the relationships.
the ideal MRO management process sourcing strategies in place to make First let’s resolve some of the tradi-
supplies the right materials whenever transaction processing virtually com- tional factors that determine the suitabil-
they are needed. This is a very simple puter to computer. This may seem a big ity of a stores organization structure.
goal which is impractical to fulfill be-
cause of the costs involved, as we have
discussed in previous chapters.
Also, maintenance wants to use ma-
terials with higher quality for reducing
maintenance efforts, but purchasing
may try to buy cheaper materials and
maximize lot size so as to achieve lower
purchasing cost. Purchasing also wants
to reduce the transaction work load by
buying large quantities two or three
PERSONNEL
MANAGING

times per year. Larger lot purchasing

will increase inventory investment, and
finance doesn’t want that.
Every function has a different point
of view in MRO (Figure 14). Therefore,
to obtain truly optimized MRO manage-
ment process, the diverse perspectives
must be reconciled in the process de-
sign. Staffing of the process follows from
the design definition. An important fac-
tor that affects the organization arrange-
ments is the chosen computer system;
equally important are the purchasing
policies and the empowerment of stores
personnel to execute transactions. Figure 14: Different viewpoints for optimizing functions

The MRO Handbook 53

Factors influencing stores
manpower
There are several basic forces that influ-
ence how stores are manned and orga-
nized:
■ Financial: If you are experiencing a
downward trend in revenue or if man-
agement has chosen a strategy of
downsizing, the ser vice sectors are
usually affected first. This means you
will probably concentrate on basic
warehouse operations functions with
Internet commerce is a reality. Stores personnel will be
expected to master an increasing number of computer skills
and to understand the commercial aspects of modern trading
practices and vendor relationships.
little manpower to spare for inventory
control and analysis;
■ Open/closed stores policy: Open
stores is a concept where it is believed
to be economical and time-efficient to
have the customers retrieve and issue
their own parts (yes, this system can and
does work within the same accuracy tol-
erances as any other stores!). This
should reduce manpower (the issuers)
or at least allow you to utilize more staff
in inventory control functions but at
the expense of a users’ time;
■ “Modern” philosophies: Innovative or
new practices such as bar-coding, ven-
dor replenishment, or direct to use-
point deliveries allow you to reduce
manpower and achieve higher accuracy
(with bar-coding) and/or service levels;
■ Personnel background and educa-
tion: Let’s face it, if you are fortunate
enough to get personnel with several
years of experience within the same in-
dustr y, a parts ticket or accounting
background and with the enthusiasm of
a cheerleading squad, then you don’t
need many people on your staff. If how-
ever you work in the real world, you
have a colourful collection of people at
various levels of education and experi-
ence. This will require an increased
staff for supervision or coaching;
■ Corporate life-cycle stage: If your organi-
zation is starting up or implementing a
new system, you will require more man-
power. The important question in this sit-
uation is “Do they have to be permanent?”
Basic considerations for stores
organization structures
The fundamental activities of a stores
operation are: Issuing, receiving, in-
ventor y control and audit. Some
stores also provide a materials han-
dling service where parts are delivered
to point of use;
■ Issuing: Issues, deliver y, pick lists:
Your experienced personnel should be
on the front line. They know the parts
and the warehouse location; they can
interpret what the users want in the
case of ambiguous or incomplete specs,
or at least they know who to call;
■ Receiving and storing, receipts, item
verification, storing: This is a pivotal
point in your operation. The receiver
“sees it first” and is required to compare
what you want to what you get. Any inac-
curacy here often takes a long time to
surface and usually when it is too late.
■ Inventory control, locating, counting,
tagging: This position is one where the
The MRO Handbook 55
most diligence must be exhibited. Cor-
rect identification and location of parts
is crucial to effective service and inven-
tor y management. Well-trained and
motivated staff are required for this
painstaking activity set;
■ Audit and analysis, item setup, analy-
sis, projects, accuracy control: While
many would argue that this position is a
luxury at best and absolute nonsense at
worst, I contend that without it, you can
never assess service levels, accuracy, in-
ventory value, effective replenishment,
or continual improvement. In many or-
ganizations, the stores manager is usu-
ally responsible for this function, but by
carefully providing adequate manpow-
er in the other areas and innovative ser-
vice techniques, you may be able to
provide the necessar y manpower for
this function as well.
These groups are by no means exclu-
sive, nor is the implication here that all
stores should be departmentalized ac-
cording to this format. Its usefulness is in
grouping together like function and skill
sets to better assist in structural design.
Other considerations for stores
structures and the environment
An additional concern when develop-
ing a stores structure is the environ-
ment in which you and your people
will work. Such factors as lack of work-
ing space, antiquated equipment, an
insufficient docking area, the number
of floors (stairs or elevators), and lim-
ited shelf space can all have a negative
impact on service delivery, and actual-
ly increase the manpower required.
You may consider spending money on
capital improvements before increas-
ing payroll costs for an extended peri-
od of time.
Human resources
management issues
Once you have identified and dealt
with the factors that impact on the
number of personnel required, you
should consider the merits of multi-
skilling. There are several benefits
from establishing a multi-skilled stores
team. First, operating flexibility is
greatly increased hence response to
peak loads and to demands of internal
and external projects is better.
Secondly, staff enjoy using a broader
range of skills and are more proficient
in their day-to-day work when there is
some variety in the task mix. Often
union constraints limit the extent to
which staff can be cross-trained but a
well presented argument backed up by
the wishes of the staff themselves can
often get a good solution for all con-
cerned. With some of these basic fac-
tors resolved, you can now address the
leadership and management issues
within a stores function.
Setting the goals
Setting goals for your department can
be relatively simple and straightfor-
ward. Some of the most common are:
■ a count variance of three percent or
less (a variance of less than two percent
of total stock value) within the year;
■ the target number of accurate inven-
tory records (i.e. records meeting their
accuracy tolerance) of 98 percent;
■ a target service level of 95 percent for
“A” type items for three months;
■ no more than 100 stock-outs a year for
class “A” and “B” items;
■ a decrease in stores value of 15 per-
cent by the end of the third quarter.
For goals to have the desired motiva-
tional effect:
■ they must be communicated and un-
derstood by the whole department,
then to the whole organization;
■ department personnel must agree
that the goal is attainable and then
they must believe that they can make it
happen. Staff should be involved in
The MRO Handbook 57
formulating the action plans;
■ regularly review performance and in-
vestigate variances from the targets;
■ sincere praising of contributions to re-
sults reinforces the goals and a positive
work climate.
Training, training
and more training
As with any trade or occupation, the
more that your personnel know about
what the department is expected to pro-
vide, how the system works, and their
role within the organization, the less
likely that performance problems will
be an issue within your stores. A trained
staff member understands the implica-
tions of not completing that one dollar
transaction on time or the importance
of orderliness within the stores as a pre-
requisite for high service and record ac-
curacy. They will know what the target
service level is for each item class and
they will care when it is not met.
Most importantly, they will
know how to improve results
After recruiting, training is the single
most effective means of developing a
capable staff. Adherence to training
plans and coaching is not easy to
achieve in this day and age of tighter
budgets and downsizing, but the return
is definitely worth your efforts. Freeing
yourself from the chore of hands on op-
erating the stores (even if it means hir-
ing temporary staff) will allow you to
provide the critical leadership input
that achieves real results.
To rotate or not to rotate
One tactic to developing a good stores
staff is to rotate your personnel chronicles how they got there and
throughout the various functions with- where they will go next. Or for those of
in your organization even if multi- you just starting, the manual of policies
skilling is not the end objective. and procedures which outlines how you
Traditionally, rotation has been do business.
achieved through a hierarchical means There are numerous reasons for
of promotion (an issuer is promoted to creating a manual but the key ones are:
inventor y control, then after several it provides a basis for training; it tells all
years, he might make it to receiver). other departments what to expect when
While this is an easier system to main- dealing with stores; and it can be an ar-
tain (the rules of promotion and se- bitrator or “coach” when new situations
niority are clearly defined) it may not are encountered by staff. The most im-
Let’s face it, if you are fortunate enough to get personnel
with several years of experience within the same industry,
a parts ticket or accounting background and with the
enthusiasm of a cheerleading squad, then you don’t need
many people on your staff.
be the best for your staff. Rotation en- portant thing about a stores manual is it
courages learning and innovation and is dynamic. Except for the most basic of
can help boost morale. In the short rules (an issue credits the inventory ac-
term, while the trainee is mastering the count and debits the issuee’s account)
new tasks, there is a strong risk that er- every process can and should change as
rors will be made. Keep reviewing and the organization grows and changes.
refining your training to prepare
trainees for success and build in quality Summary
control checks to minimize errors. The most important issue to consider
when organizing and managing stores
Write it down personnel is providing adequate man-
Often, a stores organization will get it ning to ensure basic stores functions
all right—they will man effectively, they are performed. You need to set obtain-
will perform all of the functions re- able, quantifiable goals that your edu-
quired within stores, they have a happy cated staff support. You must then
and productive staff—so what could write down the policies and proce-
possibly be missing? dures that govern and guide the oper-
“The Book,” the document that ation of your stores. e
The MRO Handbook 59
 chapter ten
Outsourcing
stores
MRO distributors versus integrators
Everyone is probably familiar with the term “outsourcing” as a result of the last few years of corporate
restructuring, but only a few people use it with exact understanding of its meaning. This section will
help you to understand what outsourcing is, what can be outsourced and how to do it.
What is outsourcing
and why do we use it?
O
utsourcing is not a fad. It is the
first disciplined approach to
optimize the ser vices supply
chain, and reflects a new level of sup-
plier/client relationships successfully.
In general, outsourcing is applied in
many functional areas: MRO invento-
r y; equipment and building mainte-
nance; printing and reprographics;
help desk, order desks, and call-cen-
ters; mail room and courier services;
internal audit; etc.
To understand the term “outsourc-
ing,” we need to think about the level of
a vendor’s involvement in sourcing
(Figure 15). Several terms are used to
distinguish services in each level, and
their simple definitions are provided
below to help your understanding:
■ Self provision: The provision of ser-
vices through internal facilities man-
aged by full and/or part-time staff;
■ Devolution: The provision of services
through the transference of responsi-
bilities, obligations, and powers to an-
other authority;
■ Contracting out: The provision of ser-
vices on the basis of a one-time contract
to a supplier;
Figure 15: the level of vendor’s involvement
■ Co-sourcing: The provision of services
through a joint venture arrangement,
where risks and benefits are shared be-
tween participants;
■ Outsourcing: The provision of services
through a long-term agreement with
specific scope and a close relationship;
■ Franchising: The provision of services
through granting a license to the select-
ed supplier to provide agreed upon ser-
vices within a specified jurisdiction;
■ Privatization: The provision of ser-
vices through transferring responsibili-
Outsourcing is not a fad. It is the first disciplined approach to
optimize the services supply chain, and reflects a new level of
supplier/client relationships successfully.
ty for service provision from the public
to the private sector;
The terms, devolution, franchising,
and privatization are generally applied
to government. However, why do we
outsource something? The main pur-
pose of outsourcing is to translate ex-
isting vendor synergy and economies
of scale into savings for the beneficiary
through a long-term agreement with
specific scope and a close relationship.
What and how can
we outsource?
Before deciding to outsource selected
or total stores activities the following
questions will guide your thinking:
■ Are your objectives achievable
through outsourcing? Is there a capable
supply base that can perform at least to
your current level?
■ Will your current organization allow
you to use outsourcing? Are there union
agreements limiting outsourcing?
■ What functions should be out-
sourced? All; inventory receiving, stor-
ing, issuing; replenishment ordering;
purchasing?
■ Which vendor(s) will you choose?
■ What ser vice criteria should be in-
cluded in the deal?
OUTSOURCING
STORES
The MRO Handbook 61
Viable alternative
to self-provision
Outsourcing generally entails several risks as well as benefits.
Some of the key benefits and risks are listed below.

Benefits
■ Cost savings
■ Reduce asset value on the balance sheet
■ Access to trained staff
■ Access to technology
■ Focus on strategic tasks
■ Better service levels
■ Transition services

Risks
■ Loss of control
■ Unanticipated change
■ Higher costs than anticipated
■ Pricing may not reflect improved technology
■ May lose good staff
■ Vendor may not survive
Based upon the understanding of the benefits and risks,
you will need to follow some of steps listed below:
■ Data collection regarding self-provision and current out-
sourcing; your baseline performance levels;
■ Benchmark;
■ Initial cost/benefit analysis;
■ Establish other potential outsourcing issues and barriers
(legal, human resources, control, etc.).
After following those steps, you can determine if outsourc-
ing is a viable alternative to self-provision for you.

The main purpose of outsourcing is to

translate existing vendor synergy and
economies of scale into savings for the
beneficiary through a long term agreement
with specific scope and a close relationship.

Objectives of alternative service delivery

The reason why we use outsourcing is to realize benefits.
The team of people looking at the outsourcing options
should write out their specific objectives such as: lower op-
erating cost, better controls, better/more skills, greater ca-
pacity, resolving short-term resources problem, improving
company focus, etc. Also, whatever your expectations of
outsourcing, the objectives should be measurable and real-
istic.

Change to organization arrangements

The following steps will help you to determine if your organi-
zation is ready to use outsourcing.
■ Chart the current organization (process flowchart and
work deployment chart).
■ Summarize current methods and procedures.
■ Examine need for consolidation of functions.
■ Assess process vs. functional management style; how will the
outsourced activities be interfaced to the retained self-provi-
sion functions?
■ Assess management compensation (re: outsourcing); are
spans of control changed?

The MRO Handbook 63

Allocation of functions dors, you begin to negotiate the deal. es), include access to value added ser-
How can you determine what functions In outsourcing, the deal normally in- vices and pricing for these ser vices,
will be outsourced, shared, retained or cre- cludes five elements: scope, ser vice include use of other third party sup-
ated? The following steps will guide you: levels, pricing, termination and rela- pliers. Ensure that outsourcing is not
■ construct a functionality matrix; tionship. Some of the basic aspects of “a one-way street” there has to be
■ decide which functions might be out- each element are described below: something in it for the vendor in
sourced and retained. Which functions ■ Scope: Ensure all activities noted in order to stay in business and perform
are unique vs. generic; the functional matrix are included. at the expected levels;
■ for those functions which are shared, Include all generic skill-based activi- ■ Ser vice levels: focus on aggregate
clearly delineate the responsibilities; ties, include staff transition in the service; ensure that targets should be
■ identify new functions resulting from deal, include all relevant assets and realistic and achievable i.e. close to
the outsourcing arrangement (e.g., third party commitments (e.g., leas- what your baseline is; specify the mini-
managing the vendor);
■ is it a measurable function?;
■ are the costs identifiable?;
■ can function be decoupled from the
process?;
■ will there be a competitive advantage
for you?;
■ how will risks be managed?;
■ are capable suppliers available?

Potential vendors
In the case of MRO supplies, there are
two types of suppliers; MRO distributors
and MRO integrators. Distributors will
help you cut costs of materials (e.g., by
volume discounts on buys) through vol-
ume buying on behalf of a number of
customers.
Integrators may also help you cut
costs, but more importantly they pro-
vide services which supplement/com-
plement your in-house expertise. More
details about those two types of MRO
suppliers will be introduced later in this
chapter. In any case, the following
points should be considered when eval-
uating potential vendors:
■ identify key objectives of the outsourc-
ing and stay focused on them;
■ clearly identify the scope of the goods
and service functions to be provided;
■ write a comprehensive request for
proposals (RFP);
■ carefully select a short list of vendors
before issuing the RFP i.e. prequalify
vendors;
■ establish an internal and external
communication strategy so that those
potentially affected don’t learn about
the project from outside sources;
■ review existing third-party commit-
ments;
■ determine bid evaluation criteria and
apply them to all responses;
■ track all issues until resolved.
After reviewing the bid documents
and evaluating the submissions based
on the points listed above, you can se-
lect two or three vendors to site visit. Al-
ways retain a “second choice” in case
talks with the “first choice” break down.

Negotiating the deal

After selecting the best qualified ven-

The MRO Handbook 65

mum ser vice levels to be met by the
vendor; specify the tools to measure
the agreed upon service levels; moni-
tor and report service levels regularly;
specify remedies to encourage the
vendor to meet the specified ser vice
levels;
■ Pricing: Consider risk sharing
agreement and not a cost plus based
agreement to: maximize supplier ac-
countability; provide for superior ser-
vice, and allow for superior return in
exchange. Start with “pay as you play”
scenario;
Whatever your expectations of outsourcing,
the objectives should be measurable and realistic.
■ Termination: Terminate if ser vices
are not satisfactory and the vendor is
not willing to improve its services;
■ Relationship: Designate representa-
tives and contact regularly (e.g., meet-
ings) to manage the contract. Define
the process to resolve conflicts and
use arbitration if all else fails. Define
the process to manage change to pro-
vide for controlled, authorized,
agreed upon changes. Specify “how
to” instructions for all the policies and
procedures.
MRO distributors versus
integrators
As described before, there are two types
of vendors: MRO distributors and MRO
integrators.
MRO distributors focus on saving
money, and have characteristics as follows:
■ large geographic focus;
■ tend to use select group of major
MRO suppliers;
■ concentrate on high volume items not
OEM parts;
■ volatile industry; many new entrants;
■ low margins but high volumes (don’t
make money on service);
■ short contract terms;
■ leave owner with management of
unique OEM parts and management of
“insurance” inventory.
MRO integrators
MRO integrators focus on adding value
through services, so they are more at-
tractive as partners than MRO distribu-
tors. They typically have following
characteristics:
■ broader scope than distributors; all
parts including OEM parts;
■ can provide specialized engineering
expertise in parts applications and
sourcing; ver y ser vice-oriented and
work with clients as partners in the sup-
ply chain;
■ vendors tend to be multi-disciplinary
consortia; use large national suppliers
but also include some of your local
favourites and provide your company
national opportunities;
■ longer contract terms;
■ can handle entire MRO function.
Summary
Outsourcing is not a panacea. It is not
right for everyone. To realize the bene-
fits through outsourcing, precise review
and analysis are necessary before imple-
mentation.
We have outlined some of the think-
ing and work steps in evaluating the ser-
vice delivery alternatives. The process
itself takes some experience to imple-
ment as we are beyond the simple make
vs. buy analysis applied to small groups
of parts. e
The MRO Handbook 67
 chapter eleven

Benchmarking
performance
Measuring and benchmarking
inventory and stores performance
If your goal is to improve the performance of the materials management process either through re-
engineering or continuous improvement, you will be faced with measuring the process (Figure 16).
Benchmarking can help provide ideas on what and how to measure the process and can also provide you
with some practical improvement or “best practices” ideas. Well-designed performance measures help
you find the process problems and their root causes. A well-organized benchmarking study will help you
set achievable targets and more importantly, you will learn how top performers achieved their results.

Measuring performance tion with that of others. But bench- quo” transaction with a partner who en-

I
t is simple to understand why perfor-
mance measures should be used for
effective management. The challenge
is designing and installing the measure-
ment system. Every company may have
different performance measures and
use them differently according to their
system of management. Further, the
measures may be varied by industry or
business environment. However, some
measures are universal and should
form the core of what you measure.
Benchmarking: A tool for
continuous improvement
Benchmarking, as popular as it has be-
come, is often misunderstood. At a
basic level it certainly includes compar-
isons of performance of your organiza-
marking is much more than that. The
measures may tell you who is doing
well, but statistics do not give you any
useful information that you can take
back to your own company and use to
improve your performance. A pulp and
paper mill with eight percent of their
manpower spent on emergencies may
see that another reports only three per-
cent, but the real question is how they
are achieving this?
Benchmarking is all about sharing
information on practices for continu-
ous improvement. It includes the shar-
ing of both quantitative and qualitative
information—the metrics as well as the
processes.
Before you rush into a benchmarking
project remember that it is a “quid pro
ters the relationship voluntarily. You must
have something worthwhile to share in
exchange for the time and effort they will
spend educating you on how they attain
their high performance levels.
Best practices in context
Because maintenance is often measured
as a cost centre, we tend to focus only on
cost issues—those around labour, mate-
rials and parts, contracts, rentals, sup-
port staff and various overheads. No one
would argue that low cost performance
in an area of expense is desirable, but
what if you can squeeze an extra two
percent throughput from your heavily
utilized equipment? What if your equip-
ment simply isn’t achieving its full po-
tential capacity because of minor
stoppages, frequent breakdowns, poor
precision and constant need for adjust-
ments or slowdowns? Increasing capaci-
ty would not only reduce your unit costs,
but also add to the top line as well.
Best practices are those actions nec-
essary to achieve the best productivi-
ty—the highest productive capacity at
the lowest possible cost. It is therefore
possible to do too much or the wrong
type of maintenance, not only too little.
A natural gas production company that
BENCHMARKING
PERFORMANCE

overhauls compressors ever y 20,000

Figure16: Useful performance measures for MRO management hours because that seems to be industry

The MRO Handbook 69

practice may be doing too much main-
tenance and basing it on the wrong fail-
ure mechanism—time.
Not everything you read about as a
best practice works well in every situa-
tion. Outsourcing building mainte-
nance makes sense only if you can get it
cheaper elsewhere, at the same quality
and if it allows you to focus on your
“core” production equipment.
The best practice preventive mainte-
nance being performed on a hydraulic
shovel in an iron ore mine in the Aus-
tralian outback may not be the same
best practice in a gold mine in the
Canadian Arctic. Best practices in
labour management in a non-union-
ized mill may not work as well in a mili-
tant unionized environment. We have
to keep the context in mind.
The selection of partners for bench-
marking is as important as the measures
and practices themselves. To find part-
ners that will provide the most useful in-
formation requires research. There are
four general categories of benchmark-
ing partners that you should consider:
■ Internal: These are operations within
the same company or corporate group.
There is an existing relationship, and it
is easy to establish a baseline and crite-
ria for comparability. The gains you can
70 Plant Engineering and Maintenance
achieve, however, are limited to the best
that your company is already doing;
■ Competitors: Direct competitors can
provide ver y useful priorities for im-
provements. Most companies are inter-
ested in the results, but don’t want to
provide their data in case it reduces
their competitive advantage. And it is
extremely unlikely that they will tell you
how they run their operation;
■ Industry: Comparison with companies
in your own industry provides useful
trend information. Opportunities for
improvement are very good, but limited
to the best that the industry is presently
achieving. Useful are the industry associ-
ations, such as the Canadian Pulp and
Paper Association, National Petroleum
Refiners Association and the Canadian
Institute of Mining and Metallurgy.
Best in class: This is benchmarking
at its best. It is determining who has the
best practice in a particular process,
such as annual plant shutdown plan-
ning or condition based maintenance,
regardless of industry sector. Business
process and practices information can
provide broad new perspectives and the
best opportunity to find “break-
through” ideas and innovations.
An auto parts plant looking to im-
prove work backlog management may
first check out the practices at its sister
plants and direct competitors, if it can.
A broader search across the discrete
manufacturing sector may reveal more
interesting approaches. Looking at
Xerox Customer Support, Canadian
Tire Auto Service, PetroCan Refineries
or Air Canada may provide ideas for
true innovation and a quantum leap in
performance
Seven steps to effective
benchmarking
■ Step 1: Assess your current situation
(baseline).
Before you can get to where you
want to be, you need to know where you
are. You need to discover areas that are
weak and in need of improvement.
They are the areas where you will focus
your benchmarking efforts so that you
can learn how to improve them.
■ Step 2: Determine what to bench-
mark—set priorities.
What do you want to benchmark?
Your assessment probably reveals sever-
al areas that are weak and in need of im-
provement. If you try to do too much
there is a risk that you will be over-
whelmed, as you won’t have resources
to fix everything at once. Incidentally,
your partners won’t have the patience

Figure 17: Defining scope
72 Plant Engineering and Maintenance
to answer more than about a dozen
questions, so make them count. You
need to focus on the areas that will pro-
duce the most benefit most easily (Fig-
ure 17). More costly initiatives with
marginal payoffs can be tackled later.
■ Step 3: Select your benchmarking
partners.
Benchmarking partners must share
some common characteristics in order
for the data to be comparable. They
may not, however, be in the same busi-
ness or even in the same industry. You
must consider what it is you are bench-
marking and find companies that have
similar unit processes in your specific
areas. Mobile equipment shops need to
turn vehicles around fast to keep the
fleet size small and utilization high.
Why not learn about fast cycle times
from airlines? High-speed packaging
operations, like bottling plants, must
keep their equipment running flat out
at certain times to process the batch.
Can you learn from postal plants, pack-
aging or newspaper printers who must
process their products in a very tight
and rigid schedule?
Identifying high performing organiza-
tions can be difficult. Trade and industry
magazines can give insight into who is
doing well. Often consultants to the in-
dustry know who the better performers
are. Industr y associations are good
sources of contacts and their publications
are good sources of general information.
The International Benchmarking Clear-
inghouse (part of AQPC) has a best prac-
tices database on the Internet for
members use. It contains numerous ab-
stracts of articles and can be an excellent
starting point for a search.
■ Step 4: Develop your questionnaire.
The questionnaire, focusing on
your areas of study, must be ready be-
fore you contact your potential part-
ners. Most will ask to see it and will
judge the value of their participation
on the quality of the questionnaire you
provide them. Craft your question-
naire simply and very precisely. They
will also want to know what they will
get out of it, such as a partner’s report
with relative standing of their compa-
ny shown in the range of data.
■ Step 5: Collect data.
Don’t underestimate the data collec-
tion task. There is no good time of year
for it: Christmas, spring break, summer
vacations, school starting, shutdown pe-
riods, year-end reporting, etc.... all con-
spire for your benchmarking partners’
time. Getting data from partners can be
like pulling teeth. Some companies that
do a lot of benchmarking, like Dupont
or Saturn, have staffs who do it regularly
and they are fast to respond and will
chase after their partner report. Others
have not done it before, see it as a lot of
work and delay it. Some simply won’t do
it even though they have said they will.
■ Step 6: Interpret data.
A well-developed questionnaire will
quickly reveal what you wanted to learn.
It can save you a lot of time on activities
that won’t produce results or it can give
you excellent justification for moving
forward. There can often be surprises
 in the data. Quantitative data can con-
tradict anecdotal information or your
research. If you find a poor performing
operation yet there is plenty of litera-
ture that leads you to think they should
be good you need to find out why.
Sometimes the questions have been
misinterpreted or answered incorrectly.
Sometimes extra zeros creep in.
■ Step 7: Site visits.
The benchmarking questionnaires
and telephone interviews can give you a
lot of insight into what’s going on but
they can’t give you the first hand knowl-
edge of how they made it happen. Visits
are essential to learning about both the
effectiveness of certain practices and
the experience with the implementa-
tion of those best practices.
One essential condition of perform-
ing a benchmark study is that all part-
ners should understand they must
accept a visit. At the outset you do not
know who will be best, although you
should have a good idea. You may get
some surprises and you want the door
open to a visit if you decide that one is
needed.
The visit should be arranged to pro-
vide enough time for you to see what
you need, but try to do it in a day. That
means being ver y focused and orga-
74 Plant Engineering and Maintenance
nized. The questions you want to ask or
an outline of what you want to see
should be sent ahead to allow the part-
ner site to prepare. You should arrive
with a small team of visitors—don’t
swamp the partner with too many peo-
ple asking questions.
Not all visits turn out as you expect.
Sometimes things look great on paper
and when you call you get nothing but
success stories. It doesn’t happen often,
but sometimes it just isn’t so. These
lessons are also valuable, especially if
you can’t find a “better” site to visit. Be
cautious, but generally if someone else
has made it work for them you can too.
Summary
Many companies find that conducting
the assessment of their current perfor-
mance one of the most useful aspects of
benchmarking. It forces their team to
measure their own performance and
critically assess their “historical” reasons
for the way they manage.
Others find the process has given
them a shared vision of their future per-
formance, a sense that achieving best
practice is really possible. The gap be-
tween this new self-awareness and
shared vision provides the work plan for
continuous improvement. e
 conclusion

Where next?
The general trend in materials management is toward a paperless transaction flow between trading
partners and their financial institutions (Figure 18).

Figure 18: Best practice procurement/payables process

T
wo significant changes are occur-
ring in the world of materials
management. One is the shift
from transaction-based purchasing to
strategic sourcing. The other is the use
of electronic commerce between com-
puter systems; increasingly, the Internet
Organizationally, stores personnel are gaining more
empowerment to make the replenishment decision based on
pre-established arrangements with vendors.
is becoming the communications link
between trading partners.
The functionality of materials man-
agement software is also increasing par-
ticularly in the direction of demand
forecasting and operations research de-
cision support algorithms.
Integration between modules within
a package is also increasing. For exam-
ple, maintenance planning functions
are linked to stock availability and can
reserve stock for specific work orders.
Databases provide visibility into spend
history for analysis and transfer summa-
ry transaction data to payables for post-
ing to the general ledger accounts
while simultaneously triggering the pay-
ment to the vendor.
Organizationally, stores personnel
are gaining more empowerment to
make the replenishment decision based
on pre-established arrangements with
vendors. Here is where purchasing pro-
fessionals spend their time—making the
right deals so that ordering can be rou-
tine enough for even computers to do it.
To get to the next generation of ma-
terials management you will have to do
a lot of hard work because the funda-
mentals have to be strong in order to
support new organization concepts and
business practices.
The electronic solution is not for ev-
eryone right now. But a look over the
horizon toward the future will help you
choose some new directions for your
company’s materials management
function. New ways of working togeth-
er is becoming the imperative of the fu-
ture inside and outside any specific
company. e

76 Plant Engineering and Maintenance