Category Archives: Inventory Management

Forecasting your MRO stock

sgmentationForecasting is rarely anyone’s favorite activity.  In fact most consider it a pain, or possibly a black art.  It is even common for companies to say they do not forecast because it is impossible in their industry (absolutely not true).  When talking about MRO stock these types of attitudes are even more evident than with regular stock.  The problem, of course, is that forecasting is necessary for people within the company to do their job and if there is no formal forecast, people will just make it up as they go, which means no consistency between departments or processes.  Not good for efficiencies, effectiveness, or optimization of your processes.  Since MRO stock tends to have much higher SKU counts and much more erratic demand patterns it is even more difficult to forecast.  One of the more effective methods for forecasting materials with erratic demand patterns is a method called segmentation forecasting.  The basic assumption for this method is that the reason for the erratic demand is that there are several different types of demand influencing the total demand quantity.  The obvious answer to that is to determine what types of demand there is for the material, forecasting each of the demands separately and then adding all the forecasts back together.  Since MRO stock often has different types of demand patterns this is an excellent methodology to use for it.

The first step, obviously, is to first determine what types of demands the MRO stock might have.  While the answer to that would be specific to any given industry or organization I would expect to see some or all of these types of demand.

  • Preventative Maintenance – Demand that is created by participation in a preventative maintenance program
  • Breakdown Repairs – Demand that is created by unscheduled breakdowns of the machinery or process
  • Project part – Demand that is created by specific projects within the organization (one time or short term)
  • Direct Order part – Demand that is created outside normal requirements and process for specific but non-normal usage.

The second step would be to define a forecasting process for each of these types of demand. For example, Preventative maintenance demand can be directly calculated by the computer if a firm Preventative maintenance schedule and individual Maintenance BOM’s exist. (There actually may be multiple BOMS for a particular process if you do major / minor maintenance. So long as the schedule notes which type and BOM to use there is no problem. For instance, if you do oil changes twice a year but every forth maintenance cycle you also change the transmission fluid then the type one BOM would only reference a quantity of oil but the type two BOM would show both oil and transmission fluid.) Breakdown repairs would probably be a straight statistical process with a sliding scale based on age of the equipment. Project and Direct Order demand would probably require a manual forecast from the people creating the demand. In order to control the processes it would be a good idea to set up a RACI chart detailing forecast responsibilities.Segmented Forecast – Part # 123

The third step would be for whoever is responsible (refer to RACI) to actually run each of the separate forecasts as per the processes defined in the second step. These forecasts would then be gathered up and added together for each separate SKU. This would give you a forecast chart for each SKU that looks something like this:

This four are relatively common in any company. There may well be other types of demand that are specific to your industry.

Month

 Total Forecast Preventative Maintenance Breakdown Repairs Projects Direct Orders

Jan

23

20

3

  

 

Feb

25

 20    

5
Mar 23 20 3  

 

Apr

 100 20   80  
May 48 20 3  

25

Jun

 20 20      

Jul

 23 20 3  

 

Aug

 20

20

      
Sep 28 20 3  

5

Oct

 130 20   110

 

Nov

 23 20

3

    

Dec

 40 20    

20
Total 503

20

      

 

The total forecast is treated the same as any other forecast and can then be shared with other interested departments such as purchasing and finance to be used for their purposes as well as serving as a basis for determining inventory stocking levels, replenishment triggers, etc.

If you would like to discuss more about Forecasting either MRO or regular stock and how to improve it in your organization, I would be more than happy to meet with you and to explore this in more detail.  Please feel free to contact me at edwhite@jadetrilliumconsulting.com

If you would like to read more about this and other topics check out my other postings on my website – http://jadetrilliumconsulting.com

Segmenting your MRO stock

sgmentation

 

Are you having trouble controlling your MRO stock?  Have you considered segmenting the stock by control process?  When done effectively, regular stock is controlled quite differently from MRO stock so you need to separate MRO from regular stock in your ERP system.  Once you have done this, you then need to separate the MRO stock into separate segments based on how you want to control any particular material.  The controls for MRO stock breaks down to several specific methods:

  • Zero Value Stock – This is basic items where the cost is written off (expensed) when it is received. For financial purposes it is important to consider which cost center any specific material gets expensed to but since it has no value in the system it is not usually considered part of inventory. Reorder control for this type of material is usually some sort of visual control.
  • Direct Order Stock – This is material that is ordered directly by someone other than procurement and not normally stored in the warehouse. There may be a number of reasons for using direct order rather than system control but it usually breaks down to a group that wants total control of a specific material. This material is usually expensed to the controlling groups cost center upon receipt and is not considered part of inventory. Reorder control is up to whoever is the controlling group for this material.
  • Project Stock – This is material ordered in by an engineer or project manager specifically for a project. When it arrives the project manager is informed, the material is isolated from the regular stock and stored until all the required materials have arrived. At this point the material may be moved to the project site or held until the project is ready to start.   The material is usually expensed on receipt but could also be shown in inventory and held with an allocation to the specific project (so it is not issued for some other use). When the material is moved to the project site it would be issued to the project thereby giving an audit trail in the system.
  • Vendor Managed Inventory – This is material where control has been handed over to a vendor on a long term contract. The vendor is responsible for monitoring stock on hand and replenishing as defined in the contract. Commonly the material is invoiced by the vendor when it is used rather than when it arrives. While the inventory count does show in the system, all the work (and cost) to monitor and control the inventory is moved to the vendor.
  • Repairable Stock – When one of these items are pulled from use and a new one put in, rather than discarding the used unit, it is repaired and returned into stock. Only if it has reached the point of not being repairable would it be discarded and a new unit purchased. There is a repair process rather than a reorder process for this material as the total quantity needed would be the number of units in use plus enough for normal replacement during the repair lead time (plus safety stock).
    • NOTE: Sometimes this material is serialized which means that the serial number must be tracked as each unit cycles through the process.
  • Visually Controlled Stock – This is material that is stored in the warehouse or at point of use but not tracked on a transactional basis. Instead visual controls such as KanBan or Two Bin is used to trigger replenishment. For financial control purposes the material is often expensed upon receipt since individual transactions are not tracked. Since there are visual triggers to reorder material there is no need for system controls which dramatically reduces the cost of control. KanBan control also tends to continually reduce the actual amount of inventory on hand which also reduces costs for the organization. Visual triggers are often used for C class items where the cost of transactional control could be higher than the cost of the actual unit.
  • System Controlled Stock – This final segment is everything else that cannot be moved to another control segment. It uses transactional control that is done in the same way as regular inventory which means forecast, inventory counts, purchase orders, receipts, issues and transactional measures. This is the most expensive and time consuming method for controlling inventory. Stock to be used for Preventative Maintenance is normally included in this group rather than in the project group as it usually involves small quantities used on a predictable schedule making it easy to forecast based on the PM schedule, a BOM, and MRP.

In summary, by splitting the entire MRO inventory into the different segments you can reduce the workload to control MRO stock levels dramatically.  As shown above, only one segment actual requires a significant work load, all the others either have no control functions, minimal control functions or control functions that have been moved to other groups.

If you would like to discuss more about MRO stock, or any inventory control, and how to improve it in your organization, I would be more than happy to meet with you and to explore this in more detail.  Please feel free to contact me at edwhite@jadetrilliumconsulting.com.

If you would like to read more about this and other topics check out my other posting on my website – http://jadetrilliumconsulting.com