Category Archives: Strategic Management

Segmenting your MRO stock

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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

What is ”Operational Excellence”?

ProcessOperational Excellence… a term that we all use regularly, but what does it really mean? Despite regular usage there may not be clarity or agreement on what each individual means by the term.  This is also reflected in the literature where there are many different and conflicting definitions.  Just as a quick example, here is the current definition in Wikipedia:

Operational Excellence is an element of organizational leadership that stresses the application of a variety of principles, systems, and tools toward the sustainable improvement of key performance metrics.

Much of this management philosophy is based on earlier continuous improvement methodologies, such as Lean Manufacturing, Six Sigma, and Scientific Management. The focus of Operational Excellence goes beyond the traditional event-based model of improvement toward a long-term change in organizational culture.

This definition seems kind of vague (IMHO). A big reason for this lack of clarity is that, in a large number of cases, Operational Excellence is a term consultants use to sell a tool program that they would be happy to teach anyone. (Note, I am not criticizing consultants, they serve many useful purposes.) When you move away from the consultants (or at least toward a different set of consultants), the definitions tend to move away from “tools” and more towards cultural definitions.  My own inclination is that Operational Excellence is a culture and as such is not tool based or an adjunct of Continuous Improvement, lean six sigma, Total Quality Management or any other set of acronyms.   The tools are there to help achieve the metrics but concentration on the tools will not enhance innovation or effectiveness.  I firmly believe that it is these innovation and effectiveness aspects that is both the strength and a critical aspect of Operations Excellence.  With this in mind, here is the definition I would propose for Operations Excellence:

A corporate culture where the strategy / tactics / metrics spectrum is aligned and clearly understood by all members of the organization leading to an inclusive environment for continuous improvement, innovation and collaboration between all stakeholders (both internally and externally ).  This means that everyone in the organization understands the why and the how of what the organization is trying to accomplish and is encouraged to not only do their best but to actively contribute to change and improvement in all organizational processes.

What this means is that management must communicate clearly to the organization what the corporate strategies are, how they see these strategies affecting the day to day tactics and ensuring that there is a clear and measurable connection between the strategies and any metrics at use in the organization.  Management must also support cross training, process training and bottom up innovation at all levels of the organization.  The goal of doing this is to create a culture of continuous improvement, quality products & processes, cost control, and customer centric thinking.  The firmer this culture takes hold within the organization, the better all their processes (operational and back office) should become.  As with all “cultural” initiatives however, there is really no finish line to this.  Instead it is a vision to aim for that will change over time as circumstances and environmental factors change.

If you would like to discuss more about Operational Excellence and how to embed 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 the other posting on my website – http://jadetrilliumconsulting.com