ARC examines MRO inventory rationalization and optimization

Ralph Rio, ARC Advisory Group

Inventory optimization directly affects C-suite metrics by providing a positive impact on the P&L statement (lower inventory carrying costs and reduced spend) and balance sheet (less inventory and increased cash). Making your boss look good is always a good career move.

For this report, we’ve segmented MRO replacement parts into two usage patterns even though, in reality, gray areas lie in between. Repetitive items wear and have a history of being replaced. Organizations maintain inventory to prevent extended downtime while waiting for replacement parts to be purchased and delivered. Critical spares apply to specific equipment needed to sustain production. Here, spare parts are purchased and stocked to control risk – particularly long lead time items. This segmentation helps reveal two corresponding and very different inventory management policies. Repetitive items use min/max or VMI. For critical spares, organizations use a combination of theory of constraints (TOC) and reliability centered maintenance (RCM) to identify the critical equipment and associated critical spare parts to stock. Here, min/max or VMI would lead to a catastrophic stock-out because, once used, the part will not be re-ordered.

Divergent departmental metrics drive dysfunctional behavior and inventory issues. Conflicting metrics associated with handover (project engineering vs. maintenance) and inventory management (purchasing vs. maintenance) drive dirty data and sub-optimized inventory. The metrics and the related business processes are opportunities for improvement.

For MRO materials, clean up the accumulation of dirty data prior to inventory optimization. Data clean-up includes part number rationalization and supplier information. Optimization involves updating the re-order point and economic order quantity (EOQ) based on recent demand and supplier performance.

The benefits of MRO materials optimization include lower spend, reduced unit costs, less logistics (expedited delivery), and recovering obsolete inventory. Also, fewer stock-outs and better decision-support information improve maintenance operations. The associated inventory rationalization provides a foundation for a successful VMI program.

Table of Contents

  • Executive Overview
  • Business Impact for MRO Materials
  • MRO Material Categories and Policies
  • Causes of Sub-Optimized Inventory
  • Inventory Optimization
  • Benefits of Inventory Optimization
  • Supplier Solutions
  • Recommendations

All signed-in clients can view the complete report in pdf format at MRO Inventory Rationalization and Optimization.

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