Published February 12, 2011
It continues to amaze me that companies big and small, well known and obscure, cannot give an accurate figure of what they spend and/or of the value of their MRO inventory.
When asked what a company’s MRO inventory spend is, estimates can vary 100%, 200% or even 300%. You will hear “It’s about $1.5 million”; “No, it’s more like $2.5 million, if we count the pallets and shrink. Wait, the spot buys are another $1 million.”
This lack of information does not exist within the supply chain for production materials, capital equipment or other important areas of business, so why do companies allow it to exist for indirect-MRO materials?
I have been in the MRO business for more than 50 years and have not seen much of a change; it is baffling that this condition continues to exist especially in today’s economy when control of all costs is so critical.
This situation is further clouded by a level of obfuscation based on who is responsible for indirect-MRO, job protection, supplier preference and the like. Some personnel who want to protect against change will devalue the MRO inventory spend to prove that change is not worth the effort or the cost of changing. To negotiate better pricing, many will increase the spend estimate in order to get the better pricing even though in practice, the spend never reaches the amount estimated.
Inventory values vary based upon who is providing the reporting and rarely includes floor and sub-stocks. Values also vary based on whether the inventory is asset or expense-based (asset more; expense less). You will hear the store’s supervisors say they have more inventory; “We are efficient, but we need more inventory to increase fill rates and guard against downtime.” Chief financial officers say less inventory, unless it is an inherited asset, and then they say more. Chief purchasing officers want less inventory so they can buy more. Distributor sales people want as much as stores can hold–they are on commission so they want to sell more, not less. Manufacturers that sell through distributors want distributors to stock more; the distributor wants to stock less and get the client’s MRO storeroom to stock more. The plant CEO wants less spend, less inventory, but parts on hand when needed in order to exceed plan. Inaccurate estimates cause inaccurate measurements and erroneous conclusions.
It is rare when all are on the same page!
A clearly defined indirect-MRO analysis—one that shows a true and objective picture—can be the first step in optimizing indirect-MRO costs that will in turn contribute to corporate net profits. Do you agree? What do you think? Let us know.
Contact Synovos with your MRO questions.