Most of the articles on our website involve inventory that is either assembled or stocked for resale to other companies or organizations. In recent months we've received a lot of inquiries about managing products that are going to be consumed internally by an organization. This is normally referred to as maintenance, repairs, and operations (MRO) inventory. Typical questions we receive include:

• How do we decide what products we should stock to maintain our operations?

• What quantities of these products should be kept on hand?

In this article we'll address these questions and help you develop an action plan for achieving effective MRO inventory management.

What Products Should be Stocked?

Many organizations have too much inventory in their maintenance and repairs inventory. Unlike inventory for resale, MRO inventory is not an investment; it is an expense of doing business. Make sure that you are not adding to this expense with unneeded items. Be sure that there is a valid need or justification for stocking every one of the products in your current MRO inventory:

• The product cannot be obtained in the time period necessary to fill a need once the need has been determined.

• The product must be purchased in a quantity greater than what is needed to fill a particular need.

• The cost of carrying a product in inventory is less than the procurement cost.

Often companies will have spare parts in stock for machinery that is no longer in service. When they retired a piece of equipment, no one bothered to check to be sure that all of the spares for the machine were removed from the parts room. That is why we recommend that once a year you examine each of the products currently in your MRO inventory that have not been used in the past 12 months. Question whether it is absolutely necessary to continue to maintain a quantity of each one of them. It is also a good idea to develop a spreadsheet listing each MRO product, the machine(s) or operation(s) it supports, and the quantity of the product normally needed for a repair or maintenance activity. That way, when you discontinue a process in the future, you can easily identify the replacement parts that can be removed from your MRO inventory.

How Much of Each Item Should be Maintained in Inventory

You can separate your MRO inventory into three categories:

• Continual-Use Items  These are maintenance items and other products that are continually used.

• Specific-Need Inventory  Though not continually used, these items are used on a regularly scheduled basis.

• Emergency-Repair Parts  These are parts whose use sporadic usage cannot be predicted.

Every one of your MRO stocked products should be assigned to one of these categories. Continual-use items are just like the recurring stock products we address in other articles and our books. Please refer to these resources to determine how to calculate a forecast of future demand and other purchasing parameters for these items. Most organizations have too much money invested in the other two types of MRO inventory. Specific-need inventory products are required for scheduled maintenance operations. Unless these are very inexpensive items (i.e., they don't cost much to carry in stock), most companies are best off acquiring just what they need before each scheduled task. Emergency-repair parts are a different story. Since you don't know when each of them will be required, how can you determine how many of each one to stock?

Part of developing your MRO stock list was defining where each spare part is used in your operations. Now we must determine the "critical nature" of each one of these items. We've found it helpful to assign each of these items into one of three categories:

Very Critical Parts  The operation or machine this product supports is critical to the success of your company. There are no readily available "workarounds." Lack of this part will cause a major, expensive problem for your company. For example, one of our customers is a food processor with one large (actually room-size) mixer. If this machine breaks down, all production stops. Therefore, any part that is necessary for this machine's operation is very critical.

Somewhat Critical Parts  The loss of the machine or operation these parts support will shut down an important machine or operation. The same company has 14 wrapping machines. If one of these machines breaks down, it may delay the completion of a production run, but it would not completely shut down operations. While processing delays over an extended period of time would cause major problems, the company can limp along for a day or two without one or two of the wrapping machines.

Non-Critical Parts  The loss of the machine or operation these parts support will have no or little effect on overall production. There are available workarounds that can be utilized for an extended period of time.

The target stock level of a repair part is determined by a combination of its "critical nature" and lead time. In the following matrix, we define the number of normal-use quantities that should be maintained in stock for each repair part:

For very critical parts that can completely shut down operations, we will keep one normal-use quantity of each item in inventory even though we can get a replacement part in less than a day. And if the lead time of a very critical part is greater than a week, we will probably want to keep three normal-use quantities on the shelf in our parts room. The cost of this "insurance" is the annual cost of carrying inventory (normally 20% to 25% of the inventory value of the target stock level). You must weigh this expense against the cost of shutting down operations. Notice that we are not even considering maintaining an inventory of a non-critical part unless it has an extended lead time.

The average-use quantity suggestions in this table are not "cast in stone" and should be adjusted for your organization's specific needs. However, if you must reduce the value of your spare-parts inventory, we strongly suggest you discontinue or reduce your stock of non-critical and somewhat critical parts before reducing the target stock level of any of the very critical items. After all, these products support the lifeblood of your vital operations.

With proper management of MRO inventory, an organization can maintain an outstanding level of productivity at the lowest possible overall cost. But like any other process, it cannot be accomplished without a logical, methodical