Answered March 23 2020
Inventory can make or break your maintenance performance. Other maintenance metrics and KPIs rely on having the right parts at the right time. Based on experience, you know how frustrating it is to put off tasks just because a part is unavailable.
While it is imperative to get the parts right away, the solution is not simply to load up the storeroom. In fact, lowering stock quantities is one of the main priorities of most companies to decrease working capital. Proper inventory management is not simply getting rid of stock or not stocking altogether. The right mindset in managing inventory is to optimize – in other words, to stock smart.
To make informed decisions when optimizing inventory, you need to be equipped with the proper tools, in the form of good data. Over the decades, organizations from various industries established some best practices that serve as a guide towards inventory management. Here are a key metrics to track for inventory, as prescribed by the Society for Maintenance and Reliability Professionals (SMRP).
Inventory turns is the ratio of the value of stock purchased, to the value of the stock that is currently on hand. The value of the stock purchased is measured over a set period, such as a year. In formula form, this is written as:
This metric gives you a sense of how fast inventory is flowing through the storeroom. It indicates the replenishment rate of your stocks. Higher values indicate fast-moving inventory, while lower values suggest slow-moving inventory. Another way to interpret low values for this metric is that materials could be overstocked – you might be bringing in small amounts while still holding massive quantities.
The ideal number of inventory turns not only varies with the type of company or industry, but also the type of stock. For example, expect critical spares to have lower inventory turn ratios given that they are not changed out regularly. These critical spares are usually kept on hand in the unlikely event of breakdowns and failure. On the other hand, you would expect to use some types of materials regularly. For such materials, like consumables, you want to aim for higher inventory turn ratios to bring in units only as needed. This drives your processes towards more efficient ways of utilizing storage space.
Keeping the nature of this metric in mind, you have to be mindful of setting targets. When considering all types of inventory within your facility, a value of 1 is considered acceptable. When looking at faster moving materials, or when excluding critical spares, a value of around 3 is recommended. Moreover, using this metric in conjunction with other indicators, such as stock outs, can portray a broader view of the inventory condition.
As the name suggests, stock outs is a measure of the number of times that a part is not available immediately. A stock out scenario is counted every time someone attempts to get a required part from the warehouse and is unable to do so. As a metric, it is expressed as the percentage of requests with stock out, over the total number of requests. Best practice targets for stock outs concerning unplanned work suggest a value of less than 2%. In formula form, stock outs can be written as:
Measuring stock outs is a proactive way of increasing overall reliability. It directly affects how fast maintenance teams can carry out their required activities. Having zero stock outs sets your maintenance teams up for quicker repair times. However, you must be cautious so that your strategies to reduce stock outs also consider an inventory optimization point of view. If your plan to reduce stock outs is to fill the warehouse up to its physical capacity, then you might want to think again.
As previously mentioned, stock outs is usually used in conjunction with inventory turns. For example, we know that a low stock out value is generally an indication of good performance. However, having low stock outs coupled with low inventory turns can suggest overstocking issues. Having overflowing quantities sitting on the shelf would obviously result in virtually zero stock outs, but with unjustifiable costs. Applying an additional layer to stock outs – in this case, inventory turns – provides a more informed assessment of your true inventory performance.
At this point, we can agree that keeping stock in your warehouse costs money and warehouse logistics](https://www.onupkeep.com/answers/inventory-management/what-is-warehouse-logistics/) is essentially a balancing act. The goal is to stock the right types of inventory that add value while keeping them at optimal levels. A way of having the parts you need in time, without the burden of managing it by yourself, is through vendor managed inventory.
As a metric, vendor managed inventory is defined as the number of vendor managed stocked materials divided by the total number of stocked materials. The basis of counting each material is by individual stock-keeping unit (SKU). In formula form, this can be shown as:
Alternatively, the basis of calculating the vendor managed inventory percentage can be the actual value of the stocked units. This accounts for the worth of stocked inventory, rather than the number of SKUs. In this case, the formula becomes:
There are some notable benefits of having your suppliers take full responsibility for providing your inventory needs. You not only gain accurate visibility with lead times, but also place orders in optimal quantities and frequencies. Choosing the right kind of materials to be managed by suppliers is an opportunity to streamline stocking levels. Important notes to remember with this kind of set-up are to ensure clear communication with your suppliers and to provide accurate usage forecasts.
Inactive stock includes materials in your stockroom that have not been used in the last 12 months or longer. Analyzing the number of inactive stocks can lead you to more strategic decisions and actions to manage your working capital. For instance, you might want to review your stocking levels for identified inactive materials, or even write-off some of the units on hand.
The list of inactive stock records should exclude critical spares and non-stock materials. Critical spares are kept in stock because of their importance to keep operations running in the event of unexpected downtime. They are usually high-value equipment with relatively long lead times. Non-stock materials, on the other hand, are items that are on the inventory records while not physically stocked. You can easily keep track of these categories when using a CMMS program that distinguishes one from the other.
The inactive stocks metric is calculated as the percentage of inactive inventory records of the total number of inventory records. That is, excluding critical spares and non-stock materials. In this calculation, think of each inventory record to be equivalent to a unique SKU. In formula form:
Inactive stock can also be computed based on inventory value instead of the number of records. The following formula shows this scenario:
Using the percentage based on the number of records tells you the extent of the issue, while the stock value tells you about your working capital reduction potential. Using both of these can tell you about which categories of stock you can prioritize to get the most cost reduction for the least amount of effort.
Storeroom attendants, also referred to as storeroom clerks, typically take on a variety of duties as part of their day-to-day activities. These duties include issuing out parts, organizing stocks, preparations to ship out or receive materials, performing inventory counts, and general housekeeping. Counting the number of transactions in a given period approximates the amount of work performed by these employees.
Calculate this metric by taking the total number of transactions within a period, then dividing it by the number of clerks. Another interpretation of this calculation is that it represents the average number of transactions that each clerk performs within the period. The following formula expresses the calculation of this metric:
Before calculating this metric, it is important to define all types of transactions that are performed in the storeroom. This way, you are ensuring to account for all types of activities. Transactions should include goods issues, returns, cycle counting, receipts, adjustments, and so on. It helps to utilize the capabilities of existing inventory management software to keep track of these movements.
Another important aspect of this metric is qualifying the people who are considered storeroom clerks. Each assigned storeroom clerk should be a dedicated full-time equivalent in the assigned role while performing these calculations. Without specific assignments, the data output would not be representative of the actual transactions that each employee performs.
Best practice values for storeroom transaction counts can vary widely depending on the facility and the industry to which it belongs. This metric can be useful when scaling up within the same modes of operation, especially when used alongside other service or delivery metrics.
Similar to storeroom transactions, storeroom records also evaluates the workload of storeroom staff. You can assume that the tasks an employee would have to do will increase with the number of materials they will be managing. The number of individual SKUs on record, in this case, represents the number of managed materials.
You can calculate this metric by taking the total number of stock records and dividing it with the number of clerks working full-time within a given period. This roughly estimates the average number of records that each working employee would need to take charge of. In formula form:
The total number of inventory stock records would include any material that has a unique SKU. This means that non-stock materials, critical spares, as well as inactive stock, are included. Only materials that are not cataloged by the facility would be excluded from this count. Typical examples of materials that are not cataloged are low-value free-issue materials typically issued out without a goods issue transaction.
As with storeroom transactions, best practice targets for storeroom records will be different for each facility. It also proves to be a useful tool for gauging workforce additions given a surge in newly created material records. It can be helpful benchmarks between similar facilities with comparable working procedures.
Implementing a comprehensive maintenance strategy requires a lot of resources and could pile up to a substantial total cost. A sizable portion of the total maintenance costs would be allocated to material costs. Maintenance material costs would include any expense incurred for materials, supplies, and consumables required to perform maintenance activities within a given period.
Pretty much all of maintenance, repair, and operating (MRO) materials would comprise maintenance material costs. This includes all stocked parts, non-stock materials, supplies, and consumables. Expenses to repair spare components would also be included in maintenance material costs. Note that by definition, maintenance material costs would exclude materials acquired for plant expansions and improvements – these are no longer in the maintenance program scope.
There are several other sources of costs when looking at the entire maintenance strategy. Most of the other components of the total maintenance cost would be from labor and service expenses. Other pieces of the maintenance budget would include internal maintenance labor, maintenance staff salaries and wages, contractor services, and janitorial services. All these, plus the material maintenance cost, would sum up the total maintenance cost.
Maintenance material costs, through this metric, are expressed as a percentage of the sum of all maintenance costs. The time basis for the metric is usually in months, quarters, or years. The following formula shows this calculation:
As a supplementary analysis, maintenance material costs can be compared to maintenance labor costs. High percentages of material costs may suggest that preventive or predictive strategies are not as effective as expected. High percentages of labor costs, on the other hand, might suggest ineffective planning. When comparing similar facilities, these percentages may be used as benchmark values to compare best practices.
As the old saying goes, you can’t improve what you can’t measure. Tracking inventory metrics is the first step towards successful inventory management. By having enough data on the current situation, one can develop strategies to improve existing processes. After implementing the improvements, the metrics would objectively show you the things you did correctly, and the things you can further refine. This becomes a continually evolving process of learning and development.
This story was updated in March 2020 with additional information.
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