mrp strategies are wrong for mro
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Produced by: Platinum Sponsor Premier Sponsor
Risk-Based Inventory Management:
MRP Strategies Are Wrong for MRO
Curtis Barton Steve Lyndon Rio Tinto Oniqua
• Managing varying MRO inventories
• Analysis of inventory for asset-
intensive business
• Implementation of a solution
• Key points to take home
• Questions
Evolution of Inventory Management
Rio Tinto Group - Company Profile
2009 Financials • Sales (mil.) $43,840.6 USD
• Assets (mil) $96,802.3 USD
• Employees 101,994
Rio Tinto Group - Company Profile
Slide 4
• Sites – • Europe/Middle
East/Africa
• 11 Processing
Plants, 10 Mining
Sites
• Australia/Asia
• 6 Processing Plants,
26 Mining Sites
• North/South Americas
• 14 Processing
Plants, 18 Mining
Sites
Rio Tinto Group - Company Profile
Slide 5
Minerals mined
include:
• Bauxite
• Borates
• Coal
• Copper
• Diamonds
• Gold
• Gypsum
• Iron
• Molybdenum
• Salt
• Silver
• Talc
• Titanium Dioxide
• Uranium
Some of our Business Units
Slide 6
• We produce commodities
o Market sets the price
o Little to differentiate our products from our
competitors
o We can sell everything we can produce
• To improve ROI, we can:
o Produce more with the assets we have
o Reduce our cost of production
Our Business
Slide 7
Slide 8
Managing Varying MRO Inventories
Varying types of assets require varying types of
analysis
• Mobile Fleet
o Heavy Mobile Equipment
o Light Vehicle
• Fixed Plant o Concentrator
o Smelter / Refinery
o Power Plant
o Material Upgrading
Slide 9
Mobile Fleet
High volume of spares
• Preventive Maintenance
o Kits
o Standard Jobs
• Break Fix
o Wide variety of equipment
Haul Trucks
Shovels
Dozers / Loaders
Slide 10
Fixed Plant
Volume of usage of spares is lower, but more complex
• Preventive maintenance
• Planned / Unplanned maintenance
o Critical equipment / Single line
o Unique / old equipment
o Lead-time issues
Long lead-times
High variability
Slide 11
Issues in Analyzing Inventory
Mining is a very conservative industry
• Asset intensive
o Most of working capital is tied up in assets
o Work in Process and Finished goods are small in comparison
• No Bill Of Material application to forecast for MRO
• High potential stock-out costs
Slide 12
Issues in Analyzing Inventory
• Criticality of equipment o Single systems
o Environmental concerns
• The majority of inventoried items have moderate to low
usage
• Personnel monitoring inventory have varied skills in
understanding the statistical calculations
• Tens of thousands of stock
items
• Large proportion of items slow
moving or intermittent demand
• Small number of items used
frequently and consistently
• Wide range of criticality / impact
• Wide range of availability
Our Inventory Profile
Slide 13
1%
15%
19% 65%
Movement
FAST
MODERATE
SLOW
NON MOVING
35%
14% 14%
25%
8%
3% 1%
Availability
< 1 week
1 to 2 weeks
up to 4 weeks
up to 2 months
up to 4 months
up to 6 months
more than 6 months
With MRO Inventory
o Only a small fraction of items meet the profile to be effectively
managed by MRP, i.e. where:
A significant proportion of demand is known in advance
Planning is done sufficiently in advance
o Most of the inventory cannot be managed by MRP:
Future demand is not known with any certainty, either quantity or timing
o How can we manage the inventory?
Competing and conflicting demands from Finance and „End Users‟
Want to deliver Maximum Service Level at the Lowest Total Operating
Cost
The Challenges of MRO Inventory
Slide 14
• SAP-MM is excellent for managing inventory for manufacturing and
retail
• MRP & time-phased planning
• Forecasting & consumption-based planning
SAP-MM
Slide 15
• Managing to a Service Level target is not optimal
o Target levels are arbitrarily set – Why do you want 95%? Why not 90% or
98.5%?
• Managing to a target Service Level is not managing risk!
o Service Level is a representation of probability
o Risk is probability * consequence
What are the chances of me not having it when it is needed?
What is the penalty or cost of not having it when it is needed?
Service Level
Slide 16
• Increasing Safety Stock
improves Service Level
• But the improvements
rapidly diminish
• How much Safety Stock
can we afford?
Service Level and Safety Stock
Slide 17
84%
86%
88%
90%
92%
94%
96%
98%
100%
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000
Serv
ice
Le
vel
Safety Stock
Safety Stock Value vs Service Level
Item A
Item B
• Keeping MRO inventory costs
money
• 15 – 20% p.a. is typical
• Is this the best use of our
capital?
• If end-users had to pay for the
cost of keeping inventory,
would their demands be
different?
Holding Costs
Slide 18
• Not having inventory when
it is needed can have
financial impact
o The higher the criticality, the
higher the penalty
o This is the „consequence‟
part of the risk equation
Stockout Cost
Slide 19
Variance Matters
Slide 20
Finding the right balance
Slide 21
Cost of Holding
Inventory
Cost of Not
Holding Enough
Inventory
How Much is
Enough?
• Getting the right level once is not
good enough
• Things change over time
o Initial estimates of usage or lead time
were not accurate
o Usage changes with production levels
and fleet size
o Market prices change the stock-out
penalty
Keeping the Right Balance
Slide 22
• Don‟t have time or resources to manually
review everything often enough
• Need to automate decisions where we can,
and get analysts to review where we have to
Keeping the Right Balance
Slide 23
• Limited forecasting algorithms, focused on fast moving inventory
• Only uses Normal distribution
o Most items that have low usage have statistical distributions like Binomial,
Negative Binomial or Poisson
• Lead time uses the manually assigned lead time, not the actual lead
time
• Does not consider variance of lead time
• Assumes Issue Size = 1; Many MRO items are used in multiples,
which can „overshoot‟ the ROP
• Does not factor in Criticality or Stock-out Penalty Cost
SAP-MM
Slide 24
• We needed a system that:
o Could support multiple business units
o Could automate the adjustment of reorder levels
o Manage by exception
o Robust, supported, maintained
o Manage by cost, not service level
o Allow modeling of „what–if‟ scenarios over multiple items
o All data in one place
o Focused on MRO Inventory
Our Requirements
Slide 25
• 100% focused on MRO
• Dominant in mining industry and other asset-intensive industries
• Selected after evaluation of SAP functionality and other apps
• A perfect complement to SAP!!
Oniqua Analytics Solution (OAS)
Slide 26
• We found the OAS term „Business
Impact‟ useful when discussing
inventory levels with end users
o The term „Criticality‟ is not the best;
To them, everything is critical!
o It is not a binary Critical/Not Critical
decision
o With Business Impact, we got them
to consider the „big picture‟ of what
would happen if the parts were not
available
Business Impact
Slide 27
• What else could we do if the
material is not available when
requested?
o Expedite delivery
o Temporary repair
o Substitute
o Or, no other option.
• Workarounds come at a cost, but
reduce the stock out penalty
• Need input from end-users
Considering Workarounds
Slide 28
OAS Workbench
Worldwide inventory consolidated in
OAS, and partitioned by Business Unit
Work Queues allow analysts to
quickly get to the records that
need to be reviewed
Control Segments
Control Segments are defined to
group together items with similar
inventory management policies
Control Segments - definition
Control Segments are based on rules
configured in OAS. These are flexible,
and are defined to meet the client‟s
business rules
OAS Inventory – Main tab
A group of records
extracted for review
Key information
extracted using SAP–
approved connectors
developed by Oniqua
OAS Inventory – Price details
Price information extracted
from SAP
OAS Inventory – Lead Time
Receipts extracted from SAP to
calculate Average Lead Time
and variance. Review Lead
Time assigned for different
purchasing scenarios, using
rules defined in OAS
OAS Inventory - Issues Issue Size and variance
calculated using Issue
transactions extracted from
SAP
OAS Inventory – Forecast
Usage is updated monthly from issue
transactions, and various forecasting
algorithms are tested to find the one that fits
closest. Abnormal usage can be „clipped‟.
Future usage and variance is calculated.
OAS Inventory – Codes tab
Other information on item
classification can be brought in from
SAP
OAS Inventory - Results
Business Impact shows
the consequence of a
stockout
Workaround Options show
what could be done if
stock is not available when
needed
Shows the current reorder levels
and OAS recommendation
Cost Model defines Holding Cost%,
Procurement Cost and Stockout Cost for the
item Status shows if it is an exception that
needs to be reviewed
OAS Inventory – Reorder Levels
Comparison of performance for the current
and recommended reorder levels.
Optimization seeks the reorder levels that
would give the lowest Total Costs
OAS Inventory - Results
OAS Inventory – What-If, fast moving
Comparison of the replenishment
cycle for the current and
recommended levels
OAS Inventory - Slow Moving Items
Slow Moving Items have
limited usage. The decision to
stock them in inventory is
based on the cost of holding
them until they are needed
compared to cost of not
having them (Stockout Cost)
OAS Inventory – What-if, slow moving
Graph shows decision to hold 0, 1
or 2 sets for slow-moving item
This shows an item with a
MTBD of 3.83 years (based
on usage history). The cost
per stockout for this item is
more than the cost of holding
it for that length if time, so
keeping it in inventory (Min =
0, Max = 1) is justified
•An objective basis for review of inventory
• Removes the “gut feel” arguments
• Standardizes the language
• Identifies specific areas for improvement
•Areas not generally considered with inventory can be assessed
• Purchasing Costs
• Stock Out Costs
• Holding Costs
•Analysis of the inventory follows a systematic process
• By usage
• By Material Group
• Etc.
Benefits Delivered
Slide 45
• Areas of value delivery, continued:
– Standardization • Processes
• Metrics
• Master Data
– Objectivity
– Consistency
– Financial Performance Improvement
– Visibility of Inventory Management in the Organization
– Improve the Skill Set of Inventory Controllers
– Ability to Make Mass ERP Changes
– Segmentation of Inventory for Analysis
– Retention of Historical Data
Benefits Delivered
Slide 46
• Were the end users included early in the process?
• How were the end users engaged during the implementation?
• Do the end users see the tool as a positive?
• How are the end users engaged as analysis is performed?
• Are the inventory personnel given enough time to perform
analysis?
Lessons Learned
Slide 47
Produced by: Platinum Sponsor Premier Sponsor
Slide 48
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