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Net Results Inc. ©2010

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MRO Materials Dispositioning

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e 1

TThhee llaammeenntt……

“Some suggest that the mosquito will survive a nuclear holocaust. We

suggest that excess MRO supplies in the channel will be there to keep

the mosquito company.”

R. MacInnes, Strategic MRO

TThhee ssoolluuttiioonn……

What if you could quickly identify excess MRO items, one by one, and

expeditiously disposition them to improve your financial outlook? And

what if you could enhance cash flow, improve asset performance

through optimal MRO material practices today?

NNooww iiss tthhee ttiimmee......

Now is the time to rid the organization of past excesses, where

companies retained maintenance, repair, and operations (MRO)

materials to offset costs associated with asset failures or idle

personnel. Now is the time for operational resources at all

levels of the organization and across the supply chain to seek

practical ways to reduce costs without sacrificing performance.

Reality is painful, where most industrial MRO practices are ill-

conceived or inconsistently applied to areas such as initial

provisioning of spares, item criticality levels, numbering and

descriptions, sources of supply, stocking decisions, and service

level requirements. All of these suboptimal practices result in

huge MRO inventory investments, almost equaling an

unassembled plant, while tying up vital company capital.

Extracting value from excess MRO materials requires precision

and know-how to guide company resources to analyze, sort,

physically evaluate, aggregate, sell, and dispose of unneeded

stock. Deeply rooted “just in case” and “buy bulk save money”

mindsets must be overcome… the paradigms of the past that

built voluminous MRO inventories must be replaced with

objectives to clean house, recover investment, standardize

improved practices and protocols, and prevent future excess.

Industry solutions exist which ensure that the investment

MRO materials do not outlive the operations they are

intended to support. Now is the time.

RReeaadd oonn……


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e 2


The Cold Hard Reality…

73% of industrial companies believe they have excessive inventory and 87% recognize the potential for

substantial cost-saving opportunity in MRO inventory per a W.W. Grainger customer survey1. Sadly,

cross-industry statistics vary little, where on average 58% of MRO inventory investment does not move

in any three year period, and where only 6% of parts account for 90% of the MRO inventory

expenditures on an annualized basis2.

2007 estimates suggest that U.S. industries purchased a staggering $136 billion in MRO inventory that

has yet to be consumed three years later… a not so warm welcome to 2010. As MRO inventories sit so

does a significant portion of the “internal capital” of the organization. If this is your company, take

heart, excess MRO materials are a realizable Investment Recovery opportunity. When conducted

properly, MRO materials investment recovery activities enable one to recoup a portion of spent dollars

from surplus, obsolete, and overstocked inventory.

Investment recovery of MRO materials cannot be accomplished by a single leadership edict “I don’t care

how you do it, just get rid of it” or the magic eraser of an accountant’s pencil. Repeated initiatives by

companies to clean house of excess materials have failed and we predict, will continue to do so. The

good news is that industry solutions do exist. However, these solutions must be paired with the

organization’s will to tackle this tough and ever growing challenge.

Cases in Point – Determining the Excess MRO Opportunity

Big industry numbers make big points… but the points that matter most are at the

operational level. Analysis of millions of data across multiple

industries reveals that the MRO inventory profile can vary quite

substantially in investment, number of stock keeping units (SKU),

and excess quantity. Table 1 provides an MRO investment

snapshot from actual companies across multiple industries.

So what are the operational points that

matter?

All industries have made substantial investments in MRO items that have no usage over any given three year period – ranging from 28% to 84% of the SKUs and 30% to 77% of the dollar value tying up millions of dollars worth of capital.

Excess investments of greater than one year’s consumption exist in MRO materials in all industries – ranging from 5.3% to 34.7% of the moving inventory value.

1 Hartler, K. Director, U.S. Solutions Development, Grainger Industrial Supply, www.grainger.com/inventory

2 Xtivity analysis findings, www.xtivity.com

http://www.grainger.com/inventory

http://www.xtivity.com/


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Table 1 - MRO Inventory Industry Benchmarks

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Annual Inventory Purchases

1

$2.0M $5.1M $6.3M $8.1M $25.7M

Total MRO SKUs 5.4K 34.3K 13.2K 33.1K 15.8K # of SKUs w/no Usage

2

1.5K (28%)

28.8K (84%)

8.9K (67%)

20K (60%)

8.3K (53%)

Inventory Value

1

$2.1M $11.5M $16.7M $12.5 $24.1M

Annualized Turnover

0.95 0.44 0.38 0.65 1.10

Inv. Value w/No Usage

3

$1.1M (52%)

$7.0M (61%)

$12.9M (77%)

$7.2M (60%)

$11.7M (48%)

Moving Inventory excess > 1 yr’s Usage

4

$126K (12.6%)

$524K (11.6%)

$1.0M (26.3%)

$281K (5.3%)

$3.2M (25.8%)

Investment Recovery Potential

5

~$95K ~$5.8M ~$1.1M ~$570K ~$1.4M

Notes: 1 – value at time of analysis; 2 – usage period equals 3 years; 3 – percent of inventory value; 4 – percent of moving inventory value

(inventory issued over the past 3 yrs); 5 – estimate based on 25% of SKUs with no usage are critical and the minimum recovery value of 10% of

purchase price.

Diving deeper, analysis reveals some alarming facts – typically non-moving inventory grows at an annual

rate of 6.7% of the stock keeping units (SKU). Further, not only are companies buying more “moving”

inventory items than they need for a year, but nearly 70% of all

SKUs purchased on an annual basis will never be used. This is

known across all industries as waste.

More unpalatable food for thought, on average only 17% of new

MRO item adds to inventory will be used within the first month,

with the second use nearly 8 months later. Given that significant

percentage of MRO items can be acquired quickly enough to

mitigate production risk and still meet resource scheduling

objectives, why are companies becoming their own storefronts? It

doesn’t get better… for initial MRO inventory orders greater than 2,

69% on average are not issued within the first 3 years of

acquisition. Wow…


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e 4


The MRO Materials Path Less Traveled…

Industry hardened souls suggest that the best strategies for success are the simplest ones; neither

history nor the numbers support this premise in the MRO materials world. Simply put, dispositioning

MRO materials is not simple. Prying excess parts from the clutches of production resources charged

with keeping vital equipment going at all costs is a task worthy of multiple conflict resolution sessions.

Whereas, an oversimplified “dump-it when the accountants tell us to do so” provides no measurable

feedback for preventing future excesses. And if the thinking is that giving back purchased goods to

industrial supply chain is as easy as a visit to the Wal-Mart customer service counter, then think again.

So what to do?

Consider these proven but challenging phases for MRO material dispositioning.

1. Identify excess MRO materials 2. Select MRO materials dispositioning strategies 3. Establish MRO materials dispositioning team(s) 4. Execute MRO materials dispositioning strategies 5. Prevent future MRO materials excesses

PPhhaassee 11 -- IIddeennttiiffyy eexxcceessss MMRROO mmaatteerriiaallss

It is imperative that organizations begin this process with clear definition of excess MRO materials. Here

are some useful guidelines:

Unknown MRO items are by definition excess unless proven otherwise

MRO items beyond their shelf life

MRO items that are obsolete

MRO items that are deemed no longer used and/or needed

Readily available MRO items regardless of criticality, in excess of one year’s worth of supply

Capital spares regardless of criticality, that have had no usage in the last three years nor a forecasted failure/replacement event to occur in the next one year

Be careful not to confuse “excess” with “criticality” of the MRO item. Excess is strictly a function of item

demand – its predicted usage. Excess is excess regardless of the criticality of the MRO item.

Typically, organizations tackle identifying excess MRO items using two concurrent streams of activities;

(1) virtual “information” analysis and (2) physical “parts” inventory. Virtual “information” analysis

requires that the organization use its available databases to

identify MRO materials that exist in the operations; all

existing stock regardless of its inventory status.

The physical “parts” inventory requires the visual

identification by technical resources that can

associate MRO items to assets or locations as

well as determine such attributes as criticality,

likely usage, obsolescence, and so on.


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Net Results relies on MRO information specialists such as Xtivity (www.xtivity.com) and IHS

(www.ihs.com/mro) to quickly flush out the excesses as retained in the MRO inventory information

management systems (databases) of organizations. What might an MRO information analysis reveal?

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≥1 and <2 5,301 $2.544,447 $2.358,306 $186,141 $2,333,661 $2,043,756

≥2 and <3 909 $583,368 $282,378 $300,990 $280,863 $334,647

≥3 and <5 396 $297,435 $85,248 $212,187 $85,773 $63,900

≥5 and <10 201 $57,132 $10,401 $46,731 $10,863 $11,256

≥10 and <50 96 $74,403 $4,518 $69,885 $4,764 $4,551

≥50 and <100 9 $15,552 $255 $15,297 $255 -

≥100 and <1000 6 $12,576 $48 $12,528 $39 -

More than 1000 - - - - - -

Figure 1 - Paper Mill Excess MRO Inventory

Figure 1 is an analysis of an operation which defined excess MRO items as those with more than 1 year’s

worth of inventory at the current consumption rates. The above analysis does reveal an additional $7

million in MRO dead stock; inventory that had not been issued within the same three year analysis

period. And yes…as hard as it is to believe, operations exist with over 1,000 years of supply for items

they consume. To be certain not all excesses can be easily identified in MRO inventory database

applications, as stock could exists in multiple unaccounted for places. For a more complete snapshot of

excess MRO stock, organizations should expand their analysis to include MRO items that may exist as a

result of non-stock purchases such as, significant procurement card acquisitions, rotable inventories

held by vendors, and vendor supplied materials.

PPhhaassee 22 –– SSeelleecctt MMRROO MMaatteerriiaallss DDiissppoossiittiioonniinngg SSttrraatteeggiieess

There are five useful dispositioning strategies that will ultimately be blended to achieve the overall

investment recovery objective. Reuse buckets: Return and Redeploy. Sell buckets: Market and Fire Sale.

Rid bucket: Clearance.

http://www.xtivity.com/

http://www.ihs.com/mro


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Each dispositioning strategy has varying levels of return on investment (ROI) as implied in Figure 2.

Consider these differences when calculating the ROI for investment recovery activities.

Figure 2 - Dispositioning Strategy Relative ROI

Strategy 1: Return

Cancel it – identify the excess materials currently on order and cancel the purchase orders

now. To do so requires multiple levels of review and analysis. The first is an immediate

review of all open purchase orders for non-stock materials and determine if sound logic was

applied to the order quantity. The second requires an analysis of current MRO inventory

replenishment orders accompanied by a detailed review of maximums, minimums, and safety stock

levels used to drive inventory replenishment activities. If replenishment parameters have been derived

arbitrarily, then a detailed line by line review of open purchase orders will have to be conducted to

validate the logic used. When using automated analysis such as the Xtivity Inventory Optimizer, which

applies the correct statistical methods to determining stocking parameters, do not be surprised if 85% or

more of MRO inventory item order quantities and order points are modified. Typically 20% of moving

line items will have in excess of 1-year’s supply; cancelled purchase orders will be against these line

items. Companies that have completed this type of analysis have historically canceled purchase orders

for nearly 8% of their moving inventory value. This is no small amount of instant savings!

Give it back – return the items. Returning items to the original seller is rarely an easy proposition,

especially in these challenging economic times. The longer time passes from the original item

acquisition the less likely a return will be acceptable or one will recover the full value. And even if one is

successful in negotiating a return, don’t be surprised if there is an associated restocking fee.


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Alternatively, inventory buybacks, a longstanding industry practice, is usually conditioned on longer

term agreements with industrial distributors to buy future products with some level of certainty.

Buybacks by Original Equipment Manufacturers (OEM) or Engineering, Procurement & Construction

(EPC) firms is less likely but not unheard of. In short, be skeptical of those professing the ease of

returning items.

Strategy 2: Redeploy

Keep it – should we retain it? Our industry experience suggests that at a minimum 25% of

non-moving MRO inventory will be retained as critical and/or as a capitalized spare.

Retaining spares based on the criticality, the likelihood and severity of its failure is a good

risk management strategy, but keeping excess quantities is not. The decision to hold critical

spares is multifaceted; consider these criteria as a starting point. A clear definition of criticality, an

agreed upon retention period (typically three years); the estimated number and timing of the item

failures; whether failures can be reasonably detected with sufficient lead time to order replacements;

and supply surety over the life of the item. Industry practice suggests that critical engineered or unique

items be held over the life of the associated asset given longer lead times and supply availability.

Transfer it – can it be used elsewhere in the organization to avoid immediate purchases of like

materials? Detailed “inventory sharing” analysis provides both insight on where excesses exist and

where inventory shortages can be addressed by intra-company transfers. The rationale for inventory

sharing is often based on the notion that logistics and administration costs would be less for transferring

items between production facilities rather than buying new materials. This rationale is generally true

based on a onetime aggregated shipment of materials. Unfortunately for most organizations, MRO

inventories at different locations use varying part numbers and descriptions for like or substitute items,

making the inventory sharing analysis a near impossibility. Fortunately, both data cleansing and

inventory optimization technology exists to help tackle this challenge; ultimately enabling the confident

identification and sharing of MRO items with minimum risk to plant operations. Lastly, reuse may

require that certain items be converted or repaired, consider these costs before redeployment.

Strategy 3: Market

Once the decision has been made to sell MRO items, the investment recovery team will

need to investigate the various ways to do so in the marketplace. The sales path selection is

not as simple as it might first appear. There are many ways to sell materials, ranging from a

fixed price sale, private sale, negotiated sale, auction, sealed bid, consignment, or

outsourced sale. What follows is a discussion of a few that makes sense for MRO items.

Bundle it – MRO items have potential value to used equipment buyers, similar to spare parts included

with the original purchase. Recognize that the investment recovery of associated parts will likely be

included in the sale price of the asset. This strategy works exceptionally well if the organization has

associated parts to the equipment, either physically or in information databases. Specific associations

are typically found in blueprints, P&IDs, BOMs, equipment catalogs and so on. If parts to equipment

associations are not available create them, especially for known critical spares that a prospective buyer

would value.


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Consign it – entrusting excess parts to a third party for resale is another viable option. Third parties that

specialize in selling items often have a list of qualified buyers and have considerable experience in

conducting all aspects of the sales transaction. This is an effective time saving strategy for the

investment recovery team. Consignment charges typically range from 10 to 20% of the sale price.

Trade it – swapping excess materials for new or used materials and/or services may be an option worth

exploring. This option may play out as a credit against future purchases or a pure trade within or

between company locations and a recognized source of supply.

Figure 3 – Try trading one gauge for another

Strategy 4: Fire Sale

Auction it – does it make sense to sell excess MRO materials to the highest bidder? It does

if the item is in an as-manufactured condition, can be easily described, and associated to an

equipment type, industry, and/or MRO commodity group. Multiple service providers can

provide on-location as well as web-cast auctions.

eBay® it – does it makes sense to advantage MRO material resale efforts by using one of the largest

internet based auction sites, eBay®? eBay® is an online auction with localized websites established in

over thirty countries. It provides a shopping website in which individuals and businesses buy and sell a

broad variety of goods and services worldwide. The majority of the sales take place through a set-time

auction format, but "Buy It Now" price listings may make sense for excess MRO items.

Strategy 5: Clearance

Donate it – need a tax write-off? Equipment is typically donated, but do not forget to

include the associated spare parts. Check with accounting resources to determine the

specific financial and tax implications of a donation.

Dispose It – no other option of value? This is the option of last resort and is all too often the only option

given the condition of MRO items and their associated records. If this path is taken, consider the use of

a temporary hold area for items tagged for disposal. This holding area should be organized and

managed so that parts can be easily located and identified. And only after an agreed upon period of

time are items officially disposed. When disposing of MRO items consider all “green” risks, where both

internal resources and disposal services comply with safety and environmental regulations.


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IInnvveessttmmeenntt RReeccoovveerryy BBeenneeffiittss

IR teams save their companies an average of $8 million a year; individual companies have saved as much as $150 million a year from the asset management services of investment recovery professionals.

CAPS Research 2009 Investment Recovery Performance Report shows that for every dollar spent on investment recovery, $31 was returned to the bottom line: www.capsresearch.com.

70 to 90 percent of every sales dollar generated by investment recovery goes straight to contribution margin.

For every dollar generated by an IR team activity, $20 in sales would be required to generate the same net effect to the company's profit.

The value of the investment recovery is measured by a variety of results such as increased utilization of assets through deployment of unused equipment and materials; improved return on capital employed; reduced or eliminated disposal and maintenance costs; added source of revenue from sales; and minimized tax liabilities.

The investment recovery function also pays off in improved corporate morale. Employees and shareholders alike feel good about working for and investing in companies that are resourceful with assets rather than wasteful.

Source: Investment Recovery Association

Time is a factor in determining benefits…

Not all resale channels deliver the same return over

time. Industry data depicted in Figure 4 indicates that

when a third party investment recovery organization

has 12 months to execute a sales contract rather than

6 months, they can typically increase Marketplace

sales by 350% (as compared to Auctions and eBay®)

and thereby increase customer returns by 24%.

Figure 4 - MRO Equivalent Value Extracted

by Dispositioning Sales Channel

As one begins to evaluate the dispositioning of MRO

materials, it is reasonable to expect leadership to ask

the question, “What is the potential payback for such

an effort?” We suggest the industry “10/10” rule of

thumb as the starting point for estimating the

dispositioning opportunity – where 10% of the MRO

annual spend can be potentially sold, at an average of

10% of the original purchase price. Certainly

companies have achieved better, but only if, and it’s a

big if, they combine a thorough and statistically

correct MRO stock analysis, with experienced

operational resources and market savvy business

people. Be confident that the “10/10” estimates are

directionally correct. Even if the specific investment

recovery estimates appear small, use this opportunity

as a wake-up call to improve current MRO materials

management practices. Preventing the inevitable

“time to clean house again” three years hence is

worth the investment. The Investment Recovery

Benefits inset provides additional thought-starters.


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PPhhaassee 33 –– EEssttaabblliisshh MMRROO mmaatteerriiaallss ddiissppoossiittiioonniinngg tteeaamm((ss))

Although important, do not assume that a disciplined, cost centric,

supply savvy, purchasing team can singularly tackle this challenge.

Dispositioning excess MRO items requires a multidisciplinary approach,

where perspectives based on varying needs, are required to credibly

define and identify excess MRO material candidates. Internal teams

typically include representation from engineering, operations,

maintenance, MRO storeroom and inventory management, purchasing,

and accounting functions, from one or more production locations.

These teams are commonly augmented by knowledgeable investment

recovery resources, whose expertise guides the overall execution of the

dispositioning project, not just a singular phase.

When forming the investment recovery team ensure that the following

resource capabilities exist. The ability to –

Facilitate agreement and common direction.

Extract and analyze MRO inventory databases to determine usage and excesses.

Extract and analyze purchasing databases to determine what purchased parts should be considered.

Physically identify MRO items and associate them to an asset or location.

Determine stocking requirements for all items.

Determine the best dispositioning bucket to place items into.

Apply accounting rules to inventory, expensed, and capitalized items.

Perform physical dispositioning activities.

Oversee contracted resale and dispositioning services.

Develop improved internal and supply chain practices to avoid future excesses.

If this appears to be a hefty investment in resources, read and reread

the benefit section on page 9, until one has a clear grasp of the value of

such an effort. A well orchestrated excess MRO material dispositioning

project makes “invisible wastes visible” by educating all members on

how to see, improving practices, ultimately preventing future excesses.

Many intangible benefits exist above just the monies generated through

dispositioning activities – perhaps none bigger than organizational

resources clearly understanding the impact of their decisions on the

operational and financial performance of the enterprise.

The dispositioning project ends when the methods and management

systems necessary to prevent MRO material excess investments are

successfully deployed and monitored for continually improvement.


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PPhhaassee 44 –– EExxeeccuuttee MMRROO mmaatteerriiaallss ddiissppoossiittiioonniinngg ssttrraatteeggiieess

What follows are the essential project milestones for each MRO material dispositioning phases.

Successful completion of each requires that dispositioning team members be knowledgeable of MRO

materials management fundamentals, best practices, supporting technologies, and the requisite

knowledge to discern one industry technology solution from another. A word of caution – no matter

how well intentioned, assembling a team of ill-prepared resources with instructions to “just fix it” will

produce limited results.

PPhhaassee 11 MMiilleessttoonneess:: IIddeennttiiffyy eexxcceessss MMRROO mmaatteerriiaallss

1. Assure knowledge of MRO materials management practices. Knowledge may be the missing ingredient in effectively disposing of excess MRO materials and more importantly preventing future excesses. Training of responsible leadership and team resources about current industry best practices and proven MRO inventory optimization technology is an essential first step in doing right things right.

2. Scope the effort. The next step is to scope the MRO material dispositioning effort - single site, multi-site… some or all; MRO inventory only, purchased parts, parts included in service contracts; remnants of construction projects? When scoping the effort, understand that dispositioning activities are managed at the local level with support where necessary from corporate and/or industry specialists. Just be mindful of natural resistance to being told what to do… especially from perceived outsiders. If resistance is stiff, the oft described velvet glove, iron fist approach may be the last best option to encourage necessary involvement.

3. Identify MRO materials candidates. If not already completed, define critical parts definitions per Phase 1 activities cited in this paper. A word of caution. One may quickly find that existing databases are inadequate to the task; with unclear and multiple descriptions items, stocking locations, and accounting status. Further, one may also find that the order points, order quantities, lead times, have been arbitrarily derived; meaning someone declared the amount to be stock, versus using the statistically correct analyses of actual consumption patterns. All of these factors may hinder progress but should not stop it. For instance inventory sharing between sites typically requires a common naming if not numbering system. But if there are no intentions of moving excess items to another location, the lack of a common naming or numbering system is not a show stopper. Item description standardization and inventory optimization technology exists and will ultimately be required for Phase 5 prevention activities.

PPhhaassee 22 MMiilleessttoonneess:: DDeevveelloopp tthhee MMRROO mmaatteerriiaallss ddiissppoossiittiioonniinngg ssttrraatteeggyy

4. Bucket by dispositioning strategy. Bucket candidate MRO items by dispositioning strategy (return, redeploy, market, fire sale, and clearance). Create bucket portfolios that contain list of MRO items, their location, current excess quantities, purchased or book value, original source of supply, and so on. These bucket portfolios will be core databases used by dispositioning teams.

5. Estimate return on investment (ROI). Apply the “10/10” rule of thumb discussed on page 9 to estimate a directional ROI. If a more indicative ROI is required by leadership to move the project forward, then apply agreed upon accounting rules to estimate investment recovery monies by each bucket portfolio. Don’t let a low estimate of investment recovery stop the process. The true win is not only investment recovery but unearthing and subsequently improving business practices that created the material excesses.


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PPhhaassee 33 MMiilleessttoonnee:: EEssttaabblliisshh MMRROO mmaatteerriiaallss ddiissppoossiittiioonniinngg tteeaamm((ss))

6. Establish dispositioning team(s). A team approach is required to execute MRO disposition activities. Page 10 describes the likely member and the necessary team capabilities. Once the team charter has been developed and agreed upon, the team should validate accuracy of inventory information contained in the bucket portfolios. Further it should review any other analysis conducted as during Phases 1 and 2. Team members may choose to divide and conquer by bucket portfolio and/or by location. Depending on the scope of the MRO material dispositioning effort, full-time resources may be required. As the team enters Phase 5 it will essential that they understand all aspect of the asset lifecycle as it applies to MRO materials.

PPhhaassee 44 MMiilleessttoonneess:: EExxeeccuuttee MMRROO mmaatteerriiaallss ddiissppoossiittiioonniinngg ssttrraatteeggiieess

7. Conduct physical reconciliation. The team must have resources who intimately know the operation, the equipment, and the associated parts. With the first order of business being the reconciliation of inventory records to what is actually in the operations. Only direct hands-on contact will ensure that an item exists in a saleable or as-manufactured condition. Given the magnitude of this effort consider supplementing this team with industry resources such as skilled technicians, industrial distributors, OEMs technical support, and other known product specialists.

The physical identification of MRO inventory can become a laborious process especially if potential excess materials are tucked away throughout the facility in desks, shelves, and cabinet space. If an organization has significant amounts of uncontrolled excess MRO stock, then consider establishing a user immunity policy prior to the MRO “round up” effort. More than likely “stuff” was hidden because of system weaknesses, the very same weaknesses the team is now trying to solve.

8. Conduct information reconciliation. Without fail, the team will discover information discrepancies during physical reconciliation activities as described in step 7. When this occurs, team members should attempt to make MRO item records right, this has infinitely more valuable than arguing past practices. It is quite common to identify MRO items worthy of dispositioning that are not accounted for in any inventory database. Going forward, it is important that records of these items are created, recording their current condition, locations, ownership, and accounting status. Lastly, if rotable spares are listed in the bucket portfolios, is important that any documented repair or rebuild history be collected and associated with the item record.

9. Disposition MRO materials. Each MRO item dispositioning bucket may require different environmental, packaging, disposal and shipping requirements;

these should be captured in each bucket portfolio. Be sure that these methods are clearly stated, defined, and

consistently applied. Remember that a sale isn’t complete until an item is delivered in the agreed upon

condition accompanied by the requested and often required documentation.


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10. Perform dispositioning accounting. Recognize that as MRO inventories grew so did their importance on the company’s balance sheet, where huge chunks of accounting write-offs are considered an indicator of poor leadership and questionable financial stability. For asset intensive industries rarely are MRO materials immaterial to financial performance. The clear expectation of the market is for companies to establish a credible operational and financial platform to assure a sustainable future. Inaccurate accounting of the value MRO materials, specifically their value in use, destabilizes this platform.

Accounting for the dispositioning of MRO materials has multiple implications. If stock is sold then revenue would be recognized. In-kind consideration provides one-to-one benefits for trades. Donating items gives benefit to the recipient and potential tax benefits to the giver. And disposing of items creates accounting write-off to equal to the inventory value or the net book value of a capitalized item.

To stabilize the MRO material portion of a company’s financial platform accounting must develop the best approach for potential writing-offs of stock as it becomes slow moving or obsolete. Every company has a corporate fiduciary responsibility to identify these items and take action. A few accounting actions include: write-off/down procedure, annual benchmarking test for amount written off/down per year, quantifying differences between depreciable life and useful life of capitalized items to prevent accounting surprises, MRO material investment protocols to be used by all disciplines, “off-line” non-inventoried stock audit procedures, excess and dead part identifiers, and so on. In the end, the real value of the inventory should be considered zero when the SKU is not moving, obsolete, or is sitting idle due to excess. Simply put, “if you are accounting correctly you are managing correctly.”

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11. Prevent future excesses. Phase 5 activities are without question the most critical to preventing future excesses by balancing operational risk with optimal investments in MRO materials3. Unfortunately, leadership believes that is being tough-minded by ordering shelves to be filled with extra parts just-in-case something fails or to prevent idle maintenance resources has woefully failed. It is our contention that tough-minded leadership is successful when it focuses resources on preventing failures through investment in improved equipment and component designs, accompanied by improved practices and operating environments. Solving chronic problems such as excess MRO materials requires new organizational approaches supported by technology solutions. Fortunately for tough-minded leadership new solutions exist.

3 MacInnes, R. and S. Pearce, Strategic MRO: A Roadmap for Transforming Assets into Competitive Advantage,

Productivity Press, 2003.


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Much has been written on why MRO inventory seems

to grow without bounds. Beginning with the notoriously

generous OEM spare parts lists, to construction trailers and

lay down yards burgeoning with materials destined for capitalized

inventory, to component manufacturers adding upgrades and must

have features to stay with or ahead of competition, to a complete

lack of understanding by internal resources of what MRO materials are

being consumed by what asset or resource. The result… few accurately

understand what and how many MRO items should be kept in stock. The facts

speak for themselves – investment in MRO stock has been and continues to be

disproportionately high and quite naturally when spending is thought to be out

of control, uninformed management steps in and sets arbitrary ceilings on MRO

purchases or stocking levels. When will the insanity end?

We recommend the following ten core operating practices to prevent excesses in MRO material

investments, being mindful that not just internal practices may require changes, but also that of

suppliers.

1. Establish clear protocols for making initial MRO material stocking decisions. These protocols should be based on more than one factor, typically the opinion of the OEM. If the OEM is suggesting a massive investment in spare parts, what does it portend for the reliability of the asset? Proven methods exist for guiding initial provisioning activities, use them.

2. Conduct MRO item description cleansing, standardization, and enrichment activities for stock and non-stock materials. This reduces the confusion on what actually exists in stock, what has been acquired, what meets standards, what items are unreliable … the list goes on. Ultimately, accurate and useful descriptions are foundational to all inventory rationalization and optimization activities.

3. Develop Bill of Materials (BOMs) for frequently used items and all currently inventoried items (regardless of past usage). This “where used” classification will help establish criticality and service levels, support ongoing reliability improvement efforts, drive maintenance strategies, and ultimately support future dispositioning activities.

4. If multi-site operations exist, establish common naming and numbering standards that enable sharing of high-cost capital spares. Caveat emptor. Do not be sold on inventory sharing of frequently used or consumable MRO materials as a permanent strategy. Industrial end-users are consumers, not suppliers. The exception is facilities that are closely located and can share common inventories with minimal logistics cost. Inventory sharing strategies are useful for the initial bleeding down of existing stocks, but should be quickly replaced with better inventory stocking practices based on location specific consumption patterns.

5. Use the right statistical algorithms for establishing inventory stocking parameters. Sadly, nearly all companies with significant investment in MRO material inventories get this wrong, with just a few not caring enough to figure it out. What is needed is a complete shift in the mindset, as well as the techniques used to solve the peculiarities of MRO material demand patterns; this point alone will make or break all MRO material dispositioning and optimization initiatives.


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6. Review acquisition practices, such as emergency POs, procurement cards, and employee expense reports to determine if practices are unnecessarily driving up controlled inventory or off-line (black) stock levels.

7. Establish clear and consistent protocols (reliability, availability, costs, etc.) for parts rationalization activities. Once in place conduct ongoing equal and substitute parts analysis to reduce the number of SKUs that effectively do the same thing.

8. Evaluate current MRO item consumption levels. Identify bad performers and look for more reliable alternatives or improved operations and maintenance practices.

9. Create a company-wide mindset that it is a consumer of MRO materials not an industrial distributor or national retailer of DIY materials. Emphasize that every expenditure on excess MRO items wastes company money that could be put to other uses.

10. Where practical, ensure that all maintenance work orders account for materials used and returned. Analysis of material consumption at the work order level, as compared to inventory issues and purchase orders is often quite revealing. Apply this analysis to service providers who also pull from local stocks or provide materials as part of their contract agreements.

The above list must be strengthened with improved engineering, procurement, operations, inventory,

and supply chain management practices, each worthy of their own discussion.

Why doing nothing is a decision…

Doing nothing is a decision that many organizations choose to take. And

who can blame them. Historically there was little option but to

conduct periodic purges of overflowing MRO stock. Over time the

overabundance of MRO inventories became a necessary evil to

leadership and operations alike. Eventually “evil”

was dropped and “necessary” became the

operative thinking. For many, this painful

situation remains incurable. And even the

best leadership intentions of passing

responsibility from department to operations

back to departments has not magically solved it.

Doing something is also a decision, but doing it wrong

has the potential for harming production objectives and the careers of those who attempted to tackle

the MRO challenge. Invest in getting MRO materials management right, and then the benefits will be

clear, achievable, and sustainable in a relatively short period of time. Successful organizations have

achieved 100% return on investment in less than three months with a potential cash flow savings of 12%

over three year period.

Now is the time to rid your company of excess MRO materials and the practices that created them. The

path to optimal MRO materials management practices is challenging but not insurmountable. Industry

capabilities have advanced and practical solutions exist that successfully address this age old problem.

We have attempted to provide the reader with practical and real world advice on how to approach the

excess MRO materials investment challenge. We have done our part… the next step belongs to you.


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About the Authors

Rich MacInnes – is the founder and President of Net Results Inc. As a foremost expert in

solving MRO materials challenges, Rich leads the Net Results’ team of MRO

dispositioning resources in delivering MRO solutions to industries such as:

manufacturing, utilities, oil & gas, refining, mining, transportation, and defense. His

book Strategic MRO, A Roadmap for Transforming Assets into Competitive Advantage

provides the framework for tackling tough MRO challenges.

Rich Brady – is the Co-founder and Managing Director of BDM Consulting Inc. With over

15 years of operations and management experience with Merck and Intel Corporations,

Rich brings a wealth of domestic and international experiences in areas of spends

management, strategic sourcing, contract management, inventory optimization, and

business practice excellence.

About Net Results Inc.

Net Results combines industry analysis, thought leadership, and exceptional

asset management, maintenance, and MRO materials improvement

methodologies to deliver second-to-none performance and financial

improvement results to clients around the globe. Net Results performs onsite assessments to determine

the scope, strategies, level of effort, and cost benefit of tackling MRO material dispositioning challenges.

Contact us at [email protected] for more information.

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BDM Consulting Inc. has over 30 years of global experience in international supply

chain organizations, BDM Consulting knows how to “lean the supply chain and return

cash to your flow.” This is accomplished through tailoring proprietary methodologies

and best-in-class practices to asset intensive industries around the globe. BDM Consulting partners with

its clients to optimize their materials planning, sourcing, inventory, and logistics operations.

IHS Intermat is the leader in the industrial MRO parts optimization industry, delivering

three comprehensive MRO solutions to the marketplace. IHS Intermat utilizes a proven,

service-based model that leverages service and software tools to cleanse, standardize, and

enrich MRO material descriptions. Further, IHS Intermat provides inventory optimization

solutions that dramatically improve plant and MRO supply chain performance, while reducing overall

cost of operations. And if MRO material investment recovery is needed, IHS Intermat partners with

Net Results Inc. to deliver proven MRO Material Dispositioning services.

Xtivity, Inc. is the developer of the xIO MRO Inventory Decision Support Service.

Xtivity’s sole mission is to assist asset intensive industries to improve and simplify

decisions related to MRO materials through used of the xIO Inventory Optimizer™, the only effective

MRO optimization service that uses a proven scientific method to calculate correct Order Points and

Order Quantities for both frequently used and infrequently used maintenance inventory items.

mailto:[email protected]

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