Leveraging the metrics

Feb. 28, 2005
In part three of Contributing Editor David Berger's piece on KPIs, he offers up a powerful set of CMMS-based metrics that addresses materials management.

Part 1 | Part 2 | Part 4

In the last two columns, I described two secrets to success in determining a small but powerful set of measures that trade off in the area of facilitating the management of assets and people. I also explained the perils of having too few or too many measures, as well as the importance of how the measures interact or trade off. This column continues the discussion about key measures, but with a focus on managing your MRO supply chain. Next month, I’ll discuss financial measures for managing your overall maintenance department.

Linking the chain
The discussion about the small but powerful set of materials management measures described below includes an indication of how they interact and trade off. Be aware that there is discrepancy about how these measures are defined and used within a given company, so imagine how they’re interpreted across industry. So, whatever measures you settle on, ensure their meaning is understood consistently throughout your enterprise.

To be maximized
Start with your average service level. Fewer stockouts of spare parts means a greater service level. However, contrary to what many believe, a 100% service level is never optimal. This is because the service level trades off with the inventory level. The higher the service level, the greater the cost of the inventory needed to ensure fewer stockouts. For service levels greater than 90%, the cost of inventory begins to rise sharply. At 100%, the cost approaches infinity.

It is, therefore, more cost-effective to classify your inventory using ABC and XYZ analysis, a feature found on more sophisticated CMMS packages. This analytic algorithm identifies the more expensive or higher-volume parts. Pareto analysis determines the 20% of products that account for 80% of spare parts inventory, in terms of volume and dollar value. For A- or X-class items, you should strive to have high service levels (about 95%). This increases the likelihood that when a high-impact downtime situation occurs, required spare parts will be available.

Criticality analysis helps refine the determination of which parts need higher service levels. Critical spares might require higher service levels to ensure quicker response to downtime. In turn, this positively affects key operational measures such as production throughput.

Next, examine inventory turns. This is a measure of the number of times spare parts turn over in a year. Be careful not to trade off your service level in the pursuit of higher turns -- a danger in arbitrarily reducing your inventory levels. Maximizing turns through, say, lower obsolescence, reduces spare parts inventory costs and preserves service levels.

Then, focus on vendor performance. The performance of the maintenance department and, in turn, operations, depends to a large extent on the performance of the MRO vendors that feed it and the quality of the material they supply. In the past, there was an adversarial relationship between MRO suppliers and your purchasing department. Thus, a typical company would have multiple suppliers of a given spare part and keep extra inventory on hand just in case the suppliers failed to deliver. The alternative to this rather costly “just in case” philosophy is using the 80/20 rule to determine the top 10 vendors supplying the vast majority of parts. The idea is to build long-term partnerships with as few suppliers as possible.

Determine your selection criteria to reduce the number of suppliers. The more obvious criteria are price, quality and service, based on analysis of the supplier history your CMMS captured. Consider order frequency and severity of:

  • Over/under shipments.
  • Late shipments.
  • Backorders.
  • Substitutions.
  • Quality rating fields and “quantitative” ratings with system-calculated values tied to supplier problems.
  • Poor documentation (packing slip and invoice accuracy).
  • Extended lead time.
  • Pricing anomalies.

Other criteria often overlooked when paring down suppliers are track record in maintaining supplier partnerships and alignment of strategic objectives, vision, values and culture.

To be minimized
The big one is inventory level: the measure of the average dollar value of spare parts in stock. It trades off with the other measures, especially service level and inventory turns. Continuously reducing the inventory level increases inventory turns at the expense of a corresponding potential increase in stockouts. On the other hand, lower inventory levels mean faster parts picking, fewer errors and less obsolescence. Accordingly, maintenance personnel can respond faster with the right parts to correct a downtime situation, thereby maximizing production output.

Moving to a just-in-time environment helps reduce the inventory level without a resultant drop in service level. This requires a strong partnership with your suppliers, as described above, to ensure quality spare parts are available when you need them.

Pay attention to obsolescence. One of the easiest ways to reduce the spare parts inventory level quickly is a matter of simple housekeeping -- cull your inventory by looking for obsolete items. Although some accountants don’t like to see a big write-down on inventory in a given quarter, it’s a small price to pay for a great cost reduction initiative. The CMMS can help find obsolete parts if you list your inventory in order of “date last issued.” As described above, improved vendor relationships and a JIT philosophy can provide comfort that non-critical parts, which turn over slowly, are kept from cluttering stockroom shelves. Furthermore, moving from a fire-fighting mentality to a more planned environment reduces the need for parts to be available just in case.

Another factor is supplier pricing. One obvious way to improve the bottom line on maintenance material costs is to secure better pricing on parts. This is far more likely if you have a strong relationship with fewer key suppliers, and you use your CMMS to stay on top of vendor performance. For “A”-class items, it pays to go through a formal process of obtaining quotations on long-term supply contracts to optimize pricing. A two-way service level agreement with key vendors is also a good idea.

Keep an eye on procurement cost. The world of e-everything provides the opportunity for suppliers and customers to share in considerable benefits. One of the most promising opportunities is e-procurement, including electronic exchange of catalog items, design documents, purchase orders, receiving documents, invoices and payment. Companies are enjoying between 10% and 30% cost reductions for purchasing tooling and spare parts electronically. The reason is reduced lead time, fewer errors, less paperwork, decreased labor, greater adherence to standards, auto or semi-auto tracking and expediting, consolidation across multiple plants and so on.

However, for other opportunities in the e-marketplace -- e-trading, e-auction, e-quotation -- you must balance the greater availability of buyers and sellers against competitive pricing, with potential quality and service-level reduction.

Don’t forget the simple, lower technology-driven ways to reduce procurement costs. This includes reducing the number of rush orders through better planning, reducing the unit prices by streamlining the purchasing processes, and greater use of simple releases against blanket purchase orders that are part of the long-term contracts with key suppliers.

Storage is a cost that is seldom even tracked. This is an important measure, especially when your inventory is tying up valuable real estate that can be used for value-added activities such as production. It’s also used in the calculation of the economic order quantity, or EOQ, which weighs order and storage costs as well as quantity discounts in determining the optimal number of units to order. Some of the more sophisticated CMMS packages have multiple EOQ algorithms that include storage cost calculations.

E-mail Contributing Editor David Berger at [email protected].

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