The MRO inventory pitfall that costs millions

If some is good, then more is better, right? With electrical and lighting MRO inventory, more is just more—more cost, more stockroom space taken up and more time wasted finding parts.

Many plants have storerooms bursting with MRO parts. In many cases, their overstuffed cribs can easily exceed a one-year supply. Looking beyond surplus, there’s also obsolete inventory. Supply Chain Management Review estimates 20 percent of MRO inventory is outdated.

All these extra parts create a mountain of cost and problems for your organization. There’s obviously the output of cash, in addition to opportunity cost.

Maintaining surplus inventory is expensive

First, there’s the cash paid to purchase the parts, but that’s just the start. When it comes to inventory costs, like an iceberg, there are plenty of other costs below the surface:

  • Sunk cost. Money tied up in inventory is money that can’t be used for capital investment.
  • Carrying costs. Examples include state-level inventory taxes (“tangible personal property,” a.k.a. TPP taxes), insurance premiums and renting extra warehouse space.
  • Storage costs. If you carry parts for more than a year or two, the expenses of holding onto the inventory add up and you’re essentially buying the parts again.
  • Lost productivity and wasted time. Up to 20 percent of trips to the storeroom result in maintenance personnel leaving empty-handed because they can’t find the parts they already have in stock.

The adage that it doesn’t cost anything to hold onto parts you’ve already bought couldn’t be more false. Add up the costs for every extra part, across all your plants, and it can be millions. It’s expensive to carry inventory.

Make the mountain into a molehill

Excess inventory creates a mountain of expenses, but the problem can be reversed. Turn that mountain into a molehill by streamlining inventory with an MRO solution provider. Here’s what that looks like:

A Fortune 500 chemical company found itself plagued with runaway supply chain costs. The company needed to reduce expenses and hired IM Supply to take over their electrical and lighting needs.

The customer’s goal was 5 percent savings, but through a rapid implementation, IM Supply’s team slashed costs by 7 percent (more than $200,000) in the first year with even more savings forecasted.

The customer has plants located across the US and Canada and the first step of IM Supply’s implementation was to conduct crib crawls at each one. A crib crawl is a hands-on inspection of inventory at each plant.

“We analyze the storeroom cribs and warehouse spaces to see what they currently stock,” said Jared Hoover, president of IM Supply. “Then we compared that to their purchase history reports and calculated new min./max. levels for them. We bought up some of their excess inventory and let the rest wind down through use without replenishing them until they hit the new minimum level.”

Reducing carrying inventory was an important part of helping the chemical company lower its spend. Culling excess inventory from the customer’s system resulted in immediate savings. (Read the full case study here)

The 5 secrets to effective inventory management

IM Supply’s solution for this Fortune 500 company followed a battle-tested blueprint that they’ve successfully implemented time and time again across North America. The plan’s five complementary points drive MRO profitability.

  1. Analyze the current situation

MRO is a physical business and it requires boots on the ground. The first step is to do crib crawls to physically inspect the on-hand inventory. Physical inspections are critical because it’s very common for a storeroom’s contents not to match the system’s entries. There may be more or less in the storeroom than the system says there is.

  1. Identify obsolete inventory

Inventory falls into three categories: parts you need, excess quantities of parts you need and outdated parts. Eliminating the third category of inventory is an immediate win. IM Supply works with customers to buy back or otherwise liquidate these parts.

  1. Determine how much inventory you actually need

Identifying parts in third category described above is easy, but distinguishing between category one and two is a little harder. We analyze plant maintenance records, purchasing records and manufacturer recommendations to determine the demand for parts. Then, our team can set new min/max inventory levels with the plants for critical parts.

  1. Offload excess inventory

It’s cheaper to get rid of inventory surplus than to keep it. We help customers clear out cluttered stockrooms through buy-backs and other liquidation means.

  1. Leverage just-in-time inventory

Why carry non-critical inventory when you can have it delivered to you exactly when you need it? A key ingredient in a successful MRO supply relationship is having distributor locations near your plants. With the distributor warehouses nearby, plants are freed from investing heavily in non-critical inventory. Instead, these less important parts can be delivered within 24 hours from the supplier’s local warehouse. At IM Supply, we have more than 3,000 electrical distributor locations across North America, so there’s always a fully stocked warehouse near each of your plants.

IM Supply is a national electric and lighting MRO partner with deep experience in helping customers leverage lighting for maximum plant productivity and lowering total cost of ownership. IM Supply can offer a wealth of advice on keeping plants running safely, more efficiently and in full compliance with applicable regulations.