How to Manage Your MRO Inventory

Kris Bagadia, PEAK Industrial Solutions, LLC
Tags: inventory management

Effective parts management is crucial to maintenance productivity and reliability. If equipment is down and a required part is unavailable, the breakdown could cost you a significant amount of money. Sometimes the part is in the storeroom but can't be found. You then must locate a vendor, identify the part and order it. A lot of money is then lost despite the fact that the part is in your storeroom. By properly managing your maintenance, repair and operations (MRO) inventory, you can save 10 to 30 percent of your annual inventory dollars.

Managing MRO Parts

Managing MRO parts can be challenging. On one hand, you need parts to be available in the case of breakdowns. At the same time, you cannot have an excessive amount of money tied up in inventory. Proper MRO parts management is a balancing act.

Quality vs. Price

When locating parts, you want to ensure that you select a quality part at a reasonable price. There are a couple of ways this can be accomplished.

Brand Name vs. Generic

Just like pharmaceuticals, the costs of generic parts are much lower than brand-name parts. In fact, you can often find the same part for a fraction of the cost under a generic name. The key for the MRO buyer is to focus on the specifications (speed, frame size, etc.) of the required parts. This allows you to comparison-shop to find the parts that meet the specifications at the cheapest prices.

Part Quality

Although a low price can be appealing, it may not always be the best choice in the long run. For instance, a construction company was using diamond cutters that cost $500 each. These cutters were poor quality and needed to be replaced every week. The MRO buyer decided to seek alternatives and eventually found a high-quality cutter for $1,200. Although the new cutter was more than twice the price of the original, it lasted six times longer. This initial cost yielded a savings of approximately $1,800 over the six weeks.

As you can see, it is important for the MRO buyer to think outside the box when buying parts in order to find ways to cut costs and still maintain quality.

Proper Quantities

Over the years, I have seen several MRO buyers who randomly determine the quantity of parts to order. Some companies even have a policy to order an extra of every part to ensure the part is on hand if it is needed. This results in an excessive amount of money held in inventory. If you overstock, you lose a lot of money. If you understock, you may have increased breakdowns, and the delay in procuring a part can result in monetary losses. However, you can determine re-order points and appropriate quantities to purchase based on lead times, parts usage history and the consequences of not having a part when needed.

Receive Material at the Optimum Time

If your storeroom and inventory are well-organized and re-order points are used, you generally will do very well. Unfortunately, this is not the case in many organizations.


Many companies operate in a reactive mode where parts are rush-ordered as they are needed. This expedited shipping can result in excessive costs that may go unnoticed as long as the company is still profitable. These are often the companies that end up going under.

Just-in-Time Ordering

With this system, the ordering of a part is scheduled so it arrives shortly before it is needed. Unfortunately, maintenance operations cannot schedule for an equipment breakdown. However, you can still apply the concept of "just in time" for preventive maintenance and other planned tasks. For example, if preventive maintenance calls for filters to be changed on air-handling units, the filters can be ordered so they arrive shortly before they are needed, rather than being ordered far in advance and then stocking them. Space is saved, and excess money is not kept in inventory.

The Cost of Issuing a Purchase Order

Many people overlook the fact that it costs money both to process and to issue purchase orders (POs). These costs come from labor, shipping and overhead for all related departments. The costs may be as low as $30 or as high as $500 to issue a purchase order.

The MRO buyer usually issues a purchase order as soon as parts are requested. At the end of the day, the buyer may have issued 10 POs. If each purchase order costs $300, the total cost is $3,000. Every storeroom or MRO buyer should be aware of the fact that POs cost money and should know exactly how much they cost.

It is not that POs shouldn't be issued, but rather that they should be consolidated. If purchase orders are not urgent, which they shouldn't be (as this is a sign that something else is wrong), hold off on them. At the end of every day, every two or three days, or whatever frequency works best depending on when they are needed and for what purpose, the POs should be consolidated. This way, instead of issuing six different purchase orders to one company, after three days you might be able to issue one PO with six line items and save money.

Carrying Costs

It would seem that the cost of a $50 part is $50, but that is actually not the case. In reality, when the part comes in and is put on the shelf, the part now costs more than the initial $50. These carrying costs consist of the building or storeroom, shelving, insurance, utilities, property taxes (in certain counties), labor (storekeepers, etc.), and obsolete parts (shrinkage, scrap, etc.).

As you can see, you spend a lot more on the part than just the initial cost. Typical carrying costs are between 12 to 20 percent of the purchase cost. Therefore, it is crucial to determine the optimum frequency and time for ordering parts.

Consequences of Carrying Costs

A buyer purchases 200 filters in order to receive a 10-percent discount because it seems like a great deal. The problem is that the filters must now be stored somewhere, and they take up a tremendous amount of space. Because of this space and the associated carrying costs, the company actually loses money.

Minimizing the Dollar Value of Your Stored Inventory

It is important to minimize quantities so the minimum amount of money is tied up in inventory, but it is just as important that parts are on hand when needed. This seems like a contradictory statement, but it is possible.

This can be done by keeping everything organized and having re-order points set. Re-order points should be calculated for each part based on its criticality, the consequences of not having the part (money lost), the cost of the part and the lead time.

You should also set re-order quantities. A re-order quantity should be established for each item so the MRO buyer knows how many of each part should be ordered. If your inventory record accuracy is 99 percent or better, you will not be operating in a reactive mode. The operation will run smoothly and the dollar value of stored inventory will be minimized.

Finally, work on reducing lead times, analyze your supplier's performance and check for obsolete parts so they are not taking up critical space.

Remember, the goal of MRO purchasing is to have the right part at the right time for the planned work. By cutting costs when locating parts, purchasing in proper quantities, ordering parts so they are received at the optimum time, reviewing the process of issuing purchase orders, and minimizing stored inventory, you can help your company maintain control of your parts inventory and improve asset reliability.

About the Author

Kris Bagadia is the founder and president of PEAK Industrial Solutions. He has experience in all facets of the maintenance management process and has stayed at the forefront of CMMS/EAM technology for more than 25 years. Kris also has extensive consulting ex...