Industrial MRO refers to the maintenance, repair and operations of machinery and equipment used in an integrated supply chain management model. As the focus on sourcing and procurement has gotten more attention since the global economic downturn several years ago, MRO providers are playing a significant role in supply chain management.
Often considered a non-core factor, ineffective MRO processes carry significant risks, which include among others:
- Unplanned equipment downtime
- Stock-out of mission-critical parts
- High freight cost
- Frustrated stakeholders
Therefore, ineffective MRO processes will have a significant impact on integrated supply chain management, in particular, downstream fulfillment. Not only does MRO affect fulfillment, but poor MRO management can impact internal business areas as well. Industrial buyers who neglect their MRO spend can lead their organizations into disorganized, maverick spending and spare parts wastage.
So, is your MRO strategy working? Have you experienced cracks or inflated costs in your production cycles as a result of ineffective response to operational needs? What should you be examining in order to lift your MRO practices?
5 KPIs for Better MRO Management
Measuring performance and the associated improvements to your MRO strategy requires setting benchmarks and identifying achievable goals. We’ve identified several metrics that should be analyzed to get a better handle on MRO processes.
MRO Spend as a Percentage of Procurement Budget
Maintenance and repair inventories should represent a low percentage of total production inventory. Therefore, MRO spend should consume 3% to 10% of overall procurement budgets.
Percentage of Maverick/Unaccounted Spend to Procurement Budget
Poor inventory accuracy and reactionary buys can inflate budgets and cause unnecessary inventory growth. Reduction in these areas will result in better spend visibility, more efficient consumption, and higher supplier accountability. Managers should look to keep this percentage under 2% of procurement budget.
Days Inventory on Hand/Inventory Turnover
Cash is tied up when MRO inventory sits. Most companies expense MRO supplies at the time of purchase, so it’s important to reduce how long these expenditures lag on the books. Keeping days-on-hand below 30 days is optimal for many industries.
Supplier Roster Contribution
MRO buyers should manage the number of suppliers that cater to 80% of their spend. With the emergence of one-stop industrial MRO distributors and integrators, buyers should look to consolidate the number of suppliers to a level of around 12% – 15% of their suppliers servicing 80% of their overall spend.
Ratio of Rush Orders to Replenishment Orders
While rush orders may be necessary from time to time, a heavy volume of rush orders increases spend, leading to cost overruns and shrinking margins. It’s important to maintain a low ratio (1:8 to 1:10) in order to combat negative impacts. Once a suitable ratio is established, it’s up to procurement, in collaboration with operations, to manage inventories to meet that ratio.
Stock outs have one of the most significant impacts.. These lead to production delays, rush orders, and higher MRO costs. This metric should calculate the number of stock out occurrences compared to total items picked and should be maintained at less than 1% on a daily or weekly basis.
By implementing these KPIs, your organization will be better suited to forecast spend, manage disruptions, and reduce the impacts to multiple business areas:
If you’re looking for more detailed guidance around MRO practices, contact an SDI representative today