MRP Strategies Are Wrong for MRO

Produced by: Platinum Sponsor Premier Sponsor

Risk-Based Inventory Management:

MRP Strategies Are Wrong for MRO

Curtis Barton Steve Lyndon Rio Tinto Oniqua

• Managing varying MRO inventories

• Analysis of inventory for asset-

intensive business

• Implementation of a solution

• Key points to take home

• Questions

Evolution of Inventory Management

Rio Tinto Group - Company Profile

2009 Financials • Sales (mil.) $43,840.6 USD

• Assets (mil) $96,802.3 USD

• Employees 101,994


Slide 4

• Sites – • Europe/Middle

East/Africa

• 11 Processing

Plants, 10 Mining

Sites

• Australia/Asia

• 6 Processing Plants,

26 Mining Sites

• North/South Americas

• 14 Processing

Plants, 18 Mining

Sites


Slide 5

Minerals mined

include:

• Bauxite

• Borates

• Coal

• Copper

• Diamonds

• Gold

• Gypsum

• Iron

• Molybdenum

• Salt

• Silver

• Talc

• Titanium Dioxide

• Uranium

Some of our Business Units

Slide 6

• We produce commodities

o Market sets the price

o Little to differentiate our products from our

competitors

o We can sell everything we can produce

• To improve ROI, we can:

o Produce more with the assets we have

o Reduce our cost of production

Our Business

Slide 7

Managing Varying MRO Inventories

Varying types of assets require varying types of

analysis

• Mobile Fleet

o Heavy Mobile Equipment

o Light Vehicle

• Fixed Plant o Concentrator

o Smelter / Refinery

o Power Plant

o Material Upgrading

Mobile Fleet

High volume of spares

• Preventive Maintenance

o Kits

o Standard Jobs

• Break Fix

o Wide variety of equipment

Haul Trucks

Shovels

Dozers / Loaders

Fixed Plant

Volume of usage of spares is lower, but more complex

• Preventive maintenance

• Planned / Unplanned maintenance

o Critical equipment / Single line

o Unique / old equipment

o Lead-time issues

Long lead-times

High variability

Issues in Analyzing Inventory

Mining is a very conservative industry

• Asset intensive

o Most of working capital is tied up in assets

o Work in Process and Finished goods are small in comparison

• No Bill Of Material application to forecast for MRO

• High potential stock-out costs

Issues in Analyzing Inventory

• Criticality of equipment o Single systems

o Environmental concerns

• The majority of inventoried items have moderate to low

usage

• Personnel monitoring inventory have varied skills in

understanding the statistical calculations

• Tens of thousands of stock

items

• Large proportion of items slow

moving or intermittent demand

• Small number of items used

frequently and consistently

• Wide range of criticality / impact

• Wide range of availability

Our Inventory Profile

Slide 13

1%

15%

19% 65%

Movement

FAST

MODERATE

SLOW

NON MOVING

35%

14% 14%

25%

8%

3% 1%

Availability

< 1 week

1 to 2 weeks

up to 4 weeks

up to 2 months

up to 4 months

up to 6 months

more than 6 months

With MRO Inventory

o Only a small fraction of items meet the profile to be effectively

managed by MRP, i.e. where:

A significant proportion of demand is known in advance

Planning is done sufficiently in advance

o Most of the inventory cannot be managed by MRP:

Future demand is not known with any certainty, either quantity or timing

o How can we manage the inventory?

Competing and conflicting demands from Finance and „End Users‟

Want to deliver Maximum Service Level at the Lowest Total Operating

Cost

The Challenges of MRO Inventory

Slide 14

• SAP-MM is excellent for managing inventory for manufacturing and

retail

• MRP & time-phased planning

• Forecasting & consumption-based planning

SAP-MM

Slide 15

• Managing to a Service Level target is not optimal

o Target levels are arbitrarily set – Why do you want 95%? Why not 90% or

98.5%?

• Managing to a target Service Level is not managing risk!

o Service Level is a representation of probability

o Risk is probability * consequence

What are the chances of me not having it when it is needed?

What is the penalty or cost of not having it when it is needed?

Service Level

Slide 16

• Increasing Safety Stock

improves Service Level

• But the improvements

rapidly diminish

• How much Safety Stock

can we afford?

Service Level and Safety Stock

Slide 17

84%

86%

88%

90%

92%

94%

96%

98%

100%

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Serv

ice

Le

vel

Safety Stock

Safety Stock Value vs Service Level

Item A

Item B

• Keeping MRO inventory costs

money

• 15 – 20% p.a. is typical

• Is this the best use of our

capital?

• If end-users had to pay for the

cost of keeping inventory,

would their demands be

different?

Holding Costs

Slide 18

• Not having inventory when

it is needed can have

financial impact

o The higher the criticality, the

higher the penalty

o This is the „consequence‟

part of the risk equation

Stockout Cost

Slide 19

Variance Matters

Slide 20

Finding the right balance

Slide 21

Cost of Holding

Inventory

Cost of Not

Holding Enough

Inventory

How Much is

Enough?

• Getting the right level once is not

good enough

• Things change over time

o Initial estimates of usage or lead time

were not accurate

o Usage changes with production levels

and fleet size

o Market prices change the stock-out

penalty

Keeping the Right Balance

Slide 22

• Don‟t have time or resources to manually

review everything often enough

• Need to automate decisions where we can,

and get analysts to review where we have to

Keeping the Right Balance

Slide 23

• Limited forecasting algorithms, focused on fast moving inventory

• Only uses Normal distribution

o Most items that have low usage have statistical distributions like Binomial,

Negative Binomial or Poisson

• Lead time uses the manually assigned lead time, not the actual lead

time

• Does not consider variance of lead time

• Assumes Issue Size = 1; Many MRO items are used in multiples,

which can „overshoot‟ the ROP

• Does not factor in Criticality or Stock-out Penalty Cost

SAP-MM

Slide 24

• We needed a system that:

o Could support multiple business units

o Could automate the adjustment of reorder levels

o Manage by exception

o Robust, supported, maintained

o Manage by cost, not service level

o Allow modeling of „what–if‟ scenarios over multiple items

o All data in one place

o Focused on MRO Inventory

Our Requirements

Slide 25

• 100% focused on MRO

• Dominant in mining industry and other asset-intensive industries

• Selected after evaluation of SAP functionality and other apps

• A perfect complement to SAP!!

Oniqua Analytics Solution (OAS)

Slide 26

• We found the OAS term „Business

Impact‟ useful when discussing

inventory levels with end users

o The term „Criticality‟ is not the best;

To them, everything is critical!

o It is not a binary Critical/Not Critical

decision

o With Business Impact, we got them

to consider the „big picture‟ of what

would happen if the parts were not

available

Business Impact

Slide 27

• What else could we do if the

material is not available when

requested?

o Expedite delivery

o Temporary repair

o Substitute

o Or, no other option.

• Workarounds come at a cost, but

reduce the stock out penalty

• Need input from end-users

Considering Workarounds

Slide 28

OAS Workbench

Worldwide inventory consolidated in

OAS, and partitioned by Business Unit

Work Queues allow analysts to

quickly get to the records that

need to be reviewed

Control Segments

Control Segments are defined to

group together items with similar

inventory management policies

Control Segments - definition

Control Segments are based on rules

configured in OAS. These are flexible,

and are defined to meet the client‟s

business rules

OAS Inventory – Main tab

A group of records

extracted for review

Key information

extracted using SAP–

approved connectors

developed by Oniqua

OAS Inventory – Price details

Price information extracted

from SAP

OAS Inventory – Lead Time

Receipts extracted from SAP to

calculate Average Lead Time

and variance. Review Lead

Time assigned for different

purchasing scenarios, using

rules defined in OAS

OAS Inventory - Issues Issue Size and variance

calculated using Issue

transactions extracted from

SAP

OAS Inventory – Forecast

Usage is updated monthly from issue

transactions, and various forecasting

algorithms are tested to find the one that fits

closest. Abnormal usage can be „clipped‟.

Future usage and variance is calculated.

OAS Inventory – Codes tab

Other information on item

classification can be brought in from

SAP

OAS Inventory - Results

Business Impact shows

the consequence of a

stockout

Workaround Options show

what could be done if

stock is not available when

needed

Shows the current reorder levels

and OAS recommendation

Cost Model defines Holding Cost%,

Procurement Cost and Stockout Cost for the

item Status shows if it is an exception that

needs to be reviewed

OAS Inventory – Reorder Levels

Comparison of performance for the current

and recommended reorder levels.

Optimization seeks the reorder levels that

would give the lowest Total Costs

OAS Inventory - Results

OAS Inventory – What-If, fast moving

Comparison of the replenishment

cycle for the current and

recommended levels

OAS Inventory - Slow Moving Items

Slow Moving Items have

limited usage. The decision to

stock them in inventory is

based on the cost of holding

them until they are needed

compared to cost of not

having them (Stockout Cost)

OAS Inventory – What-if, slow moving

Graph shows decision to hold 0, 1

or 2 sets for slow-moving item

This shows an item with a

MTBD of 3.83 years (based

on usage history). The cost

per stockout for this item is

more than the cost of holding

it for that length if time, so

keeping it in inventory (Min =

0, Max = 1) is justified

•An objective basis for review of inventory

• Removes the “gut feel” arguments

• Standardizes the language

• Identifies specific areas for improvement

•Areas not generally considered with inventory can be assessed

• Purchasing Costs

• Stock Out Costs

• Holding Costs

•Analysis of the inventory follows a systematic process

• By usage

• By Material Group

• Etc.

Benefits Delivered

Slide 45

• Areas of value delivery, continued:

– Standardization • Processes

• Metrics

• Master Data

– Objectivity

– Consistency

– Financial Performance Improvement

– Visibility of Inventory Management in the Organization

– Improve the Skill Set of Inventory Controllers

– Ability to Make Mass ERP Changes

– Segmentation of Inventory for Analysis

– Retention of Historical Data

Benefits Delivered

Slide 46

• Were the end users included early in the process?

• How were the end users engaged during the implementation?

• Do the end users see the tool as a positive?

• How are the end users engaged as analysis is performed?

• Are the inventory personnel given enough time to perform

analysis?

Lessons Learned

Slide 47

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Slide 48

MRP Strategies Are Wrong for MRO

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