Use your CMMS to reduce costs and improve quality through better inventory management
Your CMMS provides numerous opportunities for managing costs across multiple drivers. One key source of savings stems from better management of inventory. From processing a purchase order to replacing a spare part, a modern CMMS has numerous features and functions that can dramatically improve productivity. In my experience, however, most companies use only about 15 to 30% of this rich functionality. Check to see if you are effectively using, or could use, some of the more advanced features described below.
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Service level analysis. Service level can be defined in many ways, but typically it is the percent availability of spare parts upon request. For example, a 95% service level means that 95 times out of 100, spare part requests were fulfilled.
Service levels are analyzed by part and by part category. This is because it would be completely impractical to maintain a service level of 100% across the entire inventory. The cost of carrying inventory to sustain 100% service would be astronomical, especially with thousands or even with hundreds of inventory items. Typically, only certain parts or part categories require high service levels.
A sophisticated CMMS will track the cost of carrying a part or part category at a given service level. Note that the cost begins to rise dramatically for every 1% increase in service level beyond approximately the 96% service level. This is essential to bear in mind when determining a service level agreement with operations. A good analysis tool will provide operations with a sense of the dollar tradeoff when increasing service levels. Some of the more sophisticated inventory control systems will allow what-if analysis to strike a balance between inventory level and service level.
ABC and XYZ analysis. Another means of categorizing inventory for optimization of service levels is using the ABC and/or XYZ classification systems. For ABC analysis, inventory items are classified into three groups: ‘A’ class items constitute a small number of parts with a high volume usage (e.g., 20% of the parts account for 80% of the volume); ‘B’ class items have a larger number of parts but a lower volume usage (e.g., 30% of the parts with 15% of the volume); and ‘C’ class items are the balance of parts but do not turn over that often (e.g., 50% of the parts having only 5% of the volume). Similarly, XYZ analysis deals with dollar value, for example, ‘X’ class items may have 20% of the parts accounting for 80% of the inventory value.
Some systems will allow you to create more than three classifications (e.g., ABCDE classification). This allows fine-tuning of the delicate balance between service level and inventory value across the entire inventory.
Multiple costing methods. There are many methods for valuing inventory including LIFO (last-in, first-out), FIFO (first-in, first-out), average costing, standard costing, and ABC (activity-based costing). By far the most popular is average costing; however, activity-based costing can significantly enrich the service level agreement with operations through better allocation of maintenance costs. Activity-based costing ensures costs are allocated to a product based on a simple activity cost driver such as throughput time.
Multi-warehouse. Better inventory control systems will allow establishment of multiple storage locations like formal warehouses or stores, to less formal storage areas like trades cribs or even trucks for field maintainers. Modern systems track inventory and service levels within a given storage area, as well as on a consolidated basis. Drill-down capability provides a means for managers to zoom in quickly on the underlying cause of say, excessive service level or inventory turnover variances for a given period. This is a critical feature for multi-plant, distributed, or decentralized maintenance departments in order to properly monitor their service level agreements with operations.
Economic order quantity (EOQ). In order to optimize the cost of ordering, purchasing, and carrying inventory, one or more EOQ algorithms can be used to calculate the right quantity of spare parts to purchase. One CMMS vendor has 19 algorithms available for EOQ calculations.
Supplier hierarchy. Better management of suppliers means better service for operations. One of the most impressive features is the ability to build a hierarchy of suppliers showing who supplies what by commodity grouping (e.g., pumps). Users can also build hierarchies of the parent-child relations between supplier companies, and which inventory classes apply to which supplier agreements (e.g., blanket purchase orders) for pricing a given item.
Supplier history analysis. Good supplier management requires that proper records be kept. The following shows some of the supplier history captured by a good CMMS:
- parts purchased from a given supplier
- total volume purchased (year to date, last year)
- average lead time
- number and duration of late shipments
- number of over-shipments
- number of short shipments
- number and value of damaged goods shipped
- number of substitutions
- number of times improperly invoiced.
Rather than relying on gut feelings or vague recollections, analysis of supplier history is a powerful tool in negotiating with a supplier.
Order policy. Below are some basic rules to keep in mind when ordering from suppliers:
- Reorder point: Reaching a predetermined reorder point triggers the stockkeeper, maintenance personnel, or purchasing agent to initiate a purchase order. A CMMS removes the guesswork about when to reorder stocked parts, thereby minimizing costly stockouts. As well, a purchase requisition can be prepared directly from the system when a reorder point is triggered.
- Spare parts: Every purchased piece of equipment seems to be accompanied by a spare parts list valued at three times the value of the original equipment. To avoid costly inventory, check to see if the part is common to another piece of equipment; check for generic alternatives from cheaper, local sources; ask about reconditioned or used parts; investigate tooling an expensive part in-house or at a local machine shop (for example, a shaft); and weigh the cost of stocking the part versus the net cost of downtime plus a possible premium for a rush order. An analysis of parts usage history obtained from your CMMS can assist in making these decisions.
- Expensive items (capital expenditures): Try to obtain at least three quotes, making sure every vendor is quoting on exactly the same specifications. Just weigh the added labor cost of 20 minutes to a full day required to process additional quotations with the potential savings of thousands of dollars—it’s worth the trouble. Also, don’t buy a Rolls when what you need is a wheelbarrow. For example, determine the life remaining on a piece of equipment and avoid buying expensive replacement parts that will out-last and out-perform the equipment itself. A CMMS can help compare maintenance costs associated with different vendors’ equipment.
- Contractors: Even if time is of the essence, get at least verbal estimates of the total cost. If this is not possible, obtain a verbal estimate of the contractor’s per diem rate and probable expenses. If you forget all of the above, do not forget to obtain and discuss a written confirmation of work performed, materials used, and expenses incurred prior to the contractor’s departure, while the details are fresh in everyone’s mind. By recording this information on the CMMS, contract work can be better controlled. Some CMMS packages allow users to track contractor hours and dollars over and above the purchase order/invoice.
- Expediting: This is a must for critical parts, expensive items, or items with long lead times. Expeditors are a nuisance to suppliers, but invaluable to you for ensuring that deadlines are met and downtime is minimized. A CMMS can act as a tickler file for triggering key dates for expediting.
This story originally appeared in the October 2021 issue of Plant Services. Subscribe to Plant Services here.
This article is part of our monthly Asset Manager column. Read more from David Berger.
