Introduction<\/h2>\n\n\n\n
Maintenance and Stores \u2013 Is it a partnership? Should it be? Or, are these two separate functions who occasionally meet when the need is critical? Is each serving the other well? In my many years of experience in working with hundreds of industrial operations, the storeroom or spare parts is one of the most frequently criticized functions, and the self-assessments at these operations suggest the criticism is justified \u2014 at least in the eyes of the maintenance department. Each is not serving the other well, not because they don\u2019t want to, but because they have differing measures, values, goals, and so on. All this begs for a process for aligning the two functions for the greater good of the business overall: a partnership. This is discussed below, along with a sample partnership agreement. It is offered as a starting point, a framework for discussion, not a conclusion. There will likely be other issues to address and modifications to be made to suit the organization.<\/p>\n\n\n\n
The Hidden Cost of Stores<\/h2>\n\n\n\n
I\u2019ve often joked that in an ideal world, the procurement\/stores function would have nothing in the storeroom \u2014 it\u2019s working capital sitting idle, not working, when it could be available for the cash needs of the company. By the same token, the maintenance manager, in an ideal world, would want a spare plant, so it\u2019s always available. Clearly, neither is acceptable, so how do we get the balance correct? A partnership agreement which includes measures that are often in conflict with each other seems like a good start. For example, holding both the stores function, and the maintenance function accountable for inventory levels or inventory turns and for service levels or stock out rate.This approach would foster their collaboration in balancing two measures that are often in conflict, so that the net effect is better overall business performance. Before we get into the details of this, let\u2019s consider the consequences of a poorly run storeroom, along with a poorly run maintenance department.
In a typical organization, it\u2019s very common for the maintenance technicians to spend (waste) an hour per day searching for parts, returning parts, ordering parts, etc. This is a significant loss of productivity for maintenance, not to mention the potential impact on production losses during that wasted time. It\u2019s also common too that the maintenance function\u2019s planning and scheduling process is less than ideal, resulting in an inability to plan the work, identify the parts needed, and have them picked in the storeroom and placed in a designated area for the maintenance work scheduled. There are other problems, but these illustrate the point of lost maintenance productivity and lost production output. It’s also common that parts are not available when needed for various and sundry reasons as much as 10-20% of the time, at least as reported by the maintenance staff. With all this in mind, let\u2019s calculate what this might be costing the business (you can create your own examples based on your actual data), because of poor maintenance and stores practices.
In a larger manufacturing organization, you might have $5M worth of spare parts in the storeroom. So, if we make some assumptions about overheads, lost or damaged parts, return on capital, etc., we get the following result for the cost of a poorly run process between maintenance and stores:<\/p>\n\n\n\n
Direct and Opportunity Cost<\/h2>\n\n\n\n\n- Overhead on Stores (building, staff, power, etc.): 10% x $5M\/yr = $ 500K<\/li>\n\n\n\n
- Opportunity Cost of Capital: 10% x $5M = $ 500K<\/li>\n\n\n\n
- Damage\/\u201cShrinkage\u201d @ 2% x $5M = $ 100K<\/li>\n\n\n\n
- Total calculated cost = $1,100K<\/li>\n<\/ul>\n\n\n\n
But, other costs may be \u201chidden\u201d:<\/p>\n\n\n\n
\n- Maintenance labor efficiency losses @10% of labor x $10M (100 people x 1 hr\/day x $50\/hr x 200 days\/yr) = $1,000K<\/li>\n\n\n\n
- Production Losses (1%) from parts unavailability – 1% x $60M = $ 600K<\/li>\n\n\n\n
- The REAL cost = $2,700K<\/li>\n<\/ul>\n\n\n\n
The hidden costs are likely quite conservative, and are typically greater than the overhead and opportunity cost of capital (the money you could have invested at the company\u2019s return on capital requirement). All this begs the question of how to better manage this loss. As part of improving the maintenance and stores function, it is recommended that you develop a partnership agreement, either formal or informal. It must NOT be used as a basis for criticizing each other, creating an Us v. Them environment, but rather as a basis for collaboration. As noted above, the purchasing\/stores manager wants to minimize stock holding (working capital not working), while the maintenance manager wants lots of parts (just in case). Getting the balance right is key. As such, and as mentioned above, I would hold both functions accountable for inventory levels or inventory turns, AND for parts service levels, or stockout rate. These two measures conflict with each other, and getting the balance right requires a collective effort to make decisions that are right for the business overall. And, I would attach those measures to a partnership agreement, an example of which is provided below, and which would constitute a part of each\u2019s performance appraisal.<\/p>\n\n\n\n
Background and Prerequisites\/Issues to Consider<\/h2>\n\n\n\n
Given a company\u2019s objective of improving stores and maintenance performance and therefore company performance, e.g., lower inventory levels, while simultaneously improving service levels (reducing stockout rate), below are issues to consider in the basis for that approach. A strong, team-based working relationship between stores and maintenance must be developed using the mutually agreed requirements described below for the actions to be taken by all parties. This will include performance measures, including key shared performance measures, for the delivery by all parties which are primarily focused on the success of the business.
As a prerequisite for this effort, maintenance \u201cdomains\u201d must be assessed to determine current maintenance practices and its potential impact on stores. For example:<\/p>\n\n\n\n
\n- \u00a0In a Reactive Domain, wherein maintenance practices are mostly reactive with schedules routinely interrupted and lots of unplanned downtime, lots of spare parts are typically required. You don\u2019t know what you may need next, so you keep lots of everything to keep the plant running.<\/li>\n\n\n\n
- \u00a0In a Preventive\/Predictive Domain, fewer parts are required because you have a much better idea of which and when parts are needed. Most work is planned based on excellent PMs and condition monitoring to detect problems early and the need for parts.<\/li>\n\n\n\n
- \u00a0In a Proactive Domain, which focuses on defect elimination in all the equipment and processes in all departments, including the preventive and predictive domains, the need for parts is minimized. There are fewer failures, there is longer equipment life, and there is much lower need for spare parts. It\u2019s ideal for reducing spares needs.<\/li>\n<\/ul>\n\n\n\n
Moreover, stores will evaluate the following or similar measures and provide this information to maintenance to assess the need for current levels of inventory:
\u2022 Percentage of inventory that has not \u201cmoved\u201d or been used over the past three years. It\u2019s been reported that 50-60% is common.<\/p>\n\n\n\n
\n- \u00a0Growth rate of non-moving inventory. This has been reported to be growing at ~7%\/yr.<\/li>\n\n\n\n
- Percent of parts that account for 80-90% of annual expenditures. It\u2019s been reported that 5-10% of inventory represents 80-90% of annual expenditures.<\/li>\n\n\n\n
- Percent of inventory that has never been used. It\u2019s been reported that 60-70% of items purchased annually will never be used.<\/li>\n\n\n\n
- \u00a0Inventory orders for quantities >2 that are not used within three years. This has been reported as 60-70%.<\/li>\n<\/ul>\n\n\n\n
Certain benchmarks can be used to judge Stores and Maintenance performance, e.g.:<\/p>\n\n\n\n
\n- Percent work planned and schedule compliance to the plan. (Best is 90%+)<\/li>\n\n\n\n
- Reactive maintenance level (reactive maintenance is work done in each week that wasn\u2019t scheduled that week, PLUS resources held in reserve \u201cjust in case.\u201d (Best is <10%; worst is >50%)<\/li>\n\n\n\n
- \u00a0Inventory turns. Typical is 0.5 – 1, best is 2.<\/li>\n\n\n\n
- \u00a0Stockout rate. Typical is >10%. Best is near zero for critical spares; <5% for non-critical.<\/li>\n<\/ul>\n\n\n\n
A subjective evaluation will be made as to 1) the frequency that parts have duplicate names, and 2) the storeroom doesn\u2019t know the part is needed because maintenance hasn\u2019t identified it.<\/p>\n\n\n\n
Finally, it is important to understand, \u201cWhat fails most often, and what parts are needed for this?\u201d Make sure you have those. For the equipment that doesn\u2019t fail very often, assess the criticality, consequence, and probability of failure to make a business decision regarding the part.
A sample partnership agreement is attached for your consideration and modification to adapt to your circumstance. This can be used to create a more formal agreement, or informally to discuss and work through specific issues and objectives. As noted, it must not be used to create an Us\/Them environment \u2013 quite the contrary \u2013 its purpose is to create a collaborative, team-based environment.<\/p>\n\n\n\n
About the Author<\/h4>\n\n\n\n![\"Ron](\"https:\/\/higherlogicdownload.s3.amazonaws.com\/AAMP\/UploadedImages\/YHFmOPveQWiwVjyKQMn1_RonMoore-T.png\")
But, other costs may be \u201chidden\u201d:<\/p>\n\n\n\n
- \n
- Maintenance labor efficiency losses @10% of labor x $10M (100 people x 1 hr\/day x $50\/hr x 200 days\/yr) = $1,000K<\/li>\n\n\n\n
- Production Losses (1%) from parts unavailability – 1% x $60M = $ 600K<\/li>\n\n\n\n
- The REAL cost = $2,700K<\/li>\n<\/ul>\n\n\n\n
The hidden costs are likely quite conservative, and are typically greater than the overhead and opportunity cost of capital (the money you could have invested at the company\u2019s return on capital requirement). All this begs the question of how to better manage this loss. As part of improving the maintenance and stores function, it is recommended that you develop a partnership agreement, either formal or informal. It must NOT be used as a basis for criticizing each other, creating an Us v. Them environment, but rather as a basis for collaboration. As noted above, the purchasing\/stores manager wants to minimize stock holding (working capital not working), while the maintenance manager wants lots of parts (just in case). Getting the balance right is key. As such, and as mentioned above, I would hold both functions accountable for inventory levels or inventory turns, AND for parts service levels, or stockout rate. These two measures conflict with each other, and getting the balance right requires a collective effort to make decisions that are right for the business overall. And, I would attach those measures to a partnership agreement, an example of which is provided below, and which would constitute a part of each\u2019s performance appraisal.<\/p>\n\n\n\nBackground and Prerequisites\/Issues to Consider<\/h2>\n\n\n\n
Given a company\u2019s objective of improving stores and maintenance performance and therefore company performance, e.g., lower inventory levels, while simultaneously improving service levels (reducing stockout rate), below are issues to consider in the basis for that approach. A strong, team-based working relationship between stores and maintenance must be developed using the mutually agreed requirements described below for the actions to be taken by all parties. This will include performance measures, including key shared performance measures, for the delivery by all parties which are primarily focused on the success of the business.
As a prerequisite for this effort, maintenance \u201cdomains\u201d must be assessed to determine current maintenance practices and its potential impact on stores. For example:<\/p>\n\n\n\n- \n
- \u00a0In a Reactive Domain, wherein maintenance practices are mostly reactive with schedules routinely interrupted and lots of unplanned downtime, lots of spare parts are typically required. You don\u2019t know what you may need next, so you keep lots of everything to keep the plant running.<\/li>\n\n\n\n
- \u00a0In a Preventive\/Predictive Domain, fewer parts are required because you have a much better idea of which and when parts are needed. Most work is planned based on excellent PMs and condition monitoring to detect problems early and the need for parts.<\/li>\n\n\n\n
- \u00a0In a Proactive Domain, which focuses on defect elimination in all the equipment and processes in all departments, including the preventive and predictive domains, the need for parts is minimized. There are fewer failures, there is longer equipment life, and there is much lower need for spare parts. It\u2019s ideal for reducing spares needs.<\/li>\n<\/ul>\n\n\n\n
Moreover, stores will evaluate the following or similar measures and provide this information to maintenance to assess the need for current levels of inventory:
\u2022 Percentage of inventory that has not \u201cmoved\u201d or been used over the past three years. It\u2019s been reported that 50-60% is common.<\/p>\n\n\n\n- \n
- \u00a0Growth rate of non-moving inventory. This has been reported to be growing at ~7%\/yr.<\/li>\n\n\n\n
- Percent of parts that account for 80-90% of annual expenditures. It\u2019s been reported that 5-10% of inventory represents 80-90% of annual expenditures.<\/li>\n\n\n\n
- Percent of inventory that has never been used. It\u2019s been reported that 60-70% of items purchased annually will never be used.<\/li>\n\n\n\n
- \u00a0Inventory orders for quantities >2 that are not used within three years. This has been reported as 60-70%.<\/li>\n<\/ul>\n\n\n\n
Certain benchmarks can be used to judge Stores and Maintenance performance, e.g.:<\/p>\n\n\n\n
- \n
- Percent work planned and schedule compliance to the plan. (Best is 90%+)<\/li>\n\n\n\n
- Reactive maintenance level (reactive maintenance is work done in each week that wasn\u2019t scheduled that week, PLUS resources held in reserve \u201cjust in case.\u201d (Best is <10%; worst is >50%)<\/li>\n\n\n\n
- \u00a0Inventory turns. Typical is 0.5 – 1, best is 2.<\/li>\n\n\n\n
- \u00a0Stockout rate. Typical is >10%. Best is near zero for critical spares; <5% for non-critical.<\/li>\n<\/ul>\n\n\n\n
A subjective evaluation will be made as to 1) the frequency that parts have duplicate names, and 2) the storeroom doesn\u2019t know the part is needed because maintenance hasn\u2019t identified it.<\/p>\n\n\n\n
Finally, it is important to understand, \u201cWhat fails most often, and what parts are needed for this?\u201d Make sure you have those. For the equipment that doesn\u2019t fail very often, assess the criticality, consequence, and probability of failure to make a business decision regarding the part.
A sample partnership agreement is attached for your consideration and modification to adapt to your circumstance. This can be used to create a more formal agreement, or informally to discuss and work through specific issues and objectives. As noted, it must not be used to create an Us\/Them environment \u2013 quite the contrary \u2013 its purpose is to create a collaborative, team-based environment.<\/p>\n\n\n\n
About the Author<\/h4>\n\n\n\n