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Gatekeeping the Storeroom: The Key to Sustainable Materials Management

James Kovacevic; MMP, CMRP, CAMA; Principal Consultant; High Performance Reliability

Introduction

Whether it is in service, cost, or risk mitigation, many organizations are exposed to significant risks as a

result of the, oftentimes, poor performance of storerooms.

According to MRO Connection (MRO Connection, 2016);

62% of order points are wrong

81% of order quantities are wrong

97% of lead times are wrong

It is easy to dismiss these stats, after all, what impact will the wrong order quantities have on an

organization? How do lead times impact our spare parts management? In both cases, the impact is

greater than most suspect. These incorrect values in our spare parts master data, and a lack of rigor in

what we put in our storeroom, will result in (MRO Connection, 2016);

30% of stock not being used

8% of stock are duplicates

25% of technician’s time is spent looking for parts

Consider that a small manufacturing operation may hold $1,000,000 in spare parts. This means that a

potential $300,000 will be thrown out through obsolesces or waste, $80,000 may be tied up in stock

duplicates, and technicians may spend 10 hours a week looking for parts that are not there or are

incorrectly stocked. This means that over the course of a year, an organization can lose $15,000 of

productivity per technician. Not to mention the lost opportunity costs that result from poor storeroom

management practices.

When compared to raw materials, little consideration is paid to the supply chain and master data

management of spare parts. This is the main contributing cause to poor storeroom performance, and

stems from;

A lack of understanding of the importance of master data

A lack of systems/processes to facilitate master data management

A lack of risk tolerance on stock outs

An inconsistent usage of spare parts

Storerooms require a surprising amount of attention, and a level of governance to make them sustainable

and provide maximum service to the organization. This attention and governance are known as

gatekeeping, and is attained through the 3 Ps;

Policy

Procedures

People

By addressing the 3 Ps, any organization can implement a gatekeeping process that will achieve the level

of efficiency and attention to detail required to make the storeroom, and ultimately the organization,

successful.

Policy

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A policy plays a critical role in controlling the storeroom and is defined by ISO 55000 as “intentions and direction of an organization as formally expressed by its top management.” (International Standards Organization, 2014). Outlining a policy for spare parts should be the first step taken towards bringing the storeroom under control. The policy will set the expectations concerning how spare parts will be managed within the organization. The policy will typically include high-level requirements across all aspects of spare parts, not just the gatekeeping activities. A spare parts policy will start with a statement that emphasizes the importance of spare parts to the organization. The statement may also include the organization's tolerance for risk and financial requirements, which sets the context and needs for control of spare parts. The policy will then list out the expectations. An example spare parts and storeroom policy may state;

ABC Inc. is committed to the maximizing the return on ABC Inc.’s assets. In order to balance the operational and financial needs with risk, spare parts shall be managed on a risk-based approach*. To meet this required all sites within ABC Inc. shall;

Ensure adequate resources are provided to achieve the contents of this policy

All storeroom staff shall be trained in spare parts & storeroom management practices

Spare part descriptions shall conform to the ABC Inc. taxonomy

Spare parts shall be reviewed using a defined and repeatable procedure prior to being stocked

All spare parts stocked shall be included on a bill of material

All spare parts shall be subjected to a formal cycle count at least annually

All critical spares shall be reviewed annually for criticality and stocking levels

All other spare parts shall be reviewed bi-annually for criticality, stocking levels, and obsolesce

All spare parts shall be issued to a work order

All non-stocked or special ordered parts shall be ordered to a work order

All storerooms shall ensure it is protected from unauthorized access

All storeroom procedures shall be defined and documented

Storeroom and spare parts performance shall be monitored

Continually improve spare parts and storeroom management processes * Note how this does not say emotional

Included in this example policy are a few key expectations that indicate a gatekeeping process is required. First, all spare parts shall be reviewed using a defined and repeatable procedure. Second, all spare parts shall be included on a bill of material. Third, all non-stocked or special order spares shall be ordered to a work order. Each one of these expectations now needs to be covered in a procedure. Having a spare parts policy shall ensure that not only are all expectations communicated, but also allow individual sites to develop processes to meet the expectations. This is critical as the “who” and “how” may vary across sites within an organization. The policy will not cover the details in how these expectations will be met, this is where procedures come in.

Procedures

A procedure is defined by ISO 9000 as “specified way to carry out an activity or a process” (International

Standards Organization, 2008). Procedures are a required to ensure that the expectations (policy) are

executed in a consistent and repeatable way.

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A gatekeeping process is typically made up of five procedures (Figure

1), that work together to implement and manage a risk-based approach

to spare parts;

Stock Request

Stock Review

Stock Approval

Stock Creation

Performance Management

Starting the gatekeeping process is the Stock Request procedure. The

Stock Request ensures that all relevant information is provided to the

storeroom, and the appropriate awareness of the request is present.

This very basic procedure will reduce the number “convenience stock”

requests that come into the storeroom. The stock request generally

requires the following;

Part Description

Manufacturer of Part

Manufacturer Part Number

Equipment Part is Used On

Risk to Equipment if Part is Not Available

Estimated Usage Per Year

Approval Sign-Off (Tier based on part cost, typically requires a sign

off from the maintenance supervisor, if request is submitted by the

technicians)

The Stock Request is then submitted to the storeroom for Stock Review.

The Stock Review procedure (Figure 2), is where the majority of the work

takes place in the gatekeeping process. During the stock review, information

is gathered, validated and analyzed according to the expectations of the

policy. The Stock Review will determine if a part shall be stocked, what

classification the part will receive, stocking levels, and approval levels

required.

The first step is to review the existing spare parts and determine if the part is

already stocked. If it is already stocked, then the estimated usage will need to

be added to the existing usage. While the part may already be stocked, the

attributes of the spare part may change based on the new usage, and impact

to the organization.

Depending on the maturity of the organization and the state of their data, two

different analyses may be used. The first is the basic analysis, designed for

organizations without a lot of data or an asset criticality analysis. This analysis

utilizes a few basic formulas and a risk matrix table;

The risk matrix table (Figure 3) is quite simple and does not take into account

the criticality of the equipment. It simply takes the probability of failure and the

lead time of the part;

RPN = Probability of Failure x Lead Time

o RPN of 1-2 – Do not stock, order as needed

o RPN of 3-12 – Setup as stock part; stock on min / max

Figure 1: Gate Keeping Process

Figure 2: Stock Review Process

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o RPN of 15-25 – Setup as critical part; utilize safety

stock in addition to min / max

To determine the Minimum and Maximum hold quantity, the

following formulas are utilized;

Minimum (min) Quantity (or reorder point) = (Usage per

year / 365) x Lead time in days

Maximum (max) Hold Quantity = Minimum + Average

Consumption During Lead Time

Average Consumption During Lead Time = (Estimated

Usage per Year / 365) x Max Lead Time

The second analysis is much more detailed and allows organizations to better firm up their spare parts

program. This analysis leverages data and existing asset criticality analysis;

Building on the risk matrix from the basic analysis, as well as the asset criticality analysis, the stocking

strategy can be built;

RPN (Probability of Failure x Lead time) x Asset Criticality Category (Break Asset Criticality

Rankings into 5 categories)

o RPN of 1-30 – Do not stock, order as needed

o RPN of 31-94 – Setup as stock part; stock on min / max

o RPN of 95-125 – Setup as critical part; utilize safety stock in addition to min / max

To determine the Minimum and Maximum quantities, the following formulas are utilized;

Minimum (min) Quantity (or reorder point) = (Usage per year / 365) x Lead time in days

Maximum (max) Hold Quantity = Minimum Quantity + Economic Order Quantity

Economic Order Quantity = √(2DS/H) (Gulati, 2013)

o D = Demand or Usage per year

o S = Ordering Cost per order

o H = Inventory Carrying Cost

Determining the safety stock requires an understanding if the failure or usage of the part can be

predicted. If the usage of the part can be predicted the following formula is used;

Predictable Usage = (Maximum lead time – normal lead time) x Normal consumption rate

Normal consumption rate = (Expected annual usage / 365)

If the usage of the part is unpredictable, the following formula is used to determine safety stock;

Unpredictable Usage = K x √D

o K = Acceptable level of coverage

o D = Average Consumption During Lead Time = (Estimated usage per year / 365) x

Maximum lead time

If your CMMS / EAM does not allow for safety stock, it is recommended to add the safety stock to the

minimum (reorder) quantity.

Level of Acceptable Coverage

50.0% 75.0% 80.0% 85.0% 90.0% 98.0% 99.0% 99.9%

K Factor 0.0 0.7 0.8 1.0 1.3 2.1 2.3 3.3

Figure 3: Risk Matrix Table

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With the stock review completed and recommendations developed, the final stock approval is the next

step in the gatekeeping process.

The stock approval process is essentially validating the analysis, and ensuring the appropriate sign-offs

take place based on the cost of stocking the spare part. Based upon the organization's approval levels,

the stock analysis will be approved by either the storeroom manager, maintenance manager or the site

manager.

Once the appropriate approvals have been attained, the spare part can be created in the CMMS / EAM. This is the Stock Creation process (Figure 4). This process is vital to the long-term sustainability of the process as it will ensure the stock in the storeroom is correct and is not a duplicate. The first activity in the Stock Creation process is to apply the organization's data standards to the part. The data standard will be used to develop the description of the part (noun, modifier, attributes), determine what characteristics need to be entered for the part and lastly to standardize the manufacturer name and part number. With the spare parts data cleansed, the spare will be reviewed against existing materials in the spare parts master for the second time. This activity will ensure that there are no duplicates (whether direct or Fit, Form, Function duplicates) in the storeroom. Add the spare part to the BOM and with this complete, the spare part can now be ordered and stocked. However, the gatekeeping process is not yet complete. As with all processes, there needs to be a check and act portion. This is known as the Performance Management process. At a regular frequency, there needs to be a review of the metrics of the process. These metrics will ensure that the review actually took place, the appropriate approvals attained and lastly to ensure the data standards have been applied to the process. This report could look at;

Overall Compliance – the number of spares meeting 100% of required criteria against total spares

Right, First Time – in which only recently added spare parts are reviewed against the required criteria.

Processing Time – the average time to process a spare parts request

Utilizing these reports will allow you to identify gaps in the process and identify improvements. The policy and procedures are now in place to gatekeep the storeroom. But the most challenging part is to ensure the people involved in the process are engaged and follow the process.

People

More often than not, the challenges that plague gatekeeping the storeroom stem from personnel tasked with running it. People generally don’t want to change current protocols and procedures and fear the control being placed on the storeroom. Where does this fear come from? It is often a result of storeroom personnel being held accountable for maintaining the constant and continuous supply of spares. The fear of losing any control of something they may feel responsible for will result in a lower tolerance for risk. Another factor to consider is that by forcing all parts to be reviewed against criteria, a part may not be stocked, or may be out of stock when it is required, as stock levels are based on risk. To address this fear of accountability and low tolerance for risk, it is highly recommended that a cross-functional group of

Figure 4: Stock Creation Process

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people is used to define the criteria in the analysis. The criteria developed by the team is Probability, lead time and criticality rankings. In addition, gathering support from senior management, finance, procurement, and operations will help to reduce the negative emotional reaction that can be triggered when the part is not immediately available, and will provide reassurance to the storeroom staff. The topic of change management is beyond the scope of this paper, but all relevant change management techniques should be utilized when implementing the gatekeeping process. However, one easy-to-implement tool for getting people on board and keeping them accountable throughout the process is to use a RACI chart.

Technology

Technology can be used to assist with the gatekeeping process. There are technology solutions for each and every step of the process, and many of them integrate with the CMMS / EAM. A technology solution that is integrated with the CMMS / EAM virtually eliminates any data entry areas, and emotion from the analysis. Utilizing a technology solution also allows for quick and easy reporting and measurement of the process. This is valuable as it eliminates the burden of measuring the process and allows the team to focus on driving the improvements to the process. However, the technology solution can be expensive and it may force an organization to follow a defined workflow which does not align with the business structure or process. Technology can be used to manage the workflow, conduct the analysis, and perform the data cleanse and the spare part creation, but they must fit and work for the business

Common Issues

As with all new processes, there are a few common issues that are encountered, but can be overcome. By being aware of these common issues, it is possible to avoid them, or at a minimum, reduce the impact they have on the gatekeeping process. Two of the most common issues are;

Emergency parts – Many organizations have a requirement in place ensuring that a part may not be ordered unless it has a CMMS / EAM part number. While this does prevent free text orders, it may cause poor / incorrect data in the system. When an emergency does happen, virtually no one will take the time to follow the gatekeeping process. To overcome this, there should be an exception process in place, in which the rough data can be entered into the CMMS to order the part. The part should be ordered only to the required quantities, no extra. After this part is ordered to address the emergency, it should then be routed through the standard process, and data in the CMMS / EAM updated with the minimum, maximum quantities, etc.

The process takes too long – Getting the correct lead times from the supplier, determining the usage, and gathering the criticality does take time. Executing the analysis and using the formulas do take time as well. But so does cycle counting obsolete parts, and adding a satellite storeroom to hold additional parts. By communicating the benefits of a little bit of upfront work, versus the long term work, it is possible to overcome this. In addition, even if a technology solution cannot be implemented, develop a simple spreadsheet to conduct the analysis and calculate the values. This simple spreadsheet will save time, reduce errors and eliminate the concern over how much time the gatekeeping process takes.

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Conclusion

Once the gatekeeping process has been implemented, the benefits to the organization will quickly accumulate. In one storeroom (1400 SKUs, $3M), a site reduced the total value of their storeroom by $450,000 (15%) by addressing the incorrect minimum / maximum quantities. They were also able to prevent$50,000 (2%) worth of parts from being added to the storeroom in the first year. Downtime did not increase, in fact, it decreased, as they were able to stock the right parts. Lastly, this site was able to prevent 38 (3%) duplicates parts from being added to the storeroom. Gatekeeping the storeroom is not an easy process, and requires discipline, but by gatekeeping the storeroom, the perceived value of the storeroom and its service will increase, while the monetary value and risk decrease. Keywords: Storeroom Management, Spare Parts, Materials, Spares, Materials Management, Governance, Master Data, Data

References Gulati, R. (2013). Maintenance & Reliability Best Practices. New York: Industrial Press Inc.

International Standards Organization. (2008). ISO 9000 Introduction and Support Package: Guidance on

the Documentation Requirements of ISO 9001:2008. International Standards Organization.

International Standards Organization. (2014). ISO 55000 Asset management — Overview, principles and

terminology . International Standards Organization.

MRO Connection. (2016, 06 14). Retrieved from MRO Connection: http://www.mroconnection.com/