Is your MRO inventory culture just-in-case or just-in-time?

Corporate MRO (Maintenance, Repair, and Overhaul) inventory strategies range from “just-in-case” to “just-in-time,” each carrying risks at their extremes. Finding a balance that aligns with an individual facility’s unique requirements is crucial to reduce costs associated with holding unnecessary spare parts while maximizing equipment availability.

The “just-in-case” culture

The “just-in-case” approach often overlooks the costs of holding spares that may never be used. This strategy, commonly adopted by teams focusing solely on the supply side of spares demand, leads to purchasing decisions based on spot market prices without forming partnerships with suppliers. Consequently, maintenance operates on a reactive basis, resulting in inventory levels significantly above the industry average for their sector.

The “just-in-case” culture

In contrast, “just-in-time” advocates understand the need to optimize spares demand at the equipment level, recognizing the opportunity to better utilize cash for enhancing equipment efficiency and performance. These organizations foster long-term supply arrangements with key suppliers who, in partnership, maintain a backup stock of critical, long lead-time items. This approach typically results in inventory levels below the sector’s industry average.

Understanding the cost of holding inventory

To ascertain inventory holding costs, one must consider the Inventory Carrying Cost (ICC) or Holding Cost Factor (HCF), representing the cash investment tied to owning and storing inventory before its necessity arises.

The HCF, a percentage of total inventory value, encompasses capital costs, handling, insurance, labor, obsolescence, shrinkage, and storage space costs.

Industry experience suggests annual holding costs range from 15-40%, with a typical range of 20-25%. For instance, an organization with a 22% HCF and $10 million in inventory incurs $2.2 million in annual inventory management costs.