How to maximise inventory effectiveness and efficiency

The key is to adopt this approach as a continual, recurring exercise with which to manage inventory, given the number of constantly changing factors which contribute to determining inventory.

This is well illustrated in the case of the Energy & Resources (E&R) sector. While E&R companies are currently benefitting from higher commodity prices, the lessons learnt in the last downturn continue to be relevant. Many E&R companies previously held significant amounts of Maintenance Repairs and Operate (MRO) inventory ‘just in case’ these parts were required in an emergency.

This is well illustrated in the case of the Energy & Resources (E&R) sector. While E&R companies are currently benefitting from higher commodity prices, the lessons learnt in the last downturn continue to be relevant. Many E&R companies previously held significant amounts of Maintenance Repairs and Operate (MRO) inventory ‘just in case’ these parts were required in an emergency.

The old basis for holding inventory ‘just in case’ is no longer true - all inventory must be fit for purpose, available, visible, at the best cost and in the correct quantity.

This approach reduces capital expenditure requirements, maximises plant and equipment availability and minimises inventory write offs. While the immediate imperative to significantly reduce capex from the mining price crash has diminished, the benefits of taking steps to improve inventory management are still considerable.

Inventory Efficiency

During the last downturn, many E&R companies took drastic actions to reduce their cost base. This resulted in suppliers being required to provide significant price and rate reductions, simply to be retained.

A more sustainable solution for both clients and vendors is to undertake a strategic sourcing program, where vendor numbers are rationalised. A reduced number of vendors could then be offered an opportunity to maintain sales margin with an increase in the number of units purchased, with a commensurate decrease in the price for these goods and services.

Vendor Managed Inventory programs have also been introduced, where vendors manage inventory levels held at the customer’s location and payment for each item is delayed until such time as the inventory is consumed.

Another option is to outsource inventory management and associated warehousing/stores activities to a third party, with a fee for service and inventory paid for as it is consumed. This turns fixed costs into variable costs, which could also be contractually attributed to mining throughput volumes.

Inventory Effectiveness

Inventory efficiency initiatives are just one element of cost reduction resulting from reducing unit costs. The next step is inventory effectiveness, which seeks to reduce the overall quantity and mix of MRO inventory. This is achieved using detailed and dynamic inventory strategies that are risk based and tailored for specific, rather than generic asset requirements. As an example, in an asset criticality review, a reliability (risk) based strategy assessment would consider the impact of specific equipment failures (for example primary crushers) on the business objectives (output). In this context the assessment would be undertaken to classify all equipment by operational criticality, given the current business strategy and economic environment.

The output of the asset criticality review can then be used to undertake a maintenance spares inventory-holding assessment. The assessment outcome is to optimise the required spares holding, matched to the tempo and requirements of maintenance to meet dynamic E&R operations. This inventory level assessment can be undertaken as a standalone initiative, presuming the asset criticality has not changed.

Achieving optimum inventory effectiveness can be challenging. Although there is no ‘silver bullet’, based on our experience a number of key success factors have emerged:

• Dynamic inventory management – Inventory strategies should not be set once and then forgotten. Ongoing plans for the review of inventory effectiveness are essential to maximising the return on investment. Good practice is to undertake Inventory Analysis on a quarterly basis at a minimum. This analysis reviews elements such as ABC analysis (looking at the categories of inventory on a usage basis); stock turns and SLOBS (slow and obsolete stock) and is best undertaken by a cross-functional team of maintenance, operations, supply and finance professionals, working together to constantly optimise inventory.
• Clear strategies and processes for determining inventory requirements – Alignment on a single set of inventory forecast usage numbers employed across the company is fundamental to making sure planning and fulfilment processes can achieve inventory requirements, particularly relating to regular planned maintenance activities. Many companies have embedded a Sales and Operations Planning (S&OP) process that brings together things such as collaborative forecasting, forecasting accuracy and dynamic inventory control so that the right inventory is available at the right time, in the right quantities and for the best price.
• Embedding a strategic sourcing culture – Purchasing teams, whether buying inventory for operations, maintenance or for any other purpose, need to be buying at the best possible price to minimise operating costs. With so much stock sourced from China, it is critical that buying teams understand the dynamics of lead times, volume discounts as well as price when making purchasing decisions. These decisions should be made after a clear and well understood procurement strategy has been developed. This strategy is most effective where strategic sourcing is a normal part of the purchasing process. 

Achieving the optimum balance of inventory efficiency and effectiveness is a complex task that involves making sure stock is available when required while accounting for unplanned maintenance activities at the lowest cost. Our clients face a number of inventory optimisation barriers such as:

• Misalignment on inventory requirements - An example of this is the common mismatch between maintenance who do the work and the amount of inventory that procurement purchase to satisfy forecast demand. This may be a by-product of the disconnect between engineering, maintenance planning and supply forecasting, resulting in too much, too little or the wrong type of inventory.
• Excess inventory resulting from poor inventory management – Inventory is dynamic and in many cases the levels of inventory are not adjusted to meet changing maintenance requirements. This can result in shortages for in-demand items and excess inventory in line with slower consumption patterns.
• Purchasing patterns not adjusted to changing operational needs – Purchasing teams are often required to rely on historical usage to make purchasing decisions, often without the benefit of the insights from maintenance and operations on future MRO inventory purchasing decisions. The demand on the supply chain has a direct impact on the demand for inventory and, without this line of sight, the incorrect types or quantities can be purchased. Furthermore, some companies are yet to review their purchasing strategies, resulting in lost opportunities to receive more advantageous pricing from suppliers.

By understanding the critical interdependencies across all supply dimensions, GHD Advisory has helped clients save up to 50 percent on their inventory spend.