In the current business environment, CEO’s and CFO’s are proactively reviewing cost cutting initiatives to maintain profitability.  An area often missed in these reviews is costs associated with MRO inventory management. Left unchecked, inventory can drain valuable working capital which could have been invested in other operational areas.  Inventory has built in carrying costs which can represent over 25% of the total inventory value.  Every $1 of inventory stored can costs a company $0.25.  Inventory management can also tax resources needed for other core functions resulting in additional costs to the company.

Most organizations are in the business of procuring and consuming MRO materials. Many organizations have never been exposed to or engaged in the inventory resale process. This issue is often compounded by the operations perspective that selling obsolete MRO inventory is a poor strategy.  However according to a CAPS benchmarking study, over 70%-90% of every sales dollar generated by investment recovery can go directly to the bottom line as profit.  This has motivated many companies to invest in the infrastructure to build out and investment recovery strategy.

Here are a series of steps to consider when dispositioning MRO inventory as part of an investment recovery strategy.

Step 1.0 Stop new surplus materials from entering inventory

• Cancel PO’s where quantity of parts ordered exceeds the amount needed to satisfy demand (lead-time)
• Review stocking recommendations for ordering values and update the ERP system

Step 2.0 Transfer surplus materials within or across the company

• Transfer materials to facilities where the material is under stocked (It is often more affordable to pay for transportation and administrative overhead than to buy new material outright.  Materials consumed within a company retains 100% of their original value.)

Step 3.0 Identify material to return to the vendor

• Return the items to the respective vendor that are returnable
• Identify items that are in excess and can be returned back to the vendor for a percentage of the cost (These items are usually purchased in the last 12 months where quantity on hand is greater than the maximum and a 12 month supply is already on hand.)

Step 4.0 Identify excess items that can be sold

• Identify the items that have a steady burn rate
• Quantify the time needed to burn through material given historic consumption patterns or future production forecasts
• Contact disposition company to sell the inventory

Step 5.0 Identify the Non-moving Inventory

• Analyze the non-moving MRO items which make up 80% of the non-moving value (In our experience this will be approximately 12% of the nonmoving items. Retain those items which are required as critical/insurance spares and add this information to the respective “bill of materials” (BOM) in the ERP System.)
• Sell items not associated with a BOM (Once the items making up 80% of the value which haven’t moved in the last three years have been dealt with, the incremental gain versus effort diminishes rapidly.)

Step 6.0 Scrap Material

• Exercise this option as the last resort  

BDM is currently working on a detailed whitepaper for this topic send me a note if you are interested in the publication.