Optimizing Inventory Management for Maximum Asset Performance
by John Benders, Vice President Asset Intensive Industry Solutions, Mincom
In today’s competitive global economy, forward-thinking companies in asset-intensive industries such as mining understand that parts management and inventory optimization play an important role in an organization’s success. Having visibility to, and ensuring availability of, key parts is a challenge unique to these organizations due to the mission-critical and high-risk nature that assets play in business success. Asset performance cannot be achieved without maintenance strategies suited for these highly critical assets, which in turn also help to drive inventory strategies.
For instance, if a mine site employs only one crusher, that piece of equipment is essential in keeping the site running and in production. You might take a Reliability Centered Maintenance approach to this asset, which helps ensure that critical parts keeping this asset running are kept on hand, especially those with long lead times or that are scarce.
Typically, most inventory management solutions were designed for manufacturing, where the majority of inventory is made up of commodity items or raw materials, and production runs require having little inventory on hand. Because inventory costs consume a significant portion of the total annual spending of an organization, the manufacturing business therefore focuses on keeping inventory low, turns high and carrying costs down.
In contrast, asset-heavy organizations by their very nature require inventories skewed more towards spare parts rather than commodity items. The ultimate goal is having the right parts, at the right price, in the right place, at just the right time. The challenge is maximizing value from this large investment, as rising costs can quickly consume production margins and take a significant bite out of profits. However, any reductions to inventory must be achieved while mitigating the risk of production disruption from the potential unavailability of critical parts. Savings achieved through reduced inventory can quickly be lost if an unexpected production outage occurs because a critical part was removed from inventory.
Pairing Inventory Management with Asset Management Automation
Even with a thorough understanding of the principles involved in setting stock levels, the sheer volume of items limits the inventory manager’s ability to make a difference to more than a small percentage of items. In many mining organizations, inventory-optimization efforts have often been conducted manually on an annual basis, which can be a labor-intensive and prohibitively expensive proposition.
At its most basic level, the role of an Enterprise Asset Management (EAM) system is to automate replenishment of a stock item when the stock on hand has fallen below a nominated minimum value. And the fundamental role of an Inventory Optimization system is to determine the stock levels required to ensure a predefined acceptable risk that can be maintained associated with potential production losses due to critical parts being unavailable.
Bringing these two systems together can allow a mining organization to define the stock levels required for critical parts, and then maintain them in an automated fashion. This approach then allows for a reduction in inventory costs without an increase in the risk of unplanned outages due to stock outs, and allows inventory managers to focus on any exceptions that may occur – providing them with more time to manage their business.
Queensland Alumina Limited (QAL), one of the world’s largest alumina refineries, successfully reduced its inventory holdings by 14 percent over a three-year period – saving more than $8 million – while mitigating the risk of production loss due to stock-outs using a solution called Mincom Critical Inventory Optimization (MCIO).
QAL’s Supply Group manages a Maintenance, Repair and Operations (MRO) inventory valued at approximately $60 million to support the operation of its site. Records show that this inventory would have been valued at $68 million had it not been for the impact of managing stock levels using its inventory-optimization solution. This $8 million overall reduction was achieved while simultaneously reducing the risk of potential production disruptions from under-stocked items.
In addition to reducing inventory holdings – which has freed up capital and significantly reduced inventory, whilst ensuring stocks of production-dependent spares have been boosted – QAL has been able to improve vendor management and performance by using the solution to review vendor-delivery performance at the Stock Keeping Unit (SKU) level.
By streamlining its inventory process, QAL has been able to achieve the following results:
- Inventory reduction of $8 million, representing a decrease of 14 percent over three years.
- Identification of all critical items and stock levels optimized to prevent stock-outs.
- Global control of stock levels over the entire inventory, making adjustments easier to suit changing circumstances.
- A site-wide understanding of the concepts and terms involved in inventory, enabling site-wide buy-in on the process.
- Accurate planned delivery times calculated over each and every order cycle, for each material to improve reliability of maintenance scheduling and stock-level calculations.
- Improved vendor performance by allowing review of delivery performance at low levels.
- Full integration with ERP/EAM, allowing materials to be constantly readjusted to optimal levels through a simple, monthly automated process.
Mining organizations with large, high-value inventories can achieve millions of dollars in savings and mitigate risk through effective inventory optimization, leading to more effective maintenance and ultimately greater asset performance.
While any qualified inventory manager will be familiar with inventory-optimization theories and algorithms, the difficulty is that applying these concepts to each inventory stock item is complicated and labor-intensive. Sophisticated inventory-optimization software used in conjunction with an EAM solution can empower mining organizations to best leverage their managers’ skills across the entire inventory process. Automated analysis of usage and ongoing adjustment of stock levels and reordering points ensure that inventory stock levels are adjusted, and continually readjusted, to their optimal settings.
Streamlining inventory holdings can free up working capital, while maximizing availability of critical items to increase productivity, and ultimately helps achieve the broader business objectives of the entire organization.