Before you race off and start changing and 'fixing' your data and processes, I would suggest you pause and first identify how your business is currently performing regarding your MRO Supply Chain. It is important to baseline your current and past performance before setting targets that you want to reach in the future. Also, when I say MRO Supply Chain, I am referring to the following departments or roles within the business: Warehouse Operations, Inventory Management, Transactional Purchasing, and Procurement.
So, with that said, I can hear you thinking 'what do we measure, and why?'
This will be the focus for the next few TimTank blogs. I will list out five KPIs (Key Performance Indicators) that we roll up to one 'global' KPI called Supply Chain Effectiveness. This top KPI is used for managing up the management chain where the details are not necessary, just overall performance is and impacts. Underneath each of the five KPIs there are several Metrics which are usually handed out to the individual team members to monitor and drive behaviors and performance in the desired direction established from the KPIs.
Shown above are the five KPIs and how they roll up to the one single overall KPI. This Newsletter will explain two of the five KPIs; Demand Signal Quality % and Cataloged Material Spend %. More mature operations will either already have these KPIs in place, something similar, or have moved beyond them and then there are many businesses that have little in place so I will start here.
Demand Signal Quality %
Lots to unpack here! Let's start by explaining why this signal is a KPI and so important to the MRO Supply Chain. The Demand Signal is the trigger that sets the entire chain into action so the quality of this signal either triggers reactive action (inefficient) or planned action (efficient). For example, let's keep it simple and say that any signal that is released into the MRO Supply Chain is 'planned' if the difference between the reservation release date and the requirement date is greater than seven days (the formula is shown below). This gives the supply chain at least seven days to organize the picking (if the material is stocked) or purchasing and receipting, packing, delivering, and issuing to the reservation. Any released reservation with less than seven days is considered unplanned and is recorded accordingly.
Simple but effective and expect 'arguments' over the results. These are discussions that need to take place to move forward. Over time you should move the seven-day goal out one day at a time. If you are operating with a window of seven days or less, you will be forced to stock a lot of materials to meet the demand signal, this is expensive but reality because purchasing, receipting, packing, delivering, and issuing in seven days along with all the other demands in a warehouse is a tall order.
After managing several MRO warehouses over the years, you quickly notice how often people come to the warehouse in an unplanned capacity. Here are some of the key reasons that I observed:
I just wanted to have a look to see if the material in my work order is correct.
I need materials that are not in my work order (pure unplanned requirements).
To ask if they can take a material without booking it out to see if it's the correct part.
To ask if a material that they ordered (usually free text) has arrived.
All these reasons are avoidable and force the resources in the warehouse into supporting unplanned demand (time). How many times have you been frustrated by people just stopping by your desk for chat when you are busy? If you have an office, you can simply close the door when you want to work on a task undisturbed, this is not so easy in a warehouse without being rude and asking people to leave. For this reason, I have, in the past, closed warehouses for a couple of hours during the day so that they could get as much of their 'planned' work completed without distraction. The initial reaction was shock, but once implemented people that needed something from the warehouse were forced to plan their day a bit better.
This practice is still in place and working well. The warehouse team will work on tasks like goods receipting, stock taking, or send out deliveries while the warehouse is closed. People are allowed in the warehouse but only for breakdown requirements. This closure was an invention out of necessity that helped site staff to better understand the demands on Warehouse Staff.
Shown below is the formula for calculating the Demand Signal Quality %.
- Formula = Released Reservation Date - Reservation Requirement Date > 7 days = HIT, if < 7 days = MISS. Reported as a percentage of the HITs against the total number of reservations issued on a monthly reporting cycle.
- Free Text purchases are EXCLUDED from this KPI. Free Text Spend gets its own KPI for its high degree of evilness (see below).
Catalogued Material Spend %
I like to call free text spend the evil twin of catalogue material spend. I am in a constant battle to reduce free text spend as much as I can. This is not an easy task that requires a lot of groundwork to be completed before you can effectively make this change, and make it stick!
In an ideal world ALL spare parts (the M and R of MRO) should be catalogue. These materials are installed in the equipment within your operations and should be identified, cataloged, added to at least one BOM, and sourcing data (info records & source lists if you use SAP) created all at the same time. Once the material has been generated (which is the hardest part) adding it to a BOM and maintaining at least one source does not take long, most businesses just don't understand the value of this master data and its impact on downstream processes. The ones that do, reap the benefits, and get far greater value out of their ERP system.
While working for a large mining company in Australia I managed a project where we targeted the reduction of free text spend in my warehouses. As part of the project, we closely monitored free text requisitions and rejected them when a material number existed to force the consumption of existing stock. We also added resources to the cataloging team so that we could turn around new material request as quickly as possible. Most materials were cataloged within 24 hours or less. We were able to reduce free text spend from 65% to less than 8% in nine months!
This process forced the business to consume materials that we already had in stock, and we doubled the stock turns. We also reduced the working capital by $30m AUD in the same period, but for me the biggest win was hearing a maintenance planner tell me "Tim, you are right, it is easier using material numbers instead of free texting materials".
Adding a free text material to a work order takes four times longer but the process was so deeply embedded they didn't see the work in the work, until they did, and then it all changed.
Back to free text spend, the percentage is quite easy to monitor and measure. All you need to do is run a report or extract your total spend on materials for the previous month. Once you have this all you need to do is extract the value of cataloged material spend. Once you have this value, use the formula to calculate the percentage as shown below. I would suggest that you run the report both by Value and Volume.
Shown below is the formula for calculating the Catalogued Material Spend %.
- Formula = Value of Catalogued Material Spend for Materials / Value of Total Spend for Materials. The ideal for all the five KPIs is to lift the percentage as close to 100% as possible so this is why we have Catalogued Materials in the formula.
In closing...
I'll leave you with one of my favorite quotes (author unknown):
What we do not measure, we cannot understand.
What we do not understand, we cannot improve.
Talk to you soon and thank you for taking the time to read this newsletter!
Cheers,
Tim McLain
