6 Ways to Use Indirect Inventory Reduction to Clean Up Your Supply Chain
It’s no secret that indirect materials and MRO inventory are the glue that holds a company’s manufacturing and production operations together. MRO materials keep production lines running and delivery services operating smoothly. According to some estimates, indirect spending accounts for 15 to 30% of an organization’s overall expenses.
Unfortunately, many organizations tend not to treat MRO materials with the same level of concern as direct materials, simply because they do not form part of the final product. Teams are often allowed to procure indirect materials whenever they want, from whichever vendor they like, with little regard for formal procurement processes, wreaking havoc on budget, inventory management, and master data management.
These are dangerous practices for firms wishing to compete in an increasingly complex manufacturing and supply chain environment. Duplicate spare parts and indirect materials can tie up precious working capital and create inaccurate stock levels. Poor inventory data may cause plant miscommunication and increase your firm’s vulnerability to unplanned downtimes and disruptions.
The best way to protect yourself against these risks is to optimize your indirect inventory. This article examines six MRO and indirect inventory optimization methods and techniques that can help you clean up your supply chain.
What is MRO Inventory Optimization?
Inventory optimization is the process of right sizing a company’s MRO inventory to match organizational demand and criticality. This can have various benefits, including improving cash flow, reducing holding costs, minimizing waste, and enhancing operational efficiency. This also allows businesses to divert time and resources to SKUs with a higher criticality rating than those previously removed.
Most supply chain leaders are so busy with direct materials that they forget to prioritize their teams’ MRO inventory optimization. Getting a good handle on your MRO materials and spare parts can mean all the difference between a disorganized, reactive supply chain environment and one that proactively prevents problems.
Indirect vs Direct Inventory
The vast amount of items that go into making a product or service can make distinguishing between direct and indirect materials difficult.
An easy way to tell the difference is to remember that direct materials are part of a finished product that is sold to customers. Indirect materials, on the other hand, encompass spare parts, PPE, services, and maintenance activities required to operate the business. They include everything from cleaning supplies to PPE to asset spare parts that are vital to the supply chain’s operations.
The Challenges to Keeping Indirect Spending Under Control
While many industries may rely heavily on indirect materials for operational needs, indirect spend management is challenging. Indirect materials are considered less of a priority than direct materials and are only sometimes regulated by formal procurement procedures. Operations teams may create indirect spending contracts with vendors of their choice, usually for one-off purchases or emergency needs.
The diversity of indirect materials and services means there are multiple channels and vendors to choose from. In firms with weak procurement systems, operations personnel may buy MRO items from the cheapest suppliers or those closest in location to them, sometimes without checking to see if the required item is already in stock.
Key Benefits of Clean Indirect Inventory Spend
Firms that try to clean up their indirect inventory spend can achieve better supply chain resilience than their competitors. Optimized indirect inventory increases the efficiency of your supply chain processes while reducing exposure to risk as well.
Implementing sound MRO inventory optimization practices, like reviewing your materials data and removing obsolete or duplicate MRO materials, can create a more transparent database that helps operations personnel develop accurate procurement work plans. With fewer indirect inventory materials to manage, your firm also becomes more agile in fulfilling orders and responding to disruptions.
Risks within your supply chain decrease because you are much more likely to have the MRO stock needed to keep operations running smoothly. Your MRO management personnel will feel more confident producing demand forecasts and managing unplanned downtime events knowing they have the right materials in stock.
Last but not least, clean indirect spending ensures that less money is tied up in MRO inventory and fewer losses are caused by slow-moving or obsolete items. The extra working capital can be used to make higher-return investments, such as automated machinery or AI-enabled supply chain software.
6 Ways to Use Indirect Inventory Optimization To Clean Up Your Supply Chain
Whether through better resource allocation or leveraging advanced analytics, these strategies will empower you to cut through the clutter, reduce costs, and drive your supply chain toward improved performance. Let’s dig deeper into these methods and more to provide you with actionable insights and best practices that help you successfully optimize indirect inventory and drive your supply chain toward peak efficiency.
1. Gain Detailed Insights to Mitigate Risk
Reducing your indirect inventory helps you gain rich insights into the current state of your MRO stock levels and overall operations capabilities. As managers sift through the available spare parts and indirect materials data to identify which items to adjust the stocking policy, they may find old, inaccurate, or inaccessible data that reflect pain points within the supply chain.
Upon further investigation, they may discover issues such as multiple vendors for the same MRO item, indicating an informal, ad hoc procurement process among operations personnel. These insights can reveal the level of risk within your supply chain, and can even serve as valuable entry points for addressing weak supply chain practices that maintenance and procurement managers may have overlooked.
2. Analyze The Indirect Materials Spend
Indirect spending is often fragmented due to various vendors and contracting styles. Some contracts may contain inappropriate terms, like evergreen clauses, while others may not have mechanisms for price adjustments.
Reviewing your indirect spend, particularly your supplier contracts, allows you to identify the contractual agreements you are bound to and the suppliers with whom you have non-contracted spend. You’ll discover that some of your plants work with non-contracted vendors that do not offer negotiated price agreements.
You may be paying these vendors above-market prices for MRO items, and you could have gotten bulk discounts for using formal contracts. You may also increase the risk for yourself if these vendors cannot deliver essential items on time and at the agreed price.
Using standardized contracts and working primarily with contracted vendors reduces the risk of disruptions, lowers costs, and establishes a leaner supply chain.
3. Consolidate Suppliers by Evaluating Their Performance
In addition to indirect spend analysis, supplier performance evaluation could be another avenue for selecting suppliers that offer the best value to your organization.
A regular audit of your relationship with indirect spend suppliers—in particular, the prices you’ve negotiated with them, the frequency of additional charges and taxes they invoice you, and the quality of their service and products—can be a good starting point for determining which vendors are trustworthy and cost-effective for your business. After all, your suppliers’ prices impact the final cost of your products.
Reviewing a supplier’s quality of service, such as their delivery times, the accuracy of delivery quantities, and payment terms, can also help you understand which suppliers best meet your organization’s operational needs.
Keeping only the best suppliers makes you more likely to fulfill downstream customers’ requirements.
4. Offload Your MRO inventory With VMI Agreements
Some firms prefer reducing their indirect inventory by creating vendor-managed (VMI) agreements with trusted suppliers. These suppliers manage most, if not all, of the company’s MRO needs and often perform maintenance and repair operations as required.
With fewer suppliers and MRO items, firms can focus their supply chain staff on more strategic tasks, such as aligning teams on standardized procurement policies. They can also manage their indirect spending more prudently by paying for MRO items and services only when needed, thereby eliminating the risk of over- or understocking items. Firms that have switched to VMI report having more responsive supply chains that adapt to seasonal changes and commodity supply fluctuations.
5. Centralize Indirect Procurement To Harmonize Data
One of the best investments a company can make to optimize its indirect inventory is to install an intelligent, centralized MRO inventory optimization platform that can automatically harmonize its materials data without needing a data cleanse prior to getting started.
This software can track inventory levels across multiple plants and automatically classify and categorize indirect spend. Using powerful Artificial Intelligence (AI) algorithms, they can deduplicate items, identify areas to consolidate vendors, and identify similar MRO items used across the organization.
The result is a harmonized materials master database free from the siloed data repositories created by legacy systems and proprietary software. Managers no longer have to estimate MRO inventory levels like they used to with insufficient data—instead, they can see the most up-to-date stock levels via visualized dashboards and make collaborative, critical decisions based on reliable data.
6. Increase Visibility and Make Decision-Making More Efficient
An MRO inventory optimization platform can also help you gain real-time visibility into your material flows and vendor performance.
Quickly compare contracts to identify the best-value items and vendors for requesting favorable volume discounts. You can also gain total visibility of your indirect and direct spending to determine the appropriate budgetary levels for different spend categories. More importantly, the increased visibility can help you discuss and develop formal indirect material procurement processes that cater to your organization’s and on-the-ground personnel’s needs.
Doing so aligns all personnel on key procurement policies and reduces the risk of maverick spending and private inventories that cause unnecessary MRO spend outside the purview of formal procurement.
Clean up your indirect inventory with AI-enabled supply chain management software
At Verusen, our industry-proven AI supply chain platform enables your business to consolidate indirect and MRO materials data from all your facilities quickly and cost-effectively. By implementing our machine-learning-enabled software, you can better balance MRO inventory optimization and supplier risks to fulfill customer orders on time and at the right price.
Our advanced AI and machine learning algorithms automatically harmonize MRO management aspects. like indirect inventory data, without needing costly and time-consuming data cleanses. This allows your personnel to focus more on strategic tasks like evaluating vendor performance and optimizing working capital.
Visit us here to learn more about inventory reduction methods and how Verusen can help your firm achieve scalable and sustainable MRO inventory optimization.
