Abc Analysis

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ABC ANALYSIS OF MRO INVENTORY
Background
Although there is not a direct correlation between the two, an ABC Analysis on MRO parts is somewhat similar to Criticality Rankings that are developed for plant equipment by Reliability Engineering. Criticality Rankings define the relative priority of assets in terms of their impact on plant safety, productivity, efficiency or other criteria. An ABC Analysis determines the relative priority of items in an MRO storeroom based on their criticality to the support of operations and their potential impact on plant inventory and investment. There are three key activities involved in completing the analysis: prioritization, stratification, and optimization. The results of the analysis provide valuable information that can be used to determine how each part should be monitored and managed from the perspectives of procurement, warehousing, and strategic inventory management.

Prioritization
The first part of the analysis consists of rank ordering all MRO storeroom parts from 1 to n based on a set of predefined criteria. There are several different schools of thought on the best approach to take, and it is important to understand the advantages and disadvantages of each before deciding which method is best suited to your particular situation. Unlike a dependent-demand manufacturing operation with a Master Schedule and complete BOM’s, material requirements in an MRO environment are largely unpredictable. The inherent assumption in the ABC Analysis for MRO parts is that – at least to some degree – the past is a fairly reliable predictor of the future. Investment brokers are quick to remind us that is not the case, but in lieu of accurate material forecast data, there is little option. That brings up several key points to consider:

1. It is not advisable to prioritize items by on-hand inventory value, or any other parameter that can change significantly from day to day depending on issues, receipts, or other transactions that take place in the storeroom. Doing so would create dramatically different results depending on the day the snapshot of data is taken. 2. From a warehouse management perspective, there are definite benefits to analyzing inventory by activity level (number of issues or quantity of parts issued). However, using this method to prioritize inventory may negate some of the more important benefits of the ABC Analysis that are discussed below. If activity data is going to be used for such things as determining the most efficient stocking location for parts, the required data should be readily available outside of the ABC process. 4360 Corporate Road • Charleston, SC 29405-7445 • 843.744.7110 • www.LCE.com ©Life Cycle Engineering ®

3. For a newly established storeroom, or where no historical data is available, it may be useful to prioritize items initially based on unit cost until a sufficient base of historical data is developed. Given these considerations, the recommended criterion for prioritization is annualized dollar value of usage. This method combines the impact of unit cost and activity level, and provides a more stable set of data that is obtained from a horizon of historical transaction information. For each part, average annual usage is calculated and extended at the unit cost, and the parts are listed in order from highest to lowest. When using this method, there are several caveats: First, it is important to understand that “usage” is based on net quantity issued (total issues minus any returns to stock), and does not factor in inventory adjustments, scrap, or other transactions that affect the perpetual inventory balance. If proper practices are not in place to assure timely and accurate recording of transactions when parts are issued or returned, the quality of the usage data will be distorted, and the prioritization will be impacted negatively. Second, in order to get a reasonable representation of past usage levels, it is necessary to capture an...
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