Optimization of material and spare parts inventory - Unipetrol

At the beginning of the last year, UNIPETROL, a.s., decided to take an important step towards the optimization of material and spare parts inventory. For cooperation on this task, the Logio consulting company, an expert in supply management, was selected.

The field of maintenance is specific in its different approach towards defining the availability of individual parts. While in strategic decision making regarding the level of customer service for ready-made products, the inventory level doesn’t always have to cover customer demand, in the case of maintenance, it is necessary to guarantee 100% availability of critical spare parts. Their limited supply would inevitably result in large losses in the production and subsequent reduction of availability of finished products for the customers.

In manufacturing facilities similar to ours, maintenance constitutes the main supportive process, and providing enough spare parts for repairs is necessary for the production to smooth running. Maintenance inventory optimization is a very demanding project, therefore we opted for external co-operation with a specialized consulting company.“
– Jan Polouček, manager of spec. projects, UNIPETROL, a.s.

He further adds that managers in the company realized that the attempts to have a safety stock in the case of a temporary shutdown or production restrictions that would cause significant financial consequences leads to keeping higher amounts of spare part and material inventory than is necessary. This leads to an unbalanced inventory portfolio and a high percentage of obsolete items. Jiři Polouček points out that apart from locked-up capital reduction, the optimization should result also in the reduction of the risk of limited supply of spare parts necessary for unplanned repairs. Optimization in this case doesn’t have to correspond just to inventory level reduction, it can also be a plan of increasing the safety stock of some items identified by the analysis of spare parts criticality. Respecting the specific characteristic of individual operation plants is therefore a prerequisite.

Feasibility study

The project started with a feasibility study. Its aim was to define the potential savings from maintenance inventory optimization by four companies in the group, to compare the companies with each other and with the best practice (internal and external benchmarking) and to come up with an action plan for changes in the companies. “Maintenance inventory management requires proper realization and integration of five basic processes – consumption forecast, risk control, inventory level optimization, purchasing and storage. The feasibility study showed us a significant potential, especially for reduction of inventory levels,” explains Marek Šucha from Logio, and he stresses that within the project it was necessary to carry out particularly the following actions: Analysis of processes connected to supply management, identification of the critical processes and problematic points within the framework of maintenance inventory management. Process benchmarking with the group of involved companies, and a comparison with the best practice in the field. Analysis of stock movement from the historical data of individual companies. Analysis of spare part criticality. Setting up of the optimal inventory level for individual items in a form suitable for implementation into the company’s information system for supply management, and spare part inventory optimization.

The most interesting phase of the project was the inventory optimization itself. The whole process required using specialized solutions and tools, and also using the know-how of maintenance workers in order to determine the criticality of individual spare parts.

Item segmentation

The first step of the process was a detailed segmentation of the whole item portfolio based on several different views:

  • ABC analysis based on quantities consumed
  • ABC analysis based on the value of quantities consumed
  • Segmentation based on turnover (identification of the Slow Moving Inventory)
  • Segmentation based on item availability (regularly available, special, on order)
  • Special test for identification of items with sporadic consumption
  • Segmentation based on the dates of closing the order
  • Segmentation of items based on their criticality for the operations

The goal of this phase was to efficiently segment the whole portfolio into sections that required a different approach during optimization and that had specific requirements for supply planning and management. An important component of this phase was specification of the links between spare parts and technical spots.

“The result is a bill of materials of spare parts, which enables us to track the precise consumption of spare parts in individual manufacturing lines, product expense ratio in individual life cycle phases of the manufacturing equipment and a simple identification of critical and strategic parts,“
– says Marek Šucha, Logio

Efficient supply management

After the initial item segmentation, it was possible to proceed to the consumption prediction itself. In this step, it was important to divide the item consumption into consumption during a period of planned shutdown and planned repairs, and the part of consumption that emerged without being planned. In this phase, it is also common to set up a shutdown cycle, which is of course specific for each company and variable within the prediction. The Planning Wizard platform employed in this project offers a wide range of common statistical methods based on the normal consumption distribution of the given item. These methods are used for the portfolio section that doesn’t have a sporadic consumption character. Problems with consumption estimation appear for items with the so-called sporadic consumption. For such items, it is typical to have a high number of periods with zero consumption, relatively low consumption with often big variance.

“An ideal method used for estimating the sporadic consumption in most of the cases is the simulation method proposed by Smart and Willemain. The method is based on a simple principle and it focuses on the estimation of probability distribution of demand during the delivery time guaranteed by the part supplier,“
– says Tomáš Formánek, Logio

Optimization of locked-up capital

The last step was the optimization itself, which was further divided into two phases. The first phase respected the quantified results of the mathematical methods used in optimization, and the second phase focused on the expertise of the maintenance workers, taking into account especially their subjective opinion on the demand of the spare part.

Respecting the criticality significance is essential for setting the required level of spare parts, which, in the case of a shortage, influences the availability of main manufacturing devices. The criticality of the individual parts is specific for the specific operation; therefore, its estimation cannot be achieved without intense cooperation with the technical maintenance staff. For evaluation of the criticality, an integrated platform for subjective evaluation of critical spare parts by individual mechanics was used. The responsible maintenance workers answered concrete questions, which served as a foundation for their decision. Based on their answers, a criticality analysis was conducted, the possible production losses were quantified, and costs for different variants of critical items inventory levels were compared.

“The actual realization of the economies by reducing the locked-up capital is a long-term process, but already today we can see that our assumption of the potential in this area was rather conservative. Cooperation with external experts proved to be very beneficial. The use of modern tools for data analysis and supply management enabled quick realization of the project, which would otherwise, because of the high workload of our own employees, be out of our reach,”
– describes the development of the project Jiří Polouček, Unipetrol, a.s

“If we fully use the potential of the project outcomes, I expect the capital locked-up in the maintenance inventory in the affected companies of our group will reduce by up to 25 % in two-year horizon.”

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