Maintenance Repair and Operations Inventory

Original Issuance Date: July 20, 2018 (Effective July 1, 2019)
Last Revision Date: July 20, 2018

1. Policy Purpose

The purpose of this policy is to provide guidance and establish requirements for maintenance, repair, and operations (MRO) inventories controlled by the facilities management units and auxiliary units at UW Institutions.

2. Responsible UW System Officer

Senior Associate Vice President for Finance

3. Scope

This policy applies to inventory controlled by the facilities management (physical plant) units and auxiliary units at UW institutions.

This policy does not apply to inventory items specifically procured for, and used on, a capital project. However, any left-over items are included.

4. Background

MRO inventory is used to:

Repair mechanical, plumbing, or electrical components.
Perform routine tasks required for scheduled and preventative maintenance
Perform routine tasks for day-to-day operations, such as custodial services.
Complete special services or projects.
Maintain landscape and grounds.
Maintain fleet vehicles.

MRO inventory includes spare parts and products such as nuts, bolts, paint, lubricants, janitorial supplies, lighting fixtures, safety supplies, sidewalk salt, batteries, parts leftover from capital projects at UW institutions, etc.

This policy provides guidance for effective management of MRO inventory. Effectively managing MRO inventory helps institutions:

Have the right parts, at the right place, at the right time.
Balance the need to support maintenance/repair operations at an appropriate level with the responsibility to minimize costs associated with carrying inventory
Ensure appropriate internal controls are in place with respect to the safeguarding of assets, financial reporting, and management reporting.

5. Definitions

Burden rate: A burden rate is a rate that can be applied to the amount of MRO inventory that is charged to a facilities work or sales order. The burden rate is based upon items that are typically used on a job but are too small/immaterial to be charged directly (e.g., nails and screws). It is oftentimes included in the markup rate (see definition below).

Central storage locations: Sites where significant amounts (quantity and dollar value) of MRO inventory are safeguarded and stored until they are “checked out” for a particular job or use. They do not include trucks, custodial closets or sites used to meet the day-to day operating needs of buildings and grounds crews.

Critical parts: Items that physical plant determines are necessary to have in inventory at all times. Critical parts may be necessary to prepare for safety and emergency situations, maintain critical research projects, maintain equipment that uses obsolete parts, and other similar needs as identified by an institution’s physical plant.

Computerized Maintenance Management Software (CMMS): A software package that maintains a database of information about an organization’s facilities operations, which may include preventative maintenance programs, corrective maintenance work or sales orders, inventory control, key management and other related maintenance operational programs.

Chargeback rate or amount: An inclusive term for costs that facilities services charges back to institution consumers. It includes the cost of labor/fringes, actual cost of inventory materials used, special equipment, and, as applicable, markup and burden rates for inventory items (see definition below).

Key Performance Indicators (KPI): A measurable value that demonstrates how effectively a department is achieving key business objectives. KPIs are used to evaluate success at reaching targets.

Markup rate: The percentage that is added to the cost of inventory sold, used or issued. It is intended to cover the cost of obsolete inventory write-offs, inventory shortages, storeroom/stock-keeper salaries and fringe benefits. It often includes burden rate items.

MRO (Maintenance, Repair, and Operations): MRO stands for Maintenance, Repair, and Operations. This type of inventory is used to keep an institution’s infrastructure and equipment in good working order. It includes, for example, spare parts and products such as nuts, bolts, paint, lubricants, janitorial supplies, lighting fixtures, safety supplies, sidewalk salt, batteries, motors, pneumatics, plumbing supplies, parts leftover from capital projects at UW institutions and parts that are included in the burden rate. This policy does not apply to inventory items specifically procured for, and used on, a capital project. However, any left-over items are included.

One-time purchase: One-time purchases are purchases of MRO supplies that are not maintained as a regular MRO inventory item.

Perpetual inventory: A perpetual inventory systems records purchases and uses/sales immediately through the use of an automated enterprise asset management software system. This inventory method provides a highly detailed view of charges in inventory with immediate reporting of the amount of inventory in stock.

Three lines of defense: A model for internal control where management control is the first line of defense; various risk control and compliance oversight functions are the second line of defense; and independent assurance (e.g., internal audit) is the third line of defense.

Turnover ratio: An efficiency ratio that shows how effectively inventory is managed by comparing cost of goods sold with average inventory for a period. Turnover ratio is a KPI for MRO inventory.

6. Policy Statement

A. Inventory Requirements

Institutions are responsible for establishing physical safeguards and other internal controls over MRO inventory to minimize the risk of theft, fraud, errors, inaccurate reporting and inefficiencies. Safeguards and controls should be implemented commensurate with respect to and extend to all areas where MRO is stored, including vehicles. Some examples of relevant safeguards and controls include separation of duties, monitoring, cameras, passwords, cages, exception reports, written procedures, and adopting a three lines of defense model.

To ensure accurate inventory, each UW institution shall maintain a perpetual MRO inventory using appropriate software, such as a computerized maintenance management software package (CMMS). Institutions shall maintain items in this inventory according to the following tiers:

Tier	Inventory Type	Inventory Software	Inventory Valuation
Tier 1	Applies to MRO inventory items included in the burden rate as well as custodial and grounds items that are frequently transferred out to departments or buildings.	Institutions shall account for all purchases in the perpetual inventory record within CMMS.	Carrying value/quantity in the perpetual inventory record shall be periodically adjusted to the value/cost of actual items on-hand in central storage locations. These items should be accounted for on the basis of actual cost (can be calculated using average cost). This Tier is subject to an annual physical inventory requirement as described below.
Tier 2	Applies to MRO inventory leftover from capital projects.	Institutions shall account for all (a) items on-hand, (b) acquisitions and (c) subsequent activity/transactions in the perpetual inventory record within CMMS up until the point of use or disposal.	These items are accounted for on the basis of zero cost (or, if the institution prefers, on an actual cost basis). This Tier is subject to an annual physical inventory requirement as described below.
Tier 3	MRO inventory items not in Tiers 1 or 2. These items are typically individually charged back and stored in central/primary storerooms.	Institutions shall account for all purchases/acquisitions and subsequent activity/transactions in the perpetual inventory record within CMMS up until the point they leave central storage locations. This includes all purchases that by-pass physical entry into a central storeroom and are transported directly to a location for use. For these items, the purchase and use are accounted for concurrently in the perpetual inventory record within CMMS.	These items are accounted for in the basis of actual cost (can be calculated using average cost). This Tier is subject to an annual physical inventory requirement as described below.

To promote consistency and ensure the accuracy of the institution’s perpetual inventory records, the institution shall annually perform a physical count of MRO inventory in Tiers 1, 2, and 3 that is in central storage facilities, central auxiliary storage locations, and all items leftover from capital projects. This physical count can be accomplished by counting all of the inventory at one time, or by using cycle counts throughout the year. If a complete physical count of all inventory is completed at one time, it does not need to be performed at the end of the calendar or the fiscal year. Statistical sampling is an acceptable alternative to an annual count if the statistical sampling method is documented and sufficiently reliable to produce the same results as those obtained by a physical count of all items.

Annual physical counts are not required of inventory stored on trucks, in custodial closets or other similar locations. However, physical safeguards and other internal controls over these items are still needed to minimize the risk of theft, fraud, errors and inefficiencies.

The perpetual inventory record shall be adjusted to reflect the results of the physical inventory as well as extrapolation for any statistical sampling methods used. In addition, the cost associated with any differences should be charged to an over/short work or sales order and entered in the institution’s official accounting record. An alternative to an over/short work or sales order may be used to ensure entry of differences into the institution’s official accounting record.

Some parts may be considered critical parts and important to have available at all times. These parts should be identified as critical parts in the institution’s perpetual inventory. To the extent possible, institutions should adopt a just-in-time (JIT) inventory model, excluding critical parts and items necessary to have on hand just-in-case.

B. Chargeback, Markup, and Burden Rates

Chargeback rate/amount is an inclusive term for costs that facilities services charges back. It includes the cost of labor/fringes, actual cost of inventory materials used, and special equipment and, as applicable, markup and burden rates with respect to inventory items.

Chargeback, markup, and burden rates shall be reviewed and adjusted annually and more frequently if needed. Institutions shall maintain documentation to show how these rates were established and why they were changed.

As noted in UW System Administrative Policy 322, Physical Plant Service Chargebacks, costs of materials and supplies for special services performed for general operation activities and all services provided to self-supporting activities may be charged back. When these costs are charged back, they may include a markup rate. The markup rate is a percentage that is added to the cost of inventory sold, used or issued. It is intended to cover costs related to inventory and storeroom management, such as the cost of obsolete inventory write-offs, inventory shortages, storeroom/stock-keeper salaries and fringe benefits. The markup rate for MRO inventory is calculated accordingly: [cost of obsolete inventory, inventory shortages, storeroom salaries/fringes over a specific period of time] ÷ [cost of inventory used/sold over the same specific period of time] = markup rate. Note that the burden rate (described below) can be incorporated directly into the markup rate by including the cost of burden items in the numerator of this ratio/equation.

The cost of small items kept in inventory, such as nails, screws, bolts, etc, may be charged back through use of a burden rate. The burden rate is calculated accordingly: [cost of burden items used over a specific period of time] ÷ [cost of total inventory used/sold over the same specific period of time] = burden rate.

C. Financial Reporting

MRO inventory shall be reported annually according to the UW System Administration’s Controller’s Office according to the Year End Reporting Instructions for Inventories.

D. Key Performance Indicators

Institutions should identify relevant key performance indicators (KPIs) for MRO inventory to encourage greater efficiency and accountability. An internal management reporting process is recommended and should be established at each institution to periodically calculate, report out, document, and act upon KPIs for MRO inventory. Examples of KPIs for institutional management reporting include:

Turnover ratio (considered to be the best measure of inventory efficiency). This ratio can be calculated over any period of time (i.e., monthly, quarterly, annually). It is calculated accordingly:

[(Beginning inventory counts excluding critical parts) + (purchase counts made during period including one-time purchases) – (Ending inventory counts excluding critical parts)] ÷ [(the average of beginning and ending inventory counts excluding critical parts)] = inventory turn-over for the period

Results of physical inventory counts (over-and-short reporting). Sample formula: [Actual count value] ÷ [Balance in CMMS]
Stock-outs. Sample formula: [# of Occurrences] ÷ [total pieces picked]
Slow moving parts. Sample formula: [Parts identified as slow-moving (excluding critical parts)] ÷ [Total # of parts in inventory]
Emergency purchases. Sample formula: [Emergency dollars] ÷ [Total purchase dollars]
Warehouse space Sample formula: [Cubic feet used] ÷ [Cubic feet available]

Terms such as emergency purchases and critical parts should be defined by institutions consistent with management reporting and operational needs.

UW System Administrative Policy 323