Spare Parts Inventory Management. Phillip Slater
and operations for not having enough parts and by finance for having too many.
The maintenance department sees the inventory as one of the elements needed to efficiently repair the company’s machines and other assets. The maintenance people get yelled at by operations if the part is not available when it is needed and downtime results. So the maintenance people yell at stores to speed up the issue process and to make sure that everything is stocked. The people in stores yell at maintenance for not telling them how many of a part was really needed or that the part was needed at all.
The purchasing people see all the hard work they do to source the parts, locating obsolete parts and negotiating the best prices and terms. They are yelled at by maintenance for taking too long when buying parts for breakdowns. They are yelled at by finance to save more money, which then means that they get yelled at again by maintenance for buying cheap parts that do not last. They, in turn, yell at maintenance to give them more time and not have so many emergencies. They also provide maintenance with meaningful advice such as “Failing to plan is planning to fail.”
The folks in finance see money tied up that they believe could be used better elsewhere. They yell at stores, maintenance, and purchasing to cut costs, cut inventory levels, and stop spending so much money. They see fixing things as a pure expense. They get yelled at by everyone else for asking for too much to be achieved from too little.
With the elephant in your storeroom, it seems that everyone is yelling at everyone else!
But what if they could all see the whole elephant, if each group could understand the perspective of the others? What if they could understand what they were trying to achieve and the constraints within which they were working. Maybe then they could have a meaningful discussion about the management of this strange beast known as materials and spare parts inventory management. And maybe then they could work out a way to collectively improve the overall business results.
1.8 Spare Parts Management Requires Collaboration, Not Just Cooperation
Over the past few years there has been a growing awareness that effective and efficient spare parts inventory management requires the input of people from a number of different departments. Engineering spare parts inventories are influenced by engineering, maintenance, planners, stores and warehouse, finance, purchasing, operations, and suppliers. It is important that any project, training, or program aimed at spare parts inventory management engage with representatives from these groups.
But what does that really mean in practice?
Often when people are talking about this, they use the terms collaboration and cooperation as if they are interchangeable. They are not. It is easy to see why these two words are used in this way when a quick check of the Oxford Dictionary online definitions shows:
Collaboration: The action of working with someone to produce something.4
Cooperation: The action or process of working together to the same end.5
Not quite the same but not so different that the practical meaning is obvious.
A More Practical Approach
In an article titled “There’s a Difference Between Cooperation and Collaboration,” Ron Ashkenas provides a much better insight into the differences.6
According to Ashkenas, cooperation usually relates to well-meaning “cooperative” behaviors such as the sharing of information. Essentially this means keeping others informed about your intent but without alignment of goals.
On the other hand, collaboration involves “making tough decisions and trade-offs about what and what not do, in order to adjust workloads across areas with different priorities.” This requires the “ability and flexibility [for departments] to align their goals and resources with others in real time.”
These definitions show us what goes wrong when companies embark on a spare parts inventory management program without fully understanding the difference. Without the alignment of goals and performance measures, team members end up “confusing pleasant, cooperative behavior with collaboration,” says Ashkenas.
In my experience the absence of true collaboration means that there is little or no give-and-take between departments, and often the information sharing becomes “telling” rather than engaging. A classic example of this is when procurement’s goal of minimum unit cost conflicts with a stocking goal of not overordering, and so procurement buys more than is required. Another example is when little investment is made in maintenance planning and yet the storeroom is expected to know what is required.
A lack of true collaboration often results in people defending entrenched positions and then blaming others for any lack of progress or, worse still, any problems that arise.
Ashkenas goes on to say that “cross-functional collaboration is easy to talk about but hard to do. . . . if you are able to map out what’s needed and bring the needed parties into alignment you’ll not only make an impact on your organization but begin to develop some important collaborative skills.”
With spare parts inventory management, being efficient and effective means minimizing your inventory investment while maximizing your spare parts availability. This just cannot be achieved without the true collaboration of the entire team whose actions influence this result.
No review or study of spare parts inventory can be undertaken (or even commence) without first having at least a basic understanding of the financial considerations.
At first, this statement may appear to be redundant; after all, don’t people understand that spare parts cost money? Of course they do. The problem is that the impact and accounting of this expense is seen differently when viewed from different management silos. For those involved in accounting and finance, the spare parts investment is both a cash cost and a balance sheet item that must be minimized. For those involved in maintenance, spare parts are often viewed through a lens of “more is better” because the cost of downtime is so expensive. In most circumstances, the funds tied up in the spare parts inventory are of little consequence to maintenance personnel because the funds aren’t treated as a maintenance expense until they are actually used.
The problem is that in most businesses there is no single authority that sees the whole picture. The purpose, therefore, of this section is to take you through a simple explanation of how spare parts are accounted for in most organizations.
Five Key Financial Principles
Stripping back the financial considerations to their very basic principles, there are five points to understand.
1. Spare Parts Cost Money
Of course they do! Every time a company purchases a spare part, it pays another company for the part. It doesn’t matter which cost center or budget the cost is allocated to or whether it is allocated as capital or as an operating expense; the purchasing company has spent money buying the part.
In addition, in some parts of the world, companies are required to pay taxes on the value of the inventory that they hold. For example, in the USA, 11 states impose a property tax that includes spare parts inventories.7
2. Money Is Limited
While this principle is also seemingly self-evident (after all, who has an unlimited supply of money?), it is also often, somewhat conveniently, forgotten.
When a company chooses to purchase something, anything, the money that it spends on that purchase cannot be also spent on something else. This principle is true no matter if the purchase is a $1 spare part or a $100 million processing plant. This means that companies must choose how to spend their money, just as we have to choose how to spend our household budgets. This requirement to choose leads to the concept of opportunity cost.
Put