Spare Parts Inventory Management. Phillip Slater
have evolved randomly. Of course, not all “designed systems” are perfect or even fully effective, but there is a reasonably good chance that a designed system will outperform a random system every day of the week. This raises the question of who would allow themselves to have a system that has evolved randomly?
Well, unfortunately, too many companies do. In fact, in our research,1 almost 50% of companies score their development of spare parts management policies as either “no defined, formal inventory policies” or “broad-based corporate-level policy.” With either response those companies are saying that they have no specific set of policies that have been designed for day-to-day application in helping them manage their spare parts inventory. Wow!
But it doesn’t stop there. When we dig down to ask about the development and implementation of a specific spare parts stocking policy, that is, a policy to guide the decisions first on whether or not to stock an item and then on how many to stock, the number of respondents that have nothing in place jumps to a massive 75%! Double wow!
Is it any wonder then that companies find themselves so massively overstocked with spare parts and MRO (maintenance, repair, and operations) inventory, while at the same time having low levels of trust, that they hold the items that they really need? Of course not, especially once we understand that their decision-making system has evolved randomly and so delivers random results.
So what about those companies that have actually taken the time and effort to design a system for spare parts decision making? In our research we segmented the respondents based on their scores in terms of spare parts inventory management results (top performers having steady or decreasing inventory levels, high stock turns, and a low number of stockouts). We found that 75% of the top quintile (in terms of results achieved) had designed and implemented a spare parts management policy. However, we also found that 86% of the bottom quintile had not.
The difference in performance between the top and bottom performers is quite stark in terms of key spare parts management metrics, and so is the approach that they have taken for developing their spare parts inventory management systems. The top performers overwhelmingly design their systems, whereas the bottom performers have allowed theirs to evolve randomly. (These research findings are discussed further in Section 1.18, “Best Practice Spare Parts Management Research.”)
Part 1 of this book discusses the need to mindfully and deliberately develop your spare parts inventory management system. As a background to this, we explore the differences between the typical inventory types such as raw materials, work in progress, finished goods, retail inventory, and spare parts. This understanding helps explain why some of the tools and techniques that are widely used in most supply chain management situations just don’t work with spare parts inventories that are held by companies to support their maintenance and operations activities. Speaking of maintenance, it is also important to understand spare parts in the context of the end users, which is most often the maintenance and reliability function. Another contextual issue is understanding the financial considerations of spare parts inventory management; after all, no matter how they are accounted for, spare parts do cost money.
Having laid that groundwork, we shift our focus to the nitty-gritty of establishing a spare parts inventory management system. This includes understanding the minimum requirements for a workable system, establishing an identification system and management policies, and finally understanding the aforementioned best practice.
1.2 What Are MRO and Spare Parts?
Libraries, bookstores, and the Internet are filled with books, blogs, magazines, training courses, information, and experts that can detail the chapter and verse relating to supply chain and inventory management. However, as you will soon see in this book, the standard theories and formula for inventory and supply chain management do not apply to MRO and spare parts. This is explained in detail in Section 1.3. However, before progressing further, it is important to be clear about the type of inventory that this book does address.
The key is to understand that all inventories are not the same, at least that their characteristics and dynamics are not the same. Figure 1.1 shows a simplified supply chain that could be applied to almost any goods but here follows a path for the items that become MRO and spare parts inventory. This figure shows a chain involving:
1. The initial raw materials extraction or development (say, mining or chemical processing).
2. Initial manufacturing or processing into a usable form.
3. Warehousing.
4. The next stage of manufacturing or processing that creates a finished product or component.
5. Wholesaling of that component.
6. Delivery to a company that uses that component.
7. Storage in that company’s inventory.
8. Issuing to an end user.
9. Application in the company’s plant and equipment.
During this process the item continually changes from being a raw material to a work in progress to finished goods (the three standard inventory types). For example, the product produced at Step 1 is the raw material for Step 2. During processing in Step 2, it is considered to be a work in progress. After Step 2, it may be stored in a warehouse (Step 3) before becoming the raw material for Step 4 and so on along the supply chain. Further, the supply chain is made up of both material movement and information flows, so the demand from Step 4 becomes the signal for supply to Step 2. Importantly, this information flow is usually the opposite of the product flow and is the basis for production planning along the supply chain.
For typical inventory, the component at Step 5 may be sold to (say) an industrial or retail customer, and it is at this point that MRO and spare parts differ from the standard supply chain. In Figure 1.1, Step 5 is where the item is ordered for a storeroom to support maintenance and operations. During Steps 7, 8, and 9, it is removed from the storeroom and applied to repair or support the operation of a piece of equipment. And this is the defining attribute of MRO and spare parts management: being used for equipment repairs and support, not in production as a component or raw material for the next “widget” in the supply chain.
Figure 1.1. A simplified supply chain
The following are the MRO, materials, and spare parts definitions that apply to the inventory addressed by this book:
• MRO—maintenance, repairs, and operations. When used in relation to materials and spare parts, this term is referring to the items that are used to fulfill the functions of maintenance, repairs, and operations support—that is, consumables such as materials and spare parts.
• MRO—maintenance, repair, and overhaul. This really has the same meaning as the above term.
• MRO—maintenance and repair organization. MRO is sometimes used to refer to the organizations that fulfill maintenance and repair functions, but it may also be used to define the components that the organizations use and/or supply.
• Materials. Typically, this term refers to items that are purchased that are not used for production—they are not used in producing the widget. Materials are not necessarily spare parts since they could be maintenance consumables (oil, grease, welding rods, etc.) or items purchased for fabrication (for example, steel).
• Spare parts. These are items held in inventory that are used to replace failed parts or components in the equipment that is being maintained. Spare parts could be anything from a drive belt or bearing to entire components such as a pump set.
Do these definitions matter?