Spare Parts Inventory Management. Phillip Slater
on the books (see the section on financial concerns), it ignores the reality that cash was used to purchase the item and that cash has shown no return.
What all these issues mean is that the risks associated with purchasing spare parts is much greater than with items in a retail and wholesale environment. This, in turn, means that companies should take more care with their spare parts decision making, not less.
1.4 Five Common Supply Chain Techniques That You Should Not Use for Spare Parts Management
An important part of any strategy, including your spare parts inventory management strategy, is to know what not to do. By understanding which inventory management techniques you should not apply to your spare parts management (and why), you might just save your company a bundle of money (and yourself a lot of heartache).
As discussed previously, spare parts inventory is the inventory that you hold for equipment repairs and support, as opposed to the inventory that is used in production for conversion to finished goods. This distinction is important, because the characteristics that set spare parts inventory apart from other inventory types also help identify supply chain management techniques that should not be used for spare parts management, including:
1. Materials resource planning (MRP). MRP is a production planning technique that aims to coordinate assembly operations by ensuring that the required components are available in the right mix and at the right time in the assembly process flow. Spare parts are not used for production assembly, and so the MRP production planning concepts of dependent and independent demand don’t apply. The term MRP has also been co-opted by some ERP (enterprise resource planning) providers as a proxy for running a reorder report, but running a reorder report is not actually the same as MRP—it’s just a reorder report! Don’t waste your time and money learning about or trying to implement this technique if you are managing spare parts.
2. Just-in-time (JIT). JIT is a production management philosophy that aims to eliminate wasted time on a production line by coordinating materials movements. It is not a management technique for nonproduction items such as spare parts. Further, holding excess stocks so that supply can be provided in an almost instantaneous manner is not JIT because it lacks the signals and coordination of JIT. Work instead on improving spare parts planning and coordination.
3. Economic order quantity (EOQ). Applying an economic order quantity sounds very attractive—who wouldn’t want to purchase in the most cost-effective manner? The problem here is that there are too many variables in the actual EOQ calculation for the results to be reliable. For example, what if more than one item is on the purchase order? Does that split the order cost? Instead of trying to make the theoretical EOQ calculation work in the real world, apply the logic explained in Section 2.6 and don’t bother with the calculation.
4. Service level. Service level is a measure of the number of times that a request for an item is filled in the acceptable time frame. It is commonly applied in fast-moving consumer goods and other wholesale industries, with the term delivery in full on time (DIFOT) being used. Having a DIFOT of 95% would be a good target in those industries, but with spare parts, if you don’t have the right part available 5% of the time your production might stop, and then nobody will thank you for achieving a 95% service level.
5. ABC analysis. ABC is an analytical approach that divides your inventory into categories to identify which are most important and then sets agreed service levels on the availability of those items and may also set the level of control. This is a way of recognizing that all items in an inventory are not equal in terms of value to the organization and then trying to ensure that the inventory mix reflects the criteria of importance. Typically, ABC analysis is based on sales volume, gross profit, or value. With spare parts inventory we know that service levels are not appropriate, stock turn only works at an aggregate level, there is no profit margin as the spare parts are used in your own plant, and volume and value measures ignore criticality. Therefore, ABC analysis is just not appropriate; it’s better to ensure that you have appropriate categorization for guiding your decision making.
Putting aside all the technical reasons why these techniques don’t work, there is one very good reason why you should not try to apply these techniques: employee confidence. Attempts to apply these techniques will cost you time, effort, and money, and because they don’t work effectively with spare parts, they will also cost you the trust that your spare parts management system can deliver the parts required when needed. And that might just be the greatest cost of all.
1.5 The Number One Problem with Spare Parts Inventory Management
Engineering spare parts management is a big topic, and managing a spare parts inventory involves engaging with lots of participants from different parts of the business. This means that there is plenty of opportunity for things to go wrong. And that may be one of the complications that make this task more difficult than it superficially appears.
So what do you think is the biggest problem in engineering spare parts management? This is a question that I ask at the beginning of almost every workshop and training event. Given the range of personnel involved in spare parts inventory management, it is perhaps no surprise that I get a wide range of responses. Here is a list from one recent session:
• Satellite stores
• Rotable spares management
• Lead time variability
• Stockouts
• Engaging operations
• Determining criticality
• Availability
• Redundant stock
• Logistics
• Cannibalized spares
• Location mix-up
That’s quite a list!
These responses could be sorted into a number of different categories, such as structure (e.g., satellite stores), process (e.g., rotable spares management, logistics), and outcomes (e.g., stockouts, availability). There may even be other categories or ways to break down this list. However, despite these issues being quite universal, identifying and grouping them doesn’t really help us identify the number one problem with spare parts inventory management. To identify the number one problem, we need to look for a theme that is evident in each of these issues.
One theme that is evident in almost all these issues is uncertainty. For example, the typical reason that rotable spare parts management is an issue is that there is uncertainty about the spares usage requirements, the repair time, and the reliability of the repaired item—sometimes all three! We could say something similar about lead time variability (uncertain by definition), determining criticality, stockouts, availability, redundant stock, and location mix-ups.
Another possible theme is communication. One reason that many items on this list become an issue revolves around the communication (or lack of) that occurs. This is obvious with items such as engaging operations, logistics, and even cannibalized spares and location mix-ups.
While uncertainty and communication are clear issues with spare parts inventory management, in my opinion the number one problem is how people deal with that uncertainty and lack of communication. Uncertainty and poor communication represent information gaps, and almost universally the way that people fill those information gaps is by guessing.
Therefore, I think that the number one problem in spare parts inventory management is guesswork!
The Merriam-Webster Learner’s Dictionary defines guesswork as: The act or process of finding an answer by guessing.
Guessing is further defined as:
To form an opinion or give an answer about something when you do not know much or anything about it.
Many people reading this will be outraged. How dare I say that their work is based