Include spare-part costs when considering machine purchases
Spare no expense: Spare-part inventory costs can make machines more expensive.
By Chuck Dix, Envision Plastics
Anyone that has ever run a maintenance operation knows there’s a fine balance between stocking too much inventory and not having enough. We must satisfy operations with enough inventory to keep the plant running and producing. We also must not tie up too much cash in inventory. What is the maintenance department to do? Here are a few ideas that might offer some relief.
Risks, usage and vendors
Life-insurance spares: When the annualized cost of procuring, storing and maintaining a spare is less than or equal to the annual risk cost of not having the part when it’s needed, then you stock at least one. You need to look at the cost, or risk, of not having the part versus the cost in terms of machine downtime. The two costs need to be compared at their respective minimums. We call these life-insurance spares. There’s a simple model for this and it gets complicated if you have multiple users of the same part with different annualized risk costs. You’re using actuarial statistics just like the insurance companies do. These parts aren’t subject to the usual rules — it must turn over every X number of years or it gets deleted. If you live for two years without dying, do you cancel your life insurance policy?
Walmart stocking: This case is when there’s a known, relatively predictable usage rate. Under these circumstances, it‘s a trade-off between the transactional costs of procuring just one part versus the carrying costs less volume discount. One unit might cost $5, but 12 of them cost $4 each, and you use one per month. The cost of purchasing one per month will more than likely cost more than the carrying cost for the additional parts. Again, if you have financial guidelines to work within, you can make a least-cost decision. This is the method that most accountants are familiar with; you can call it the Walmart stocking model.
“We must satisfy operations with enough inventory to keep the plant running and producing.”
- Chuck Dix, Envision Plastics
Vendor inventory: In this method, the vendors hold stock inventory. There might be paperwork to sign stating that you’ll purchase a certain number of units each year and that you’ll purchase the carried inventory should the part become obsolete or pay a small annual fee for this service. The obsolete purchase applies if the part is a special order or the inventory can’t be sold back into commerce. Less cash is tied up in spare parts.
There are three things you can do to minimize the total cost of spare parts. These are:
- Standardize, standardize, standardize
- Optimize reliability by conducting root cause analysis to avoid repeat failures for the same reason
- Improve the performance of your predictive maintenance programs. This method takes time, because it might be years between failure cycles. If you know something fails every three years, then buy a replacement a couple months before it’s time to cycle the part.
Keep a minimum amount of spare parts on hand and have the vendor stock additional inventory. I prefer vendors located within a short driving distance of the plant. We can send someone for the parts or perhaps the vendor can deliver. The additional and best spare part reduction is to standardize your equipment, even if the cost might be more to start with.
For example, if you have two types of machines and three of each (six total) in-house and keep spare parts for both, cost the additional spare parts for each machine and take the highest cost for spare parts. Apply the cost for the spare parts to purchasing the same machine that has lower spare parts cost. Now you have six machines with one set of spares instead of six machines with two sets of spares. It might not work every time, but it should be looked at.
The cost to purchase Machine A is $45,000. We have three of these, totaling $135,000. Machine B purchase cost is $ 40,000. The company decides to buy three of Machine B because it costs less, totaling $120,000. We saved $15,000, and everyone feels good, until we look at the spare-parts inventory costs.
Spare parts for Machine A are readily available. We need only to keep $1,000 worth of spare parts on hand for emergency repair. Before we purchased these machines, we found a vendor that stocks parts in-house, and they’re only 30 miles from the plant.
Total cost is $136,000 for Machine A (three machines at $45,000 each, plus $1,000 in spares).
Spare parts for Machine B will be delivered six weeks after receipt of order. We learn this after the three new machines arrive, so we have to buy enough parts to keep the machines running under every contingency. Cost for the parts is $30,000. Total cost then is $150,000 for the three machines plus the parts.
We need to investigate every option before purchasing new equipment. Remember that companies compete against other companies on the basis of initial equipment price. Once you purchase that equipment, you’re locked into buying parts for it. Even if you don’t buy spare parts from the OEM, the cost might still be higher.
Chuck Dix is maintenance manager at Envision Plastics in Reidsville, North Carolina. Contact him at email@example.com or (336) 342-4749.