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By David Berger, P.Eng., contributing editor
With every purchase of a physical asset, give consideration to the spare parts and tools needed to maintain it throughout its life. Input comes from the OEM, experience with the same or similar assets, benchmarking other organizations with comparable equipment, detailed analysis of the asset and its components, or simple trial and error. However, keeping a well-stocked spare parts inventory can be expensive. Try to balance cost with spare parts availability, reliability, and performance. Use these helpful tips when trying to strike this balance.
There are a number of cost drivers to manage respecting spare parts inventory control.
Cost of capital: You can use existing capital to buy spare parts or leave your money in the bank to earn interest, or purchase something that provides a better return. Alternatively, if you have no cash, you can borrow the money at an even higher interest rate. Interest lost is the cost of capital, which should be minimized.
Ordering cost: Each time you place an order, it triggers a number of activities that cost time and money. This includes the cost of preparing a requisition, quotations, purchase order, and receiving slip, as well as stocking the parts, processing the supplier invoice, and issuing payment.
Holding cost: Spare parts occupy valuable space. Holding costs include the cost of that space, as well as related costs attributable to damage and spoilage. This is especially critical to manage when space is at a premium. Holding cost might also include the cost of storage racks and bins.
Material handling cost: Tools and equipment to move parts, such as conveyors, totes, and fork lift trucks, can be quite expensive. Furthermore, they’re assets that likely require storage, maintenance, and spare parts, thus leading to still further costs and space.
Security cost: Depending on the inventory type, location, and work environment, it might be necessary to secure the area. This involves erecting fences or more secure walls, security systems, and cameras. The cost of security is offset by the lower cost of pilferage, damage, or safety.
Human resources: People might be required to manage stores or the warehouse areas on certain shifts in certain locations. Duties might include receiving, inspecting, kitting, issuing, and restocking spare parts. Trained personnel might also be needed to run material handling equipment, conduct inventory counts, monitor security systems, and perform other duties.
Information systems: Although simple manual systems can be used for some parts such as consumables — for example, nuts and bolts — most companies adopted computerized information systems to help manage spare parts inventories. This costs money to purchase, implement, operate, maintain, and upgrade the system.
Other inventory carrying costs: There are many other potential costs of carrying spare parts inventory, such as obsolescence, shrinkage, depreciation, insurance, and taxes.
“Try to balance cost with spare parts availability, reliability, and performance.”
Understanding cost drivers will enlighten you as to the many costs associated with carrying excess inventory of spare parts. One of the ways to reduce inventory levels to only the essentials is to undertake a review of equipment criticality. Most CMMS packages have a coded field for identifying equipment criticality on, say, a scale of one to 10. More sophisticated packages allow users to assign weights and scores to an unlimited number of user-defined variables, in order to build a total criticality for a given asset or component.
Criticality is based on the consequences of equipment downtime. For example, if a given asset or component is down, the consequences might be anywhere from negligible to catastrophic in terms of financial, safety, or customer-service. Once an asset is identified as critical, use a study to determine which spare parts are required in what quantities for its maintenance.
One of the classic debates over the past few decades is whether to run spare parts inventory management functionality on your CMMS, or alternatively, on your ERP system. This, of course, assumes you have a different vendor solution for your ERP and CMMS applications, as opposed to a fully integrated ERP/EAM solution. Most major best-of-breed CMMS vendors have no problem with either approach, as integration will be required, regardless of choice. In my view, it usually is preferable to run spare parts inventory management on the CMMS because of the tight integration with work order control.
For example, if you are scheduling a work order and you need to check parts availability, there’s a significant advantage in viewing a standard parts list for a given asset from within the work order screen and checking part availability, including quantity in stock, on hold, on order, in transit, and in QA inspection. If the part is in stock, you can then determine its location. If the part is on order, you can determine the estimated time of arrival. Thus, relevant information can be accessed conveniently from within the work order screen.
In contrast, your ERP system’s tight integration with accounts payable might be the best home for purchasing functionality.
From an organizational design perspective, anyone involved in purchasing spare parts typically is reporting to or physically located within the same department as those purchasing other goods and services. This isn’t necessarily analogous to spare parts inventory control, where stores keepers and others involved in managing spare parts can be isolated from inventory warehouses for finished goods, office supplies, and other items. Moreover, these personnel often report directly to the maintenance group.