Supply Chain Management / Software

Optimize spare parts

David Berger, P.Eng., contributing editor, says get more from your inventory and suppliers.

By David Berger, P.Eng.

In most companies, maintenance and operations management focus on the volume and quality of finished goods produced, as well as the availability and reliability of assets used to produce them. This isn’t a bad thing, but such emphasis shouldn’t be at the exclusion of other key factors that influence overall productivity and customer service. Your spare parts supply chain, for example, plays an important role in minimizing asset downtime, reducing product rejects and reducing the cost of goods sold. Modern CMMS packages have many features and functions that help you effectively manage spare parts inventory.

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Key performance measures: To get the most out of your inventory, understand what success looks like. Determine the key performance measures that provide the right balance of high service levels and low supply chain management costs. As well, look for a manageable number of measures that trade off.

For example, a useful key performance measure is the frequency of spare part stockouts. To ascertain which measures, if any, trade off, imagine what might happen if you reduced the number of stockouts to near zero. Although service level would be high, what would be the trade off in terms of inventory level and turns? What about the extra space required to store the additional inventory? In fact, it’s undesirable to have zero stockouts because, statistically speaking, you’d need an infinite amount of inventory to cover for the outside chance that parts are requested many times in rapid succession. These metrics can be tracked using your CMMS.

It is undesirable to have zero stockouts.

– David Berger, P.Eng.

Another measure to consider is vendor performance. There are two ways to gather performance data about your suppliers using your CMMS, namely, quantitative metrics and somewhat qualitative ratings. Examples of quantitative metrics include number of late shipments, over/undershipments, backorders, substitutions and damaged goods shipped. Examples of qualitative ratings include on-schedule, quoted price to actual, ability to keep promises, ability to deliver per instructions, quality of packaging, invoice accuracy, and product reliability ratings. In a few CMMS packages, system-calculated values are tied to supplier history and qualitative ratings, such as a rating of 5 out of 5 for “on-schedule shipments” if the number of late shipments is less than three over the past six months.

Obsolescence is another measure worth tracking for most companies. For example, your CMMS can generate a report showing the quantity and value of spare parts that haven’t moved during a user-defined period. This allows you to assess whether such parts should be kept, modified, transferred, sold or discarded, rather than sitting idle and occupying valuable space.

Other measures to consider include average cost to order/procure parts, premium dollars spent on rush orders and average supplier price variance, and there are many more. However, choose only measures that make sense for your business, and that incentivize the right behaviors. For example, if excessive rush orders or obsolescence aren’t an issue for your operations, then don’t bother tracking it. Once you have determined which measures to optimize, set reasonable targets for improvement. Although targets vary by industry, company size and other factors, the following are some sample benchmarks:

  • Inventory turns (more than three)
  • Vendor performance (less than 1% variance)
  • Obsolescence (less than 5%)
  • Rush orders (less than the cost of inventorying those parts)

Apply Pareto analysis: Once you have clarified which measures are a priority and what a reasonable target might be, the next step is to determine the gap between current and target measures, and how best to address it. But many companies have thousands of spare parts in inventory, so where do you begin?

The easiest starting point is to use the data from your CMMS to conduct Pareto analysis on your inventory, thereby identifying, say, the top 20% of parts that account for 80% of the volume or cost of parts purchased. Pareto analysis also can be used to identify, say, your top 10 suppliers in terms of volume or cost, or the top 10 reasons why vendor performance is less than perfect. Pareto analysis enables you to focus on the high-priority parts, suppliers or issues.

Consider critical assets: Another useful view of your data is to identify critical assets and components, then conduct an analysis of critical parts. One simple way to accomplish this is to sort your assets and components by asset criticality. Those assets with the highest criticality should be your focus for evaluating:

  • Which parts are the most crucial to have accessible
  • How quickly these parts might be required to minimize downtime
  • Whether to stock the parts in-house or elsewhere
  • The minimum number of parts that need to be on-hand
  • The best supplier of the parts in terms of quality, service and price
  • The average lead time for the part
  • The reorder point for parts based on usage history and lead time
  • The economic order quantity for parts based on volume discounts from the vendor, warehouse space available, inventory carrying costs, procurement costs, and cash flow

Many CMMS packages have features that can help users establish an effective spare parts evaluation program. For example, some packages automatically check usage history for a given part and suggest corrections to reorder point, lead time or maximum levels. What-if analysis capability is another key feature that helps you understand how much to invest in your spares inventory and how that investment affects your bottom line. By entering simulation mode, you can adjust average inventory levels for different parts or part categories to determine what the resultant stockout frequency would be. This allows you to balance inventory costs and service level properly.

Partner with suppliers: One of the greatest opportunities for savings stems from better managing your suppliers. The key is to determine a short list of priority suppliers and work with them as if they were part of your own company. Of course, this presupposes that a given supplier has a similar culture and shares your enthusiasm for improving the relationship. If not, perhaps you can find alternative suppliers that think more strategically about the supply chain.

Begin a more strategic relationship with key suppliers by sharing expectations of future volumes, quality, service level, pricing and so on. Discuss mutually beneficial improvements such as better integration of each other’s information systems, e-procurement opportunities (e.g., e-catalog, e-quotations, electronic funds transfer), and use of blanket POs and electronic releases. Then track vendor performance using your CMMS to collect and analyze actual data.

Some companies have established a reward system for their suppliers, providing recognition to those that meet certain performance criteria. Other companies use a negative incentive for keeping suppliers in tow, i.e., replacing any supplier that doesn’t meet a minimum standard of performance (e.g., less than 1% of shipments have scheduling, quality or volume variances). Regardless, it’s always better to enlist your suppliers as partners with the shared objective of maximizing value for money along the supply chain.

E-mail Contributing Editor David Berger, P.Eng., partner, Western Management Consultants, at david@wmc.on.ca.

(Editor’s note: The Plant Services CMMS/EAM Software Review, at www.PlantServices.com/cmmms_review, provides a side-by-side comparison of more than a dozen popular software packages.)