Optimize spare parts

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

By David Berger, P.Eng.

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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:

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