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.
Critical equipment analysis
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.
Spare parts management on CMMS vs. ERP
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.
If purchasing resides on the ERP system, use your CMMS to pass a purchase requisition to the purchasing module and initiate a purchase order within the ERP application.
Internal vs. external spare parts management
Companies are increasingly turning to third-party service providers to manage spare parts inventories. One key objective is to reduce the inventory-related costs listed above. Additionally, an external service provider can assume or at least share the risk associated with obsolescence, shrinkage, depreciation, and overstocking. As many vendors specialize in supply chain management, and might even specialize in your industry, an external supplier is expected to bring to your company some combination of deep knowledge, economies of scale, or potential capital to invest.
However, be wary of rushing too quickly to a third party, especially under a multi-year contract. Get your house in order first; otherwise, you might be leaving too much low-hanging fruit for the external service provider to turn into a quick profit at your expense.
Spare parts maintenance
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One of the biggest surprises for me over the years is the relatively low number of asset managers that take the maintenance of spare parts seriously. This includes ensuring that parts are protected from rust or corrosion, inspected for damage, ensuring moving parts are lubricated properly, protecting certain materials from drying out, preventing parts from excessive stretching or compression, and eliminating dust from parts that might be degraded. How parts are stored and cared for is critical to extending their shelf life and that of each relevant asset. For example, hanging certain types of belts on nails might cause kinks over time, which might, in turn, result in premature asset failure.
More advanced CMMS packages are capable of establishing preventive maintenance programs for specific spare parts, as opposed to assets or components, especially if they are serialized. Furthermore, some CMMS applications help manage warranties relevant to spare parts, such as repair or replacement of a part under warranty, even if it hasn’t yet been issued from inventory.
Email Contributing Editor David Berger, P.Eng., partner, Western Management Consultants, at firstname.lastname@example.org.