Managing spare parts inventory is like walking a tightrope -- on one side, overstocks enlarge inventory unnecessarily and, on the other, understocks increase downtime cost unnecessarily. The delicate balance is threatened most severely by parts that are rarely, if ever, used.
Rarely-used inventory refers to parts that are required less than monthly, and these generally comprise 75% to 80% of a plant’s spare parts inventory. Even the most sophisticated enterprise management system can’t determine appropriate stock levels and forecast demand for rarely used inventory. The software lacks the logic necessary to determine stock levels on the basis of meager past demand. The just-in-time concept is irrelevant if the proper time dimension can’t be predicted. Common practice is for operations and maintenance personnel to set minimum and maximum stock levels and allow the enterprise management system to control actual quantities on hand.
In reality, the actual stock level for most of the rarely used inventory is reasonably close to the quantities needed to support plant availability. Nevertheless, every plant has significantly overstocked items and some highly understocked critical items. The value of unnecessary parts adds up to millions of dollars at most plants, where handling or carrying costs average 20% to 25% annually. The cumulative handling costs for parts sitting on the shelf for four or five years are equivalent to the costs of the parts.
Prudent management of maintenance inventory levels requires some inventory analysis to correct imbalances and adjust reorder points. Four common factors contribute to needless expenditures on excess inventory: overhauls, discontinued parts, purchasing easy-to-acquire parts and allowing manufacturers to set levels for spares.
There’s no need to carry any inventory of parts used only during planned, scheduled overhauls. These can be ordered one lead-time plus a few weeks before the overhaul is scheduled to begin. For example, if the normal lead time is two weeks, order the overhaul parts four weeks early. This inventory should barely touch your warehouse shelf. As soon as it does, it costs you money.
Additionally, negotiate return policies with your vendors. In most cases, completed overhauls don’t use all the parts, and the excess hardware often ends up on your shelf. Write into the contract with your vendor an agreement to take back unused parts, even if this involves a moderate restocking fee. Financially, your company will be better off avoiding the carrying costs, insurance costs and property taxes on those parts, not to mention the actual cost of the parts.
When manufacturers discontinue a repair part, sometimes it’s possible to make a last-time buy, a practice that also contributes to ballooning inventory levels. Assess these purchases logically in light of the part’s criticality and past usage history.
Some parts don’t need to be stocked at all if they can be obtained quickly, aren’t critical and are rarely used. These include:
- Parts available from multiple sources.
- Parts from a nearby vendor.
- Parts covered by a service agreement that guarantees expedited delivery.
OEMs and inventory
When your plant buys an asset, vendors and OEMs often provide a list of recommended spare parts. The vendor always wants to sell parts and the maintenance department never wants to run short, so more parts than needed are bought and stored.
Lacking any usage history, you should consider criticality and lead time when making these purchases. Risk-based techniques exist for improving the decisions for first-time buys. The best time to avoid surplus and potentially obsolete inventory is before buying the first part.
Critical parts availability
The same considerations -- criticality, lead time and past usage -â€“ that eliminate needless expenditures can be used to analyze current inventory levels and redirect inventory investment dollars. This isn’t as difficult as it might seem.
A small, core group of items have a significant effect on production and company finances. These rarely used key items are critical to production, are generally expensive and often have long lead times. In an average plant, rarely used key items represent less than 20% of inventory, but account for 80% of inventory value.
Most inventory management systems don’t track criticality, yet it’s the single most important factor in setting appropriate stocking levels. Criticality is defined as:
- High when an unsafe condition or output reduction will occur if the part fails, no other part can be substituted or reworked to serve the need, and the time between failure and the time of need is less than eight hours.
- Medium when a failure will be inconvenient, but the plant can maintain production until a replacement part arrives. One or two high-criticality measures are met, but not all.
- Low when another part can be substituted or the plant can operate without the part for a couple of weeks.
In a typical plant, 40% to 60% of parts are highly critical, 20% to 30% are medium, and 15% to 25% are low. This illustrates that most spare parts really are highly critical to plant operations. If you must guess about the criticality rating of rarely used inventory, err on the conservative side to protect availability instead of taking on unnecessary risk with a low guess. No amount of money saved will compensate you for not having a critical part when you need it.
Although almost every inventory-management system accounts for lead time, few plants keep that data field up-to-date. The problem with rarely used inventory is that it might not have been purchased within the past three years, or perhaps since the plant was built. If the vendor is still in business, it might have merged or relocated. Knowledge of such things affects lead time, and lead time affects inventory levels.
Analyze stock levels using two years to five years of past usage. Any records older than five years are either redundant or not relevant to the way equipment is currently operating. Keep in mind that failure rates on new machines initially will be a little higher than under normal operating conditions. After the bugs have been worked out and a preventive maintenance cycle established, the number of failures drops sharply. Smooth operation will continue for a protracted period of time. However, as equipment ages and nears the end of its life cycle, failures increase again. Identify increasing or decreasing failure rate trends and use best practice processes to accommodate them when setting stock levels.
Identify your own pattern for setting stock levels for critical parts -- those that deviate from your normal practices -- by studying their lead time, past usage history and quantity on hand. Then look for items with abnormal quantities on hand. You’ll uncover items having a two-month lead time that haven’t been used or used only a few times in the past two years, yet you have five or six on the shelf. By most common standards, these should be stocked at a level of only one or two.
This simple inventory analysis of criticality, lead time and past usage can uncover savings of 10% to 20% of your total inventory value. The money you save by cutting overstock can then be used to improve availability of understocked critical parts. It will make walking that tightrope a lot easier.
Mike Reynolds is President and COO at Inventory Solutions Inc., Akron, Ohio. Contact him at (330) 864-6666.