An important part of any strategy, including your spare-parts inventory-management strategy, is to know what not to do. By understanding which inventory-management techniques you should not apply to your spare-parts management (and why), you might just save your company a bundle of money (and yourself a lot of heartache).
Spare-parts inventory is the inventory that you hold for equipment repairs and support, as opposed to the inventory that is used in production for conversion to finished goods. This distinction is important because spare-parts inventory has characteristics that set it apart from other inventory types — as this review of common techniques will reveal. Here are five techniques that you should not use for spare-parts management.
- Materials Resource Planning (MRP) — a production-planning technique that aims to coordinate assembly operations by ensuring that the required components are available in the right mix and at the right time in the assembly process flow. Spare parts are not used for assembly, and running a re-order report is not the same as MRP. Don’t waste your time and money learning about or trying to implement this technique if you are managing spare parts.
- Just-In-Time (JIT) — a production-management philosophy that aims to eliminate wasted time on a production line. It is not a management technique for non-production items such as spare parts. Work instead on improving spare-parts planning and coordination.
- Economic Order Quantity (EOQ) — applying an economic order quantity sounds very attractive — who wouldn’t want to purchase in the most cost-effective manner? The problem here is that there are too many variables in the actual calculation for the results to be reliable. For example, what if more than one item is on the purchase order, does that split the order cost? My advice: Apply the logic but don’t bother with the calculation.
- Service Level — a measure of the number of times that a request for an item is filled in the acceptable timeframe. It is commonly applied in FMCG and other industries with the term “Delivery In Full On Time” (DIFOT) being used. With spare parts, if you don’t have the right part available 5% of the time, your production might stop, and then nobody will thank you for achieving a 95% service level.
- ABC Analysis — an approach that divides your inventory into categories to identify which are most important and then sets agreed service levels on the availability of those items. Typically ABC analysis is based on stock turn, profit or volume. With spare parts, we know that service levels are not appropriate, stock turn only works at an aggregate level, there is no profit margin as they are used in your own plant, and volume measures ignore criticality. ABC analysis is just not appropriate.
Putting aside all the technical reasons why these techniques don’t work, there is one very good reason why you should not try to apply these techniques: employee confidence. Attempts to apply these techniques will cost you time, effort and money, and because they don’t work effectively with spare parts, they will also cost you the trust that your spare-parts management system can deliver the parts required, when needed.
In the end, that might just be the greatest cost of all.
Phillip Slater specializes in materials and spare-parts management. He is the founder of the information site SparePartsKnowHow.com, and the author of eight books, including Smart Inventory Solutions and The Optimization Trap. For a complimentary copy of the e-book, 5 Myths of Inventory Reduction, please visit www.PhillipSlater.com.
By PHILLIP SLATER
