Risk management is a major element of spare-parts inventory management, but in many ways it is also one of the most poorly executed. Most companies understand risk management and go to great lengths to identify and mitigate risks across their organization, but this thinking is often limited to some types of commercial risk, reputation risk, and of course health and safety. Beyond the simplistic view that a stock-out may extend downtime, and therefore financial loss, most companies overlook the application of risk-management techniques to spare-parts management.
Many people have written books on risk management, and I don’t intend to try and summarize these. However, in the space available here, I want to address two important risk-management concepts. Get these right and you will go a long way to minimizing your spare-parts risks. The two concepts are strategic risk and operational risk.
In this context, strategic risk does not relate to business strategy or whether or not the company chooses the right markets and products. Spare-parts inventory strategic risk is about the choices you make on how you will manage your spare parts.
At one extreme you may choose to be ad-hoc. That is, expense items on purchase, have no formal policies, and leave procedural issues to the experience and judgment of the day-to-day managers.
At the other extreme you may choose to standardize all aspects of spare-parts management — in much the same way that you may standardize all aspects of financial management. In between, there is a sliding scale of structure.
The right strategy for your organization depends on the financial investment in your inventory and the magnitude of the potential loss. If your business can afford to experience extended downtime and the losses that result, or to manage risk through purchasing large quantities of “just in case” spares, then an ad-hoc approach might be the right strategy. If your organization cannot afford extended downtime or massive inventory investments, then you need to consider a better approach for your spare-parts management. That is, doing the right things to avoid or mitigate the potential losses.
Similarly, operational risk (in this context) is not the risk of loss from your operational downtime. Rather, it is the risk associated with how you execute your chosen strategy.
Think of this as doing things correctly. Too often companies get the strategic-management settings right but then fall down in execution. For example, they may develop a stocking policy as a way of standardizing decision-making, but then either the policy is inadequate or their day-to-day management just doesn’t follow the designated policy.
Companies that don’t consciously seek to manage their operational risk through ensuring appropriate execution of their systems are as exposed as companies that don’t take their inventory management seriously.
Risk management can be simply described as being smarter about the chances you take. When it comes to spare-parts inventory, risk management means ensuring not only that you identify the right things to do but also that you also do them correctly.
