Thought Leadership

Trading critical spare parts inventory for equipment availability – is it worth the risk?

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Most businesses have implemented working capital initiatives, with a focus on Accounts Payable and Accounts Receivables terms and conditions as well as inventories of raw materials, works in progress, and finished goods (inventory management). Some initiatives, however, go beyond to target critical spare parts by drastically reducing stock or transferring stock ownership to a third party.

On the surface, this may seem like a straightforward and smart strategy, but it carries risks that aren’t always easy to see. What if stock levels of critical spares are disconnected from true consumption? What if the replenishment is unreliable? What if the third party isn’t consistently responsive?

Most likely, in all these cases, the result is production suffers and the maintenance department isn’t efficient. Based on multiple project improvement deliveries, we know that waiting for spare parts is the main source of productivity loss in the maintenance department. While not obvious, this inefficiency can be spotted when a vehicle comes in twice for maintenance within a short period of time or a similar repair is repeated on equipment.

Often, to remediate critical parts shortage, maintenance technicians turn to cannibalism and remove parts from other functioning equipment. Technicians think they’re doing the right thing by trying to fix the problem as soon as possible. However, the true problem remains hidden – it doesn’t show up in the metrics or reporting – and is transferred down the operational value chain.

Alternatively, critical spares are rush sourced at higher cost, higher part price, and higher transport costs. In worst cases, critical spare part unavailability will directly impact equipment availability and production outcome. It’s not uncommon, and in fact, it happens more often than most people think.

4 ways to improve inventory management

So is it really worth putting at risk critical spare part availability to achieve working capital improvement? The answer lies in the financial numbers, the cost of holding critical spare part inventory versus the risk of production loss. Nowadays, the cost of capital is so low that the balance has shifted, and holding a bit more stock to maintain reliable production is a worthwhile investment.

From a supply chain perspective, achieving stability means eliminating surprises. Some organizations use a run-to-fail strategy, where they run machines until they fail. This frees up capacity in the short term, but it’s usually not a good long-term plan. Too often, run-to-fail becomes the norm, and no time is planned for maintenance.

It’s best to aim for 95% planned maintenance, so that only 5% of machine maintenance is unplanned. This proactive approach provides much-needed inventory stability and helps reduce critical spare parts stockouts.

Here are four keys to improving inventory management:

1) Spare parts forecast consumption

If you’re able to forecast consumption, you can create an accurate inventory plan. This applies to maintenance inventory as well as general inventory (raw materials and components). Often, companies simply take the numbers from last year and adjust based on the economy. For greater accuracy, it’s important to dig deeper, taking into account factors like seasonality, future industry trends, demand, and even customer input.

2) Bottom-up forecasting capabilities

Many forecasts are purely financial, but the most successful organizations track inventory at the individual SKU level. If you sold $1 million in products, do you know specifically which products? Data has to be managed at the individual product level so that you’re forecasting by SKU and connecting that information to the production schedule.

3) Planning processes and communication

Short-term demand should be accurately visible across operations, planning, and maintenance. The top organizations collect inventory data within the planning cycle, identify any changes in the plan, and then reliably inform the necessary stakeholders. Having structured decision-making processes that respond to variances ensures internal and external customers are satisfied while supply performance is maintained.

4) People and change management

This is a critical but often-overlooked component. You need to manage people’s motivations and not encourage behavior that sabotages inventory management best practices. For example, salespeople are rewarded on the ability to sell, so they avoid predicting a fall in sales and may exaggerate to ensure their customers receive stock they’ve ordered. People in manufacturing do the same so they can respond quickly to a stockout. Such practices don’t help the organization as a whole achieve inventory stability.

The advantages of supply chain/inventory management software

Supply chain or inventory management software can help businesses maintain optimal inventory levels for critical spare parts, but data quality is essential. You need the capability to manage inventory bottom up by SKU within a weekly reporting cycle. That data must be made available quickly so that variances can be tracked and an action plan implemented.

The number of SKUs is constantly increasing as new segments evolve due to technology or marketing development. As a result, the batch size will generally produce too much stock to meet working capital goals.

This means companies have to be innovative to solve stock issues and reduce batch size without losing too much efficiency. Implementing lean manufacturing controls can help manage efficiencies in a defined framework.

How the software is used depends on the company’s context and local situation. For example, it may make more sense to buy a planning tool or develop Excel-based tools around an ERP system. You’ll have to carefully analyze your customers’ service expectations and how they may change in the next few years.

At a high level, supply chain or inventory management software offers these advantages:

  • Data can be processed and communicated to stakeholders within the planning cycle
  • The planning methodology rules are easily understood and communicated
  • “What if” scenarios are easily processed
  • Planning processes are reliable, making plans more credible and easily accepted

It’s important to note the processes that control the inventory in maintenance spare parts are consistent with other product categories and segments. That means it’s possible to apply the procedures outlined here to other items, like building materials and consumables. In fact, it’s relatively straightforward to apply the same principles to other categories.

When it comes to critical spare parts, the key word is critical – they’re essential to production. You may save money up front by not keeping inventory on hand, but the long-term consequences usually don’t justify the risk.

To not only ensure your spare parts management is best-in-class but also that your risk is within reasonable levels, you must take the appropriate steps to embed the right systems, processes and behaviors within your organization.

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Posted on January 17, 2022

By Alex Davidson and Jerome Paccalin

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