SPARE PARTS INVENTORY MANAGEMENT 2016954132, 9780831136086, 9780831194239, 9780831194246, 9780831194253

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SPARE PARTS INVENTORY MANAGEMENT A Complete Guide to Sparesology®

Phillip Slater

Industrial Press, Inc.

Industrial Press, Inc. 32 Haviland Street, Suite 3 South Norwalk, Connecticut 06854 Tel: 203-956-5593, Toll-Free: 888-528-7852; Fax: 203-354-9391 E-mail: [email protected] Author: Phillip Slater Title: Spare Parts Inventory Management, A Complete Guide to Sparesology®, First Edition Library of Congress Control Number: 2016954132 ISBN print: 978-0-8311-3608-6 ISBN ePDF: 978-0-8311-9423-9 ISBN ePUB: 978-0-8311-9424-6 ISBN eMOBI: 978-0-8311-9425-3 Copyright © 2017 by Ipiaight Pty Ltd. This book, or any parts thereof, with the exception of those figures in the public domain, may not be reproduced, stored in a retrieval system, or transmitted in any form without the permissionof the copyright holders. Sponsoring Editor: Judy Bass Copy Editor: Judy Duguid Interior Text and Cover Designer: Janet Romano-Murray Although the author and publisher have made every effort to ensure the information in this textbook was correct at press time, the author and publisher do not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.

Trademark note: ICR, Sparesology, and Inventory Cash Release are registered trademarks of Ipiaight Pty Ltd. industrialpress.com ebooks. industrialpress.com

Dedication In 1676, Sir Isaac Newton wrote in a letter, “If I have seen further, it is by standing on the shoulders of giants.” In a similar vein, my ability to write this book is entirely due to the experiences and opportunities that have come to me since commencing university 36 years ago. From university lecturers, to work colleagues, bosses, projects, and clients, I have learned from each one, and the experience and insight relating to spare parts inventory management is distilled into this book. I am grateful to everyone that I have worked with, and learned from, during my career. The one constant during most of that time has been my wife, Mercedes. Without her boundless optimism, constant support, and apparently endless patience, I am sure that none of this would be possible. This book is dedicated to you.

Also by Phillip Slater A New Strategy for Continuous Improvement Smart Inventory Solutions Smart Inventory Solutions, 2nd edition The Optimization Trap

Table of Contents Preface Introduction About the Author

Part 1: The Spare Parts Management System 1.1 Your Management Systems Either Are Designed or Evolve Randomly 1.2 What Are MRO and Spare Parts? 1.3 Why Spare Parts Are Different (from Other Inventory Types) 1.4 Five Common Supply Chain Techniques That You Should Not Use for Spare Parts Management 1.5 The Number One Problem with Spare Parts Inventory Management 1.6 The Big Picture—Putting Spare Parts Management in Context 1.7 Maintenance Alone Won’t Solve Your Spare Parts Problems 1.8 Spare Parts Management Requires Collaboration, Not Just Cooperation 1.9 Financial Considerations 1.10 Follow the Money—Accounting for Spare Parts 1.11 The Key Elements of a Spare Parts Management System 1.12 A Quick Word on Multiechelon Systems 1.13 Inventory Prevention 1.14 Spare Parts Inventory Management Policies 1.15 Categories 1.16 Procedures 1.17 Developing a Spare Parts Identification System 1.18 Best Practice Spare Parts Management Research 1.19 The Best Practices That Make a Real Difference 10 Key Lessons: The Spare Parts Management System

Part 2: Create and Stock

2.1 Introduction 2.2 Deciding What to Stock 2.3 The Pros and Cons of Spare Parts Standardization 2.4 Capital Equipment and the Spare Parts First-Time Buy 2.5 Spare Parts and Criticality 2.6 A Practical Method for Setting Spare Parts Holding Levels 10 Key Lessons: Create and Stock

Part 3: Operations 3.1 The Longest Part of the Cycle 3.2 Forecasting Spare Parts Requirements 3.3 Inventory Optimization 3.4 Managing Rotable and Repairable Spares 3.5 Storeroom Management 3.6 How to Achieve 100% Inventory Accuracy—a Preventive Approach 3.7 The Practical Application of Bar Codes 3.8 Materials Data Management and Cleansing 3.9 Integrated Maintenance and Spare Parts Planning 3.10 Spare Parts Procurement Issues 10 Key Lessons: Operations

Part 4: Obsolescence and Disposal 4.1 Obsolescence and Disposal Is Part of the Life Cycle 4.2 Managing Obsolescence 4.3 Managing End of Life and Last-Time Buy 4.4 Spare Parts Disposal 10 Key Lessons: Obsolescence and Disposal References Commonly Used Acronyms Index

Preface In December 1958, a writer named Leonard Read published an essay titled, “I, Pencil: My Family Tree as Told to Leonard E. Read.”1 This essay was written from the point of view of the pencil and details the complexity and range of functions and processes required to create the seemingly simple object of a pencil. These functions and processes start with the growing and harvesting of the wood, the development of the “lead” (which is actually a complex process involving graphite, clay, water, and other elements), through to the logistics and planning to bring everything together and then deliver the pencil to the user. The essay talks about the absence of any single mastermind “forcibly dictating those countless actions,” and yet the pencil comes into being and pencils have been used for hundreds of years! The concept of the “invisible hand” (or lack thereof) could be applied to almost any modern item, but in the context of this book, let’s think about spare parts. Even the simplest of spare parts, say an O-ring, has come into the possession of its end user through an extraordinary and complex chain of people and processes. The nitrile rubber that is used for some types of Orings is a synthetic compound manufactured from a base of propylene (derived from petroleum or natural gas) as a copolymer. The process includes a range of additives and catalysts. The appropriate form of nitrile is later manufactured into O-rings through a process of extrusion, injection molding, pressure molding, or transfer molding. The O-ring is then packaged, handled, shipped, stored, distributed, ordered, shipped again, processed into a storeroom, stored again, requested, issued, transported, and finally used. Supporting this activity is most likely a mindboggling number of people, applying a range of computer software and using internal company policies and processes at potentially dozens of different companies along the way. In addition, there are supporting activities from managing, controlling, directing, and even cleaning the container ships on which the product at its various stages is moved, through to the work of accountants issuing and processing invoices and paying wages. As with the premise of the essay “I: Pencil,” it is impossible to believe that any one person has the insight or know-how required to control or manage the entire process involved in the life cycle of an O-ring. But what if we shorten the horizon and only consider the processes and management required to get from the wholesale distributor to a company through to application and finally to end-of-life disposal? Surely that would be simpler? Simpler, yes, but, except in the most rudimentary of organizations, still too complex for any one person to know or understand all the steps and processes involved. This shortened horizon in the life of a spare part includes:

• Identifying the need for the part • Deciding whether or not to stock it in the company inventory • Deciding how many to stock • Creating the software to manage and control the procurement and inventory • Entering the details into that software • Placing an order • Organizing the logistics • Receipting delivery • Entering the item into the storeroom system • Correctly storing the item • Processing the documentation and paying for the part • Planning and scheduling its use • Arranging and executing the logistics to get the part into the hands of the right person at the right time • Installing into the equipment • Monitoring the physical condition over time • Repairing when appropriate (and managing that process) • Determining when it is beyond its functional life or otherwise obsolete • Removing the part from service • Responsibly disposing of the part • Recording the disposal as required

In an organization of any reasonable size and complexity, this list of activities will involve a wide range of personnel over a long period of time. Many of these people will never know each other. Even those who work at the same company at the same time may never meet. They will never discuss their actions relating to a spare part and their role in its journey. And so this seemingly simple task of procuring and managing a spare part is not only more complex than many people realize; it also involves the coordination of the decision making and actions of people who will never meet. That is why I have written this book. While there are many good books on inventory management in general and some on spare parts in particular, to the best of my knowledge there are none that deal with the entire life cycle. Even my own book, Smart Inventory Solutions,2 deals primarily with spare parts inventory optimization as the core content. The aim of this book is, therefore, to address the key issues confronting people during the life cycle of spare parts inventory management, from establishing a systemsystem for management, to physical ml management, to final disposal. For the sake of both readability and (relative) brevity, this book does not address every conceivable issue, policy, or process. For example, while bills of material (BOMs) are mentioned, there is no discussion on their creation (and in any case BOMs are primarily a maintenance tool). Nor does this book address issues such as software creation and selection, accounting, maintenance, logistics support analysis, or spare parts interchangeability records, except as required when they directly impact spare parts decision making. No doubt that this will disappoint some readers. As with “I: Pencil,” there is no mastermind that oversees the entire spare parts management process, and so perhaps this is not only why the process fails so often but also why those failures are not so readily recognized by those involved in the system. For example, here are just a few of

the common ways in which the system fails: • Not recognizing the need to stock an item until it is too late • Not planning for the use of a part • Purchasing more than really required • Purchasing sooner or later than required • Storing in a manner that reduces the item’s functional life • Not disposing of the item when it’s no longer required • Not controlling and recording movements so that records are correct • Using software that drives inappropriate decisions Each of these failures will be noticed at some point by somebody that is part of the process but not often before the failure becomes an additional expense for the company. And it is even rarer, because of the “silo” approach of spare parts management, that any one person will see the pattern of these failures and understand the cumulative effect on a company. This book is my attempt to address these issues by providing you, the reader, with some know-how and insight into the key processes that form the spare parts inventory management life cycle.

Introduction Where do I start? This was the thought going through my mind as I looked at the pile of junk that represented the spare parts supply for the factory for which I was now responsible. As the newly appointed plant engineer for a plastics packaging producer in Melbourne, Australia, I had quite a number of issues to address, and I knew that “fixing” maintenance at this site meant that the spare parts management needed urgent attention. This wasn’t my first visit to this site, and I knew exactly what I had walked into because my appointment was actually a transfer from a sister site in Sydney. As the maintenance engineer in Sydney, I was a customer of the storeroom function. As the plant engineer in Melbourne, I was now the custodian. In addition to maintenance and engineering, I was now responsible for spare parts management, and that included the pile of junk in the corner. In Sydney I had successfully transformed the maintenance function from an old-style “craft-based” approach to a more modern “scientific” approach that these days would be referred to as reliability-centered maintenance (RCM). (Note that this was the mid-to-late 1980s and the term RCM, while known in some industries, was not as widely used in those days.) The result of this transformation was a significant improvement in uptime, which in a business that operates 24/7 is like putting money in the bank. Subsequently I was asked to move to Melbourne and transform that plant also. Looking at that pile of junk in the corner, I was wondering just what I had got myself into. As it turned out, it was this situation that provided for me the fundamental understanding of operations management, maintenance, and spare parts that became the foundation for much of my career—and that enabled me, nearly 30 years later, to write this book. Fixing maintenance at the Melbourne plant required me to gain an understanding, and oversee the management, of all aspects of spare parts inventory management, including: 1. The establishment of a spare parts management system 2. The create and stocking phase 3. The operational phase 4. The management of obsolescence and disposal

These are the four key aspects of spare parts management that span the spare parts life cycle. They are also fundamental to the idea of “Sparesology.” Sparesology® is a term I coined as a shortcut for the discipline of optimizing the physical, financial, process, and human resource management of spare parts. Sparesology is more than just inventory optimization. Sparesology requires an understanding of the complete ecosystem within which spare parts are managed, and it seeks to ensure that all factors influencing spare parts management outcomes work in concert to achieve an organization’s goals. It is this background, philosophy, and perspective that has informed the structure of this book.

The Structure of This Book This book is set out in four parts, in an order that reflects the process required during the spare parts management life cycle. These are: Part 1: “The Spare Parts Management System” Part 2: “Create and Stock” Part 3: “Operations” Part 4: “Obsolescence and Disposal” This structure is shown diagrammatically in Figure I.1.

Figure I.1

Part 1: The Spare Parts Management System The spare parts management system guides the activity and decision making throughout the life cycle of the spare parts held in inventory. It is vital that the people engaged in establishing this system understand spare parts management, not just supply chain or generic inventory management. The reasons for this are explored in Part 1. The other key considerations in this phase are understanding the financial implications, developing the policies and processes that provide the framework for action and decision making, and establishing a robust parts identification system. In addition, an understanding of best practices will help ensure that you are working from established principles and practices that deliver the best outcomes. These are all covered in Part 1.

Part 2: Create and Stock The two most important decisions in spare parts inventory management are whether or not to stock an item and how many to stock. It is these decisions that determine if you have the stock that you need and how much money you spend on your inventory. It is in this phase of the life cycle that a company has the greatest influence on its spare parts inventory, and getting these questions “right” for your circumstance makes everything else that follows that much easier (but not necessarily easy!). What is most curious about these two decisions, however, is how few companies have properly developed guidelines on the process and tools to use to make these decisions. These should be elements of the policies established as part of your spare parts management system. The problem is that, too often, when there is a policy, the guidelines are vague or nonspecific. For example, they may suggest the collection of appropriate data such as usage and lead time, which is a good start, but then provide no guidance on what to do with this information—that is, how to actually make the stock-holding decision. The intent is right, but the guidance on execution lets it down. Here in Part 2 there is definitive guidance on how to set both the reorder point and the reorder quantity, using a technique that can be applied on a daily basis with little or no software. Before getting to that, however, it is important to understand the range of issues that will most often derail the “stock–don’t stock” and “how-many” decision process. These include issues such as standardization, capital equipment and the first-time buy, so-called free spares that come with capital purchases, and spare parts criticality. These are all covered in Part 2.

Part 3: The Operations Phase Following the create and stock phase, the longest part of the spare parts life cycle is the operations phase. While the decision to create an item and stock it in the inventory may be made in minutes, the item can then be part of the inventory for years or even decades. During this time, for most spare parts, the item (and the storeroom team) can be involved in a huge range of

activities: • Future requirements may need to be forecast. • There will be regular (or maybe irregular) inventory optimization projects. • Repairable spares require management. • The storeroom needs to be set up and managed appropriately. • Periodically, the descriptive information may need to be updated and restandardized. • Stock takes will occur at least annually. • The storeroom may adopt bar coding technology. • There will be a need to coordinate activities and planning with both maintenance and procurement. Part 3 is the largest section of this book and explains the key aspects of managing all of the above.

Part 4: Obsolescence and Disposal No matter how an item was first created or how long it is part of an inventory, it is almost inevitable that at some point it will become obsolete and therefore require removal and disposal. Part 4 addresses this final phase of the life cycle by discussing end-of-life management, the lasttime buy, the management of obsolescence, and the options for spare parts disposal. Thirty years ago in that factory in the western suburbs of Melbourne, we had no road map to help us work through all this; we worked it out as we went along. It was here that I discovered that the routine approach for inventory management that we used for our raw materials and finished goods was of little use for our spare parts. We adopted the parts identification system used at the Sydney plant (we had largely the same plant and equipment). We established a storeroom function to control and physically care for the parts. When equipment was updated or replaced, we made sure that we maintained useful stock, and made the most of our limited space, by removing items that were no longer required. The result of this, and all the work we did in maintenance, was that we not only reduced downtime by 80% (yes, really) but also achieved record financial results and transformed the plant to be the profit leader of the group. We produced one-third of the product and two-thirds of the profit. Of course, we did much, much more than organize and control our spare parts, but the success that we achieved would not have been possible without a reliable supply of quality spare parts.

About the Author Phillip Slater

Phillip Slater is a spare parts inventory management and optimization specialist with more than 30 years of industry experience. Phillip’s work has helped companies save hundreds of millions of dollars in spare parts inventory and procurement spend, while, importantly, maintaining their operational capacity and support. Phillip started his career as a maintenance engineer, so he fully understands the need for having access to the right parts, at the right time. As a consultant, he has provided strategic and operational advice to some of the world’s largest corporations and has helped companies in more than 35 countries solve their operational and spare parts inventory management problems. Phillip is the founder of SparePartsKnowHow.com, an online training resource dedicated to spare parts inventory management and optimization. For more information, please visit www.PhillipSlater.com and www.SparePartsKnowHow.com.

To put the content of this book into action please visit www.Sparesology.com.

SPARESOLOGY® The discipline of optimizing the physical, financial, process, and human resource management of spare parts. Sparesology® is more than just ‘inventory optimization.’ Sparesology® requires an understanding of the complete ecosystem within which the spare parts are managed and seeks to ensure that all factors influencing spare parts management outcomes work in concert to achieve an organization’s goals.

PART 1 The Spare Parts Management System SPARESOLOGY® STRUCTURE 1. The Spare Parts Management System Understanding Spare Parts | Finance | Policies & Processes | Parts Identification | Best Practices 2. Create & Stock • Deciding What to Stock • Spare Parts Standardization • Capital Equipment • First Time Buy • Critical Spare Parts • Setting the Re-Order Point • Setting the Re-Order Quantity 3. Operations • Forecasting • Inventory Optimization • Managing Repairable Spares • Storeroom Management • Data Management and Cleansing • Inventory Accuracy • Conducting Stock Takes • Bar Coding • Integrating Maintenance and Spare Parts Management • Bills of Material • Spare Parts Procurement 4. Obsolescence and Disposal • Managing Obsolescence • End of Life Management • Last Time Buy • Spare Parts Disposal

1.1 Your Management Systems Either Are Designed or Evolve Randomly It doesn’t really matter what part of your business that you work in; there will be a system for addressing the key things that need to be done. In production planning there will be a way that demand and capacity are identified, prioritized, and scheduled. In procurement there will be a way that purchase orders are assessed, vendors selected, and invoices matched. In spare parts management there will be a way that decisions are made on what to stock and how many to stock. We all know this to be true because these tasks are completed on an almost daily basis. What is less certain is whether the system in use is the most effective and efficient way to get the job done. This is because the systems that are in place today either are deliberately designed or have evolved randomly. Of course, not all “designed systems” are perfect or even fully effective, but there is a reasonably good chance that a designed system will outperform a random system every day of the week. This raises the question of who would allow themselves to have a system that has evolved randomly? Well, unfortunately, too many companies do. In fact, in our research,1 almost 50% of companies score their development of spare parts management policies as either “no defined, formal inventory policies” or “broad-based corporate-level policy.” With either response those companies are saying that they have no specific set of policies that have been designed for dayto-day application in helping them manage their spare parts inventory. Wow! But it doesn’t stop there. When we dig down to ask about the development and implementation of a specific spare parts stocking policy, that is, a policy to guide the decisions first on whether or not to stock an item and then on how many to stock, the number of respondents that have nothing in place jumps to a massive 75%! Double wow! Is it any wonder then that companies find themselves so massively overstocked with spare parts and MRO (maintenance, repair, and operations) inventory, while at the same time having low levels of trust, that they hold the items that they really need? Of course not, especially once we understand that their decision-making system has evolved randomly and so delivers random results. So what about those companies that have actually taken the time and effort to design a system for spare parts decision making? In our research we segmented the respondents based on their scores in terms of spare parts inventory management results (top performers having steady or decreasing inventory levels, high stock turns, and a low number of stockouts). We found that 75% of the top quintile (in terms of results achieved) had designed and implemented a spare parts management policy. However, we also found that 86% of the bottom quintile had not. The difference in performance between the top and bottom performers is quite stark in terms of key spare parts management metrics, and so is the approach that they have taken for developing their spare parts inventory management systems. The top performers overwhelmingly design their systems, whereas the bottom performers have allowed theirs to evolve randomly. (These research findings are discussed further in Section 1.18, “Best Practice Spare Parts Management Research.”) Part 1 of this book discusses the need to mindfully and deliberately develop your spare

parts inventory management system. As a background to this, we explore the differences between the typical inventory types such as raw materials, work in progress, finished goods, retail inventory, and spare parts. This understanding helps explain why some of the tools and techniques that are widely used in most supply chain management situations just don’t work with spare parts inventories that are held by companies to support their maintenance and operations activities. Speaking of maintenance, it is also important to understand spare parts in the context of the end users, which is most often the maintenance and reliability function. Another contextual issue is understanding the financial considerations of spare parts inventory management; after all, no matter how they are accounted for, spare parts do cost money. Having laid that groundwork, we shift our focus to the nitty-gritty of establishing a spare parts inventory management system. This includes understanding the minimum requirements for a workable system, establishing an identification system and management policies, and finally understanding the aforementioned best practice.

1.2 What Are MRO and Spare Parts? Libraries, bookstores, and the Internet are filled with books, blogs, magazines, training courses, information, and experts that can detail the chapter and verse relating to supply chain and inventory management. However, as you will soon see in this book, the standard theories and formula for inventory and supply chain management do not apply to MRO and spare parts. This is explained in detail in Section 1.3. However, before progressing further, it is important to be clear about the type of inventory that this book does address. The key is to understand that all inventories are not the same, at least that their characteristics and dynamics are not the same. Figure 1.1 shows a simplified supply chain that could be applied to almost any goods but here follows a path for the items that become MRO and spare parts inventory. This figure shows a chain involving: 1. The initial raw materials extraction or development (say, mining or chemical processing). 2. Initial manufacturing or processing into a usable form. 3. Warehousing. 4. The next stage of manufacturing or processing that creates a finished product or component. 5. Wholesaling of that component. 6. Delivery to a company that uses that component. 7. Storage in that company’s inventory. 8. Issuing to an end user. 9. Application in the company’s plant and equipment. During this process the item continually changes from being a raw material to a work in progress to finished goods (the three standard inventory types). For example, the product produced at Step 1 is the raw material for Step 2. During processing in Step 2, it is considered to

be a work in progress. After Step 2, it may be stored in a warehouse (Step 3) before becoming the raw material for Step 4 and so on along the supply chain. Further, the supply chain is made up of both material movement and information flows, so the demand from Step 4 becomes the signal for supply to Step 2. Importantly, this information flow is usually the opposite of the product flow and is the basis for production planning along the supply chain. For typical inventory, the component at Step 5 may be sold to (say) an industrial or retail customer, and it is at this point that MRO and spare parts differ from the standard supply chain. In Figure 1.1, Step 5 is where the item is ordered for a storeroom to support maintenance and operations. During Steps 7, 8, and 9, it is removed from the storeroom and applied to repair or support the operation of a piece of equipment. And this is the defining attribute of MRO and spare parts management: being used for equipment repairs and support, not in production as a component or raw material for the next “widget” in the supply chain.

Figure 1.1. A simplified supply chain

The following are the MRO, materials, and spare parts definitions that apply to the inventory addressed by this book:

• MRO—maintenance, repairs, and operations. When used in relation to materials and spare parts, this term is referring to the items that are used to fulfill the functions of maintenance, repairs, and operations support—that is, consumables such as materials and spare parts. • MRO—maintenance, repair, and overhaul. This really has the same meaning as the above term. • MRO—maintenance and repair organization. MRO is sometimes used to refer to the organizations that fulfill maintenance and repair functions, but it may also be used to define the components that the organizations use and/or supply. • Materials. Typically, this term refers to items that are purchased that are not used for production—they are not used in producing the widget. Materials are not necessarily spare parts since they could be maintenance consumables (oil, grease, welding rods, etc.) or items purchased for fabrication (for example, steel). • Spare parts. These are items held in inventory that are used to replace failed parts or components in the equipment that is being maintained. Spare parts could be anything from a drive belt or bearing to entire components such as a pump set. Do these definitions matter? From the above you can see that they do actually matter—the terms MRO, materials, and spare parts are not fully interchangeable. Therefore, it is important that the members of your team use the terms in a consistent way, as this will avoid confusion in their communication. One way to help with this is to ensure that you have definitions of MRO, materials, and spare parts within your spare parts management policy documentation.

1.3 Why Spare Parts Are Different (from Other Inventory Types) As a young maintenance engineer, I learned the hard way that spare parts don’t follow the usual rules of inventory management. When first in a position that included spare parts management among my responsibilities, I started by applying the rules of inventory management that were taught during my time completing a maintenance engineering degree. This just did not work, and the team and I had to determine the right way to manage our spare parts inventory in order to support our maintenance and operational goals. In the previous section we demonstrated that the spare parts supply chain is different from other supply chains, if only at the very end. This difference is, however, very important, because it is at the end of the supply chain that companies plan and use the parts for their intended maintenance and operations support purpose. Not only is the supply chain different, but many aspects of spare parts inventory management are different from the usual supply chain and inventory management orthodoxy. The classic supply chain theory (and training) is based on what can be called a “retail model,” that is, the model most often associated with retail management and fast-moving consumer goods. As a way of explaining this point, in each of the following examples a comparison is

made between the approach required for spare parts management and the likely approach that would be applicable to a major retailer, such as Walmart. If not properly understood, these differences can have a significant impact on inventory decision making and the quantum of funds that are tied up in a company’s spare parts inventory.

1. Stock items that you don’t want to use. The most obvious difference between retail and wholesale inventory management and spare parts inventory management is that with spare parts you will deliberately stock items that you don’t want to use. These are the insurance spares that companies hold, literally, just in case. Insurance spares are typically high-value, long-lead-time items, without which operations would cease. Holding these spares is akin to taking out an insurance policy; you don’t want to be in a position that you need to make a claim, but you don’t want to operate without the coverage. Compare this with the way retailers or wholesalers would act. In these environments they don’t want items sitting on the shelves, unsold, for long periods; they want turnover. Retailers want items to come in and sell as quickly as possible. Items that don’t sell quickly are delisted and not restocked. Not understanding this is one of the major mistakes made by novice spare parts inventory managers. When accountants (and it is typically accountants) suggest that the way to reduce spare parts inventory is to remove all items that haven’t moved for two to three years, they are applying the retail-wholesale logic that they were taught at university, without understanding the dynamics of spare parts inventory and why it is held. 2. Items of small value can be critically important. In retail and wholesale inventory management, items of small value are rarely that important, as they are unlikely to return any significant profit unless they are very high turnover. Sometimes they are used as a “loss leader” as a way to get people into the store. Compare this with spare parts inventory, where a low-value item may be critical to keep your plant operating, and so ensuring the supply of that part might be the most important thing that the spare parts management team can do. 3. Stockout costs are disproportionately high. In retail and wholesale inventory management, the cost of not having an item available when requested (a stockout) could be limited to just the marginal profit that the company makes on that item. In some circumstances, it doesn’t even have that impact, as the buyer may back-order the item and be satisfied with receiving it later. Compare that with the cost of downtime if you do not have a critical spare part available when required. Depending upon the type of plant operated, the cost of downtime could range from thousands to hundreds of thousands of dollars—per hour! This disproportionate value of downtime, versus the cost of the spare, is what leads many companies to spend way too much on their spare parts inventories, justifying the expense with the potential value of downtime. 4. Users are part of the process but are not (generally) accountable for their actions. In a retail and wholesale environment, the user (in this case the buyer) of an item has little or no input

into determining the need for an item and certainly no input or accountability for the process that gets the item on the shelf. Compare that with spare parts where the user (maintenance) is central to determining whether an item is required, how many of an item will be required, and when it might be required. It is the user’s input that feeds into the entire procurement and inventory management process, and yet maintenance is rarely held accountable for the decisions it makes or the quality of the information it provides. 5. Small market eliminates the “balance effect.” When a retailer stocks an item, it typically has a large “catchment area” of people who may come and buy that item. For retail chains the retailer even has the option of moving items that don’t sell in one area to an area where the items do sell. This large market has the effect of enabling the retailer to balance stock locations with the location of demand. Compare that to an inventory of spare parts that is usually intended to support one machine or set of machines at one site. Few companies have a means for sharing parts, and so the demand for spare parts is limited to their own small in-house “market.” This means that if parts are bought and not used in the expected volume, there are few, if any, options for alternative use. 6. Huge forecast variations due to technical requirements. In almost all stages of the standard supply chain, the forecast variation will most likely be within 20–30%, at most. Forecast variations greater than this, and that occur repeatedly, will result in investigation and further refinement of the forecasting process. Compare this to spare parts where the forecast variation could easily be 100%. This occurs when an item is bought and not used (an item that was expected to be used). Visit any storeroom, and it is common to see where multiple units of an item are purchased but only one is used. This could be a forecast variation of 80–90%, depending on how many were purchased. 7. Massive variations in the value and volume of items managed. Retailers and wholesalers can usually afford to have different people managing the decision making for different categories. There may be a person who is the buyer of shoes, one that does fruit, and so on. This type of category management is common in industrial organizations but is much less granular. Usually the area of spare parts is one category, and that is often put together with other related categories. This means that there is one process for decision making and management of all different types of spare parts: small, large, cheap, expensive, imported, local. This makes it very difficult to develop the kind of specialist management insight that occurs in the retail and wholesale environment. This issue is discussed further in Section 3.10, “Spare Parts Procurement Issues.” 8. Stock sales usually realize little return. Of course, mistakes are made, no matter what system you are part of. In retail this could be a swift change in fashion, and in wholesale it may be the overstocking of components that are then quickly replaced by a newer model by the manufacturer. The great advantage of these industries is the ability to have a sale. This might result in the loss of all margin or even a loss on the purchase price, but it can move

the stock and recover some value. Compare that with spare parts management where obsolete and excess items often have no resale value. In many circumstances it is years before excess or obsolete items get recognized as such, and by then the vendor won’t take a return and no one else wants the old model. Sometimes people will say that they can just write off the item, but while this reduces the value on the books (see the section on financial concerns), it ignores the reality that cash was used to purchase the item and that cash has shown no return. What all these issues mean is that the risks associated with purchasing spare parts is much greater than with items in a retail and wholesale environment. This, in turn, means that companies should take more care with their spare parts decision making, not less.

1.4 Five Common Supply Chain Techniques That You Should Not Use for Spare Parts Management 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). As discussed previously, 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 the characteristics that set spare parts inventory apart from other inventory types also help identify supply chain management techniques that should not be used for spare parts management, including: 1. Materials resource planning (MRP). MRP is 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 production assembly, and so the MRP production planning concepts of dependent and independent demand don’t apply. The term MRP has also been co-opted by some ERP (enterprise resource planning) providers as a proxy for running a reorder report, but running a reorder report is not actually the same as MRP—it’s just a reorder report! Don’t waste your time and money learning about or trying to implement this technique if you are managing spare parts. 2. Just-in-time (JIT). JIT is a production management philosophy that aims to eliminate wasted time on a production line by coordinating materials movements. It is not a management technique for nonproduction items such as spare parts. Further, holding excess stocks so that supply can be provided in an almost instantaneous manner is not JIT because it lacks the signals and coordination of JIT. Work instead on improving spare parts planning and coordination.

3. 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 EOQ 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? Instead of trying to make the theoretical EOQ calculation work in the real world, apply the logic explained in Section 2.6 and don’t bother with the calculation. 4. Service level. Service level is a measure of the number of times that a request for an item is filled in the acceptable time frame. It is commonly applied in fast-moving consumer goods and other wholesale industries, with the term delivery in full on time (DIFOT) being used. Having a DIFOT of 95% would be a good target in those industries, but 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. 5. ABC analysis. ABC is an analytical 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 and may also set the level of control. This is a way of recognizing that all items in an inventory are not equal in terms of value to the organization and then trying to ensure that the inventory mix reflects the criteria of importance. Typically, ABC analysis is based on sales volume, gross profit, or value. With spare parts inventory we know that service levels are not appropriate, stock turn only works at an aggregate level, there is no profit margin as the spare parts are used in your own plant, and volume and value measures ignore criticality. Therefore, ABC analysis is just not appropriate; it’s better to ensure that you have appropriate categorization for guiding your decision making. 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. And that might just be the greatest cost of all.

1.5 The Number One Problem with Spare Parts Inventory Management Engineering spare parts management is a big topic, and managing a spare parts inventory involves engaging with lots of participants from different parts of the business. This means that there is plenty of opportunity for things to go wrong. And that may be one of the complications that make this task more difficult than it superficially appears. So what do you think is the biggest problem in engineering spare parts management? This is a question that I ask at the beginning of almost every workshop and training event. Given the range of personnel involved in spare parts inventory management, it is perhaps no surprise that I get a wide range of responses. Here is a list from one recent session:

• Satellite stores • Rotable spares management • Lead time variability • Stockouts • Engaging operations • Determining criticality • Availability • Redundant stock • Logistics • Cannibalized spares • Location mix-up That’s quite a list! These responses could be sorted into a number of different categories, such as structure (e.g., satellite stores), process (e.g., rotable spares management, logistics), and outcomes (e.g., stockouts, availability). There may even be other categories or ways to break down this list. However, despite these issues being quite universal, identifying and grouping them doesn’t really help us identify the number one problem with spare parts inventory management. To identify the number one problem, we need to look for a theme that is evident in each of these issues. One theme that is evident in almost all these issues is uncertainty. For example, the typical reason that rotable spare parts management is an issue is that there is uncertainty about the spares usage requirements, the repair time, and the reliability of the repaired item—sometimes all three! We could say something similar about lead time variability (uncertain by definition), determining criticality, stockouts, availability, redundant stock, and location mix-ups. Another possible theme is communication. One reason that many items on this list become an issue revolves around the communication (or lack of) that occurs. This is obvious with items such as engaging operations, logistics, and even cannibalized spares and location mix-ups. While uncertainty and communication are clear issues with spare parts inventory management, in my opinion the number one problem is how people deal with that uncertainty and lack of communication. Uncertainty and poor communication represent information gaps, and almost universally the way that people fill those information gaps is by guessing. Therefore, I think that the number one problem in spare parts inventory management is guesswork! The Merriam-Webster Learner’s Dictionary defines guesswork as:

The act or process of finding an answer by guessing. Guessing is further defined as: To form an opinion or give an answer about something when you do not know much or anything about it. Many people reading this will be outraged. How dare I say that their work is based on giving an answer when they don’t know much about it! In fact, it is even worse than that because the answer that is based on guesswork is often cloaked in the guise of management science. It is this guise of management science that helps people pretend that they are not really guessing. But consider the following. How often have you heard someone justify a position on inventory stocking levels by saying: • It’s based on the formula, or • It’s based on our historic data, or • Our forecast shows . . . Or something similar? Often the statement is made as if the statement itself were a full justification. Each of these things may be true (and are based at some level on management science), but they also each involve some degree of guesswork. For example: • Many people use the wrong formula for determining their stock level; they are guessing that they should use (say) a Gaussian function (most typical) when maybe the function should be Poisson based, or maybe neither. • Many people have extensive historic data on their spare parts, but that data doesn’t actually reflect the real demand history—though these people are assuming (guessing) that it does. Their data usually reflects the movement of spares out of the storeroom, not the use of those spares on their equipment. • By their nature, all forecasts are based on assumptions—which, in effect, make any forecast a guess. Even worse, many people don’t even try to determine the likely basis of future demand for the item; they merely extrapolate the past into the future without necessarily questioning if that is an appropriate approach to take. This is the basis of most software packages. The use of software makes it easy to abdicate responsibility for decision making. • The granddaddy of all guesses is the ill-informed assumption that spare parts inventory management follows the same rules as other types of inventory management. This is the underlying assumption that is at the heart of statements, often made by accountants, that there should be a clear-out of any spare part that hasn’t moved in two years.

Someone once said that all management problems end up in the warehouse. By this they meant that the warehouse (or storeroom) becomes the place that provides the buffer for problems that are actually created elsewhere. These are problems with issues such as the setup of satellite stores, rotable spares management, lead time variability, stockouts, operations engagement, determination of criticality, spare parts availability, management of redundant stock, logistics, cannibalization of spares, and location mix-ups. These issues are “managed” by stocking more inventory than would be needed if the issues were properly addressed. When considering engineering spare parts, used to support operations through returning failed equipment to a fully operational state, it is fundamental to establishing a reliability and maintenance system that you consider the likely cause of failure and from that the appropriate course of management. Having done that, it ought to be possible to at least state the basis of the future usage of a part—whether that is condition monitoring, time-based replacement, random failure, or some other approach. By identifying the basis of the forecast, it can then be reviewed for reasonableness or even currency. Yet this connection is rarely made in practice, and the “guess” becomes the basis of the stock holding. The result is that the inventory ends up being overstocked. The same can be said of the engagement of operations, the involvement of procurement, and the input from finance, where an unchallenged assumption (a guess) results in overstocking. Why is this so? Well, one answer is that it is easy (or is that lazy?) to not work through all the available information and to use a guess that is disguised as know-how as the proxy for information. A better answer might be that as long as the spare parts warehouse is overstocked, everyone can get away with this approach because it is easier to spend the company’s money on excessive parts holdings than it is to work on developing a more accurate or reasonable stockholding requirement. It is usually when you tighten up on the wasted expenditure on spare parts, that the failures of the rest of the management system really come to light. By removing the excessive stock, the other systems lose their buffer for relying on guesswork. There is another old saying along the lines that identifying a problem is half the solution. In this case it might be that identifying (and admitting) that the basis of the estimate for the future use of a part might be really just a guess then helps lead to a better solution. So if the basis of a stocking decision is unknown, or is really just a guess, then be clear and honest about that. Then you can get on with filling in the real data gaps and solving the real problem.

1.6 The Big Picture—Putting Spare Parts Management in Context Now that the characteristics that define MRO and spare parts inventory are understood, let’s put management of that inventory into the context of the big picture. To do this, consider the reason that spare parts are held—to support the maintenance requirements of your plant and equipment. Once this is understood, it makes sense that understanding the maintenance and operations support activities will help with spare parts planning, and this flows on to stocking levels. (This is discussed further in Section 3.3, “Reliability-Centered Spares.”) Therefore, it makes sense that in order to better understand spare parts management, you need to also understand the basics of maintenance management. The following is not intended to be an exhaustive explanation of maintenance activities but should be sufficient to put spare parts management into context with

maintenance. A Simple Model of Maintenance Activities Figure 1.2 is a simple model of maintenance activities. At the center of the model is “operational results.” This is the goal for everyone in the company and is about driving your plant and equipment to achieve your production plans. It is not just about minimizing downtime. Surrounding the goal of operational results are four activities that are at the heart of maintenance —they support the achievement of the company’s operational results.

Figure 1.2 A simple model of maintenance activities

Technical In Figure 1.2, “technical” refers to the technical and reliability engineering aspects of maintenance. Think of this as identifying the work that needs to be done and determining how the goals will be achieved—that is, which strategies and techniques will be applied. Key aspects of this include: • Identifying which assets are to be maintained. This might also be broken down into the subassemblies and parts level. • Identifying the potential failure modes of those assets, subassemblies, and parts. Understanding this helps to determine the maintenance management policy that will best address that failure mode and keep the plant running. • Determining criticality, which helps determine the priority of tasks that are subsequently planned.

• Identifying the appropriate maintenance management policy, which means determining what approach to take for maintenance given the detail set out in the above points. Some options include: Preventive maintenance. Specific tasks are completed based on a regular schedule in order to prevent potential failure. A simple example is replacing oil filters before they become too blocked to work effectively. Predictive maintenance. This involves inspecting the condition of the equipment to decide when maintenance should be performed, typically when some performance threshold is reached. With the oil filter example, this might include checking the pressure drop across a filter in order to determine when it should be replaced. Fixed-interval maintenance. As the name suggests, this requires that the maintenance tasks be performed at fixed time or operational intervals. For example, changing an oil filter every 6 months or 1,000 run hours. Run to failure. This means accepting that the potential failure cannot be determined in advance. For example, a puncture in a tire is a run-to-failure maintenance activity because it is not possible to determine through inspection when the failure might occur. This is often overlooked as a genuine option. Condition-based maintenance. Similar to predictive maintenance, condition-based maintenance involves regularly recording the condition of an item to understand the rate of degradation and then planning maintenance activities before the performance threshold is reached. In terms of spare parts inventory management, understanding the maintenance management policy and the chosen technical aspects of the approach to maintenance will help inform spare parts management through understanding how the demand signal for spare parts is generated. For example, with equipment that is subject to fixed-interval maintenance, the timing of parts requirements should be known well in advance of the need for those parts. Even with condition-based maintenance, the time between potential failure and functional failure may be able to be estimated, at least at a ballpark level, and therefore the time horizon for needing the spare parts is also able to be estimated. Planning and Scheduling This activity is about organizing the work. That is, who will do the work, when will it be done, how will it be done, and what tools and spares will be needed. This is the function that generates the job lists (sometimes called work orders) that instruct the maintenance team on what needs to be done and when. These job lists should also include details of the parts required (sometimes referred to as a bill of materials, or BOM). Planning and scheduling is often the place that spare parts management breaks down, because there is an assumption that parts will be available rather than an actual check of parts availability. In a well-managed system, it is planning and scheduling that triggers the need to order parts when those parts can be supplied within the planning horizon. This means that those parts do not need to be held in inventory. (The planning horizon is the time between when the need for a part is identified and when the part is actually needed. See Section 2.2.) Conversely, if the planning horizon is shorter than the lead time, then you will need to hold the parts in inventory. Often major improvements in inventory holdings can be made by reviewing the

planning and scheduling activity and the associated planning horizon. Data and Cost Management Data and cost management consists of collecting data and recording and reporting costs so that the effectiveness of the work can be determined—both the operational effectiveness and the cost effectiveness. Of course, the same information is also required to measure whether or not the activities are achieved within the available budget and cost constraints. The issues with data and cost management are: • Alignment with asset register. Ensuring that the costs are collected in a way that reflects the asset breakdown used by maintenance. • Cost allocation. Ensuring that the costs are correctly allocated. • Work order records. Ensuring that these reflect the actual usage of parts. Understanding data and cost management can help the spare parts inventory manager with checking the actual usage of items and from that help inform future plans. Materials Management The management of the materials and spare parts required to complete the work, including inventory management and procurement, is a very important but often underappreciated aspect of maintenance activity. Materials and spare parts management is as critical to the entire process as each of the other steps. It actually doesn’t matter how well your costs are tracked, or how well you plan and schedule, or how appropriate your technical solutions are, since if you don’t have the right materials and spare parts, you cannot do the work. In fact, if you don’t have the material to do the work, nothing happens. The key issues to consider include: • Direct purchasing. • Supplier management. • Cataloging. • Reorder levels. • Materials usage. • Returns to store. • Squirrel stores. • Repairs management.

In an ideal world, the people responsible for spare parts inventory management would have at least a basic grasp of the maintenance aspects discussed above. This would help with integrating maintenance and spare parts activities in order to produce better results. Failing this, there needs to be even greater collaboration between the maintenance and spare parts functions so that there can be a more streamlined, efficient, and effective approach to managing the funds tied up in the spare parts inventory.

1.7 Maintenance Alone Won’t Solve Your Spare Parts Problems Is it true that spare parts held as inventory for maintenance use are primarily captive to the sophistication and execution of the maintenance system that they support? Is maintenance and reliability execution really the driving force behind the spare parts holding levels? Would improvements in maintenance planning, scheduling, and condition monitoring make a significant difference in inventory levels? There is a persistent belief among many in the maintenance community that these things are all true, that is, that the best way to reduce spare parts holdings is to improve maintenance practices. Visit any maintenance or reliability forum, attend a maintenance conference, or strike up the discussion at your local professional group meeting, and you will no doubt hear someone saying, “Our spare parts problems would be fixed if only we could improve our maintenance.” Unfortunately, for many companies, this belief then results in little being done to improve spare parts management, while everyone waits for maintenance system changes to take effect. This, in turn, results in those companies spending maybe millions of dollars more than they need to on spare parts because they are not addressing the real reason that they hold too much inventory. While the preceding section of this book has discussed why it is important for spare parts managers to understand maintenance, it does not automatically follow that improvements in maintenance will drive major improvements in spare parts holding levels. It’s Not Just About Supply and Demand It is easy to see where the belief about supply and demand comes from. Spare parts are held as supply to satisfy maintenance demand. Therefore, if companies were better able to reliably predict demand, they could better match the supply and so hold only the inventory they need in the quantity that they need it. If only the machinations of people and process were so simple! The belief that maintenance improvements will have a major impact on spare parts holdings is only true in this idealized and theoretical world. However, in the real world, spare parts management is subject to a wide range of forces that have little or nothing directly to do with maintenance. These forces include human behavior, different attitudes and management of risk, supply chain variability, procurement myths such as use of the EOQ formula, storeroom management, and administrative practices. In terms of the investment that companies hold as spare parts inventory, the maintenance system is not the main driver of spare parts holding values. The proof of this is as simple as checking the results that companies have achieved in reducing spare parts inventory and increasing parts availability while largely ignoring the maintenance system. (Visit PhillipSlater.com for some examples of this.)

The Reality of Maintenance and Spare Parts This maintenance belief is only theoretically correct, because, theoretically, if the maintenance system can be made sufficiently sophisticated that it can reliably forecast spare parts needs, then a company could optimize its spare parts to suit its maintenance needs. The reality, however, is that this maintenance-driven belief doesn’t work in practice for two reasons: 1. Most maintenance systems contain systemic flaws or shortcuts that make them incapable of providing the required data at the required quality. 2. Similarly, most spare parts management systems are as flawed as the maintenance systems they support. Therefore, significant improvements in spare parts holdings can be achieved without doing anything to the maintenance systems, and this can lead to significant spare parts and procurement savings with no negative operational results. Yes, you read that correctly. Most companies can optimize their spare parts inventory for the environment in which they operate without actually changing anything about the way they do maintenance or negatively impacting their service to maintenance. This is because most spare parts decision making is ad hoc and emotionally based, there is little or no structure or system to the way stockholding decisions are made, and terms such as safety stock, reorder point (ROP), and min (as in max and min) are used interchangeably when they are not interchangeable. This all means that the actual stock levels become a matter of opinion that has no standard against which to compare. In addition, genuine periodic reviews of spare parts levels, so that they may be adjusted to current expectations, either are almost nonexistent or focus on single issues such as slow-moving stock. Furthermore, there is usually some form of behavioral “blame game” around stockouts that drives overstocking rather than continual improvement. This Is Supported by Research This situation is demonstrated in the results from a spare parts management quiz that SparePartsKnowHow.com has recently been running online. The quiz assesses a company’s approach to spare parts inventory management based on seven simple questions. At the time of this writing, the quiz has been taken more than 360 times, which is more than enough to remove any small sample bias. Here is what the quiz results show: • 70% of companies say that they don’t consistently provide guidance on how to determine both the reorder point and reorder quantity. Only 30% say that they do this always. • 68% of companies say that they don’t consistently provide guidance on whether or not to stock an item. Only 32% say that they do this always. • 64% of companies say that they don’t review inventory holdings as part of a formal plan of continuous improvement. Only 36% say that they do this at least annually.

So if there is no standardized approach for deciding what to stock, no standardized approach for deciding how many to stock, and no review of the current validity of past decisions, is it any wonder that spare parts stock holdings are much higher than they ought to be? Some companies can be overstocked by more than 100%! How a Spare Parts Review Can Actually Improve Maintenance In a recent case,2 a company that reviewed its spare parts holdings, and introduced a decisionmaking policy and process, reduced its inventory holdings by an average of 42% across four locations, in three countries, in just six months. At the worst location (in terms of stocking), the inventory reduction exceeded 50% (which equates to being overstocked by more than 100%). At the same time, the anecdotal feedback was that the company improved its parts availability. This was because quality decision making that sets appropriate holding levels works both ways: it establishes the right inventory at the right time. Could an overhaul of its maintenance systems have improved the availability and reliability of spare parts data and so help in getting the holding levels even lower? Of course. But it would take years to stabilize the maintenance system and collect reliable data. Is the maintenance improvement necessary in order to achieve a significant reduction in spares holdings while simultaneously improving spare parts availability? Absolutely not. In fact, establishing the method for determining stock holdings, and the subsequent interrogation of spare parts holdings, actually forces the maintenance team to think about its needs, and so the spare parts project actually improves maintenance! The Elephant in Your Storeroom Most people have heard about the bull in the china shop, but have you heard about the elephant in your storeroom? This is not a mythical five-ton mammal, feasting on your critical spares in the dark corners of your warehouse, but a reference to the perceptions of the players involved with the effective management of spare parts. To explain this, let’s revisit the story about six blind men examining an elephant.3 One day an elephant walks into a village. This was not “elephant country,” and while the people of the village were all educated and experienced in their own region, they had never heard of an elephant. The arrival of this curious beast excited the whole village, and a group of six blind men decided to find out for themselves just what this elephant was. They made their way through the crowd, and each touched a different part of the elephant. “Hey, the elephant is a like a tree,” cried the first blind man as he touched the elephant’s leg. “No, it is more like a rope,” said the second blind man who touched the tail. “I think that it is like a thick snake,” chimed in the third as he touched the trunk of the elephant. “A snake? No, it’s flat like a banana leaf fan,” said the fourth man, who was touching the ear of the elephant. “A banana leaf? Are you mad? It is more like a huge wall,” laughed the fifth man, feeling the side of the elephant. “I don’t know what you are all feeling, but this elephant feels to me like a solid pole,” said the sixth man, who touched the tusk of the elephant. They began to yell at each other and argue about the elephant, with each one of them insisting that he was right. A wise man was passing by, and disturbed by the raised voices, he stopped and asked them, “What are you blind men arguing about?” Almost in unison they said, “We cannot agree about what the elephant is like.” They each told the wise man what they could feel, and the wise man immediately recognized the problem. Calmly he explained to them, “All of you are right. The reason every one of you is telling it differently

is because each of you has touched a different part of the elephant. So actually the elephant has all those features.” Understanding this, the blind men stopped arguing and started listening. They listened as each of them described in detail what he could feel, and before too long, these men who had never seen an elephant understood exactly what it was.

What Does This Have to Do with Your Storeroom? One feature of the modern corporation is the departmentalization of functions. Companies do this to both create operational efficiencies and manage the span of management control. Thus most organizations will have, among others, an operations group, maintenance department, storeroom and logistics, purchasing and procurement, and finance. But what happens when these functions overlap? This is the elephant in your storeroom, and its name is the maintenance materials and spare parts inventory. Each of the different corporate functions mentioned has an influence on your materials and spare parts management outcomes. Yet each operates independently, often with little incentive to coordinate activities to improve the overall business results. This is classically called functional silos, with each group doing what it thinks is needed, based on what each sees. In effect, each functional group looks at the same activity and literally sees different things. (For more on silos go to Section 3.9, “Integrated Maintenance and Spare Parts Management.”) The storekeepers see a bunch of SKUs (stock keeping units) that they have to receive, store, issue, count, care for, and requisition. They get yelled at by maintenance and operations for not having enough parts and by finance for having too many. The maintenance department sees the inventory as one of the elements needed to efficiently repair the company’s machines and other assets. The maintenance people get yelled at by operations if the part is not available when it is needed and downtime results. So the maintenance people yell at stores to speed up the issue process and to make sure that everything is stocked. The people in stores yell at maintenance for not telling them how many of a part was really needed or that the part was needed at all. The purchasing people see all the hard work they do to source the parts, locating obsolete parts and negotiating the best prices and terms. They are yelled at by maintenance for taking too long when buying parts for breakdowns. They are yelled at by finance to save more money, which then means that they get yelled at again by maintenance for buying cheap parts that do not last. They, in turn, yell at maintenance to give them more time and not have so many emergencies. They also provide maintenance with meaningful advice such as “Failing to plan is planning to fail.” The folks in finance see money tied up that they believe could be used better elsewhere. They yell at stores, maintenance, and purchasing to cut costs, cut inventory levels, and stop spending so much money. They see fixing things as a pure expense. They get yelled at by everyone else for asking for too much to be achieved from too little. With the elephant in your storeroom, it seems that everyone is yelling at everyone else! But what if they could all see the whole elephant, if each group could understand the perspective of the others? What if they could understand what they were trying to achieve and the constraints within which they were working. Maybe then they could have a meaningful discussion about the management of this strange beast known as materials and spare parts inventory management. And maybe then they could work out a way to collectively improve the

overall business results.

1.8 Spare Parts Management Requires Collaboration, Not Just Cooperation Over the past few years there has been a growing awareness that effective and efficient spare parts inventory management requires the input of people from a number of different departments. Engineering spare parts inventories are influenced by engineering, maintenance, planners, stores and warehouse, finance, purchasing, operations, and suppliers. It is important that any project, training, or program aimed at spare parts inventory management engage with representatives from these groups. But what does that really mean in practice? Often when people are talking about this, they use the terms collaboration and cooperation as if they are interchangeable. They are not. It is easy to see why these two words are used in this way when a quick check of the Oxford Dictionary online definitions shows:

Collaboration: The action of working with someone to produce something.4 Cooperation: The action or process of working together to the same end.5

Not quite the same but not so different that the practical meaning is obvious. A More Practical Approach In an article titled “There’s a Difference Between Cooperation and Collaboration,” Ron Ashkenas provides a much better insight into the differences.6 According to Ashkenas, cooperation usually relates to well-meaning “cooperative” behaviors such as the sharing of information. Essentially this means keeping others informed about your intent but without alignment of goals. On the other hand, collaboration involves “making tough decisions and trade-offs about what and what not do, in order to adjust workloads across areas with different priorities.” This requires the “ability and flexibility [for departments] to align their goals and resources with others in real time.” These definitions show us what goes wrong when companies embark on a spare parts inventory management program without fully understanding the difference. Without the alignment of goals and performance measures, team members end up “confusing pleasant, cooperative behavior with collaboration,” says Ashkenas. In my experience the absence of true collaboration means that there is little or no give-andtake between departments, and often the information sharing becomes “telling” rather than

engaging. A classic example of this is when procurement’s goal of minimum unit cost conflicts with a stocking goal of not overordering, and so procurement buys more than is required. Another example is when little investment is made in maintenance planning and yet the storeroom is expected to know what is required. A lack of true collaboration often results in people defending entrenched positions and then blaming others for any lack of progress or, worse still, any problems that arise. Ashkenas goes on to say that “cross-functional collaboration is easy to talk about but hard to do. . . . if you are able to map out what’s needed and bring the needed parties into alignment you’ll not only make an impact on your organization but begin to develop some important collaborative skills.” With spare parts inventory management, being efficient and effective means minimizing your inventory investment while maximizing your spare parts availability. This just cannot be achieved without the true collaboration of the entire team whose actions influence this result.

1.9 Financial Considerations No review or study of spare parts inventory can be undertaken (or even commence) without first having at least a basic understanding of the financial considerations. At first, this statement may appear to be redundant; after all, don’t people understand that spare parts cost money? Of course they do. The problem is that the impact and accounting of this expense is seen differently when viewed from different management silos. For those involved in accounting and finance, the spare parts investment is both a cash cost and a balance sheet item that must be minimized. For those involved in maintenance, spare parts are often viewed through a lens of “more is better” because the cost of downtime is so expensive. In most circumstances, the funds tied up in the spare parts inventory are of little consequence to maintenance personnel because the funds aren’t treated as a maintenance expense until they are actually used. The problem is that in most businesses there is no single authority that sees the whole picture. The purpose, therefore, of this section is to take you through a simple explanation of how spare parts are accounted for in most organizations. Five Key Financial Principles Stripping back the financial considerations to their very basic principles, there are five points to understand. 1. Spare Parts Cost Money Of course they do! Every time a company purchases a spare part, it pays another company for the part. It doesn’t matter which cost center or budget the cost is allocated to or whether it is allocated as capital or as an operating expense; the purchasing company has spent money buying the part. In addition, in some parts of the world, companies are required to pay taxes on the value of the inventory that they hold. For example, in the USA, 11 states impose a property tax that includes spare parts inventories.7

2. Money Is Limited While this principle is also seemingly self-evident (after all, who has an unlimited supply of money?), it is also often, somewhat conveniently, forgotten. When a company chooses to purchase something, anything, the money that it spends on that purchase cannot be also spent on something else. This principle is true no matter if the purchase is a $1 spare part or a $100 million processing plant. This means that companies must choose how to spend their money, just as we have to choose how to spend our household budgets. This requirement to choose leads to the concept of opportunity cost. Put simply, if money is spent on one thing, the purchaser forgoes the opportunity to spend that money on something else. Money is a limited resource. Therefore, if a company invests $1 million in spare parts, above and beyond the quantity of parts required to keep operating, then it forgoes the opportunity to invest that $1 million somewhere else. That might be: • Buying more productive plant and equipment. • Paying down debt. • Returning to shareholders. In financial terms this opportunity cost is determined by what is known as the weighted average cost of capital (WACC, pronounced “wack”). The WACC takes account of the sources of a company’s funds: borrowings, shareholder funds, bond issues, retained profits, to name a few. Effectively the WACC is the rate of return that a company requires in order to pay for all of its sources of funds. In practical terms there are two major issues with applying the principle that money is limited. First, at an operational level, it only seems like funds are limited if there is a specific budget, and there is rarely a budget for spare parts inventory. Hence the funds spent on parts that become inventory are not measured against a target. Second, establishing an “inventory budget” that takes account of all the risks is very difficult (and most likely is the problem that a reader of this book is trying to solve). This is why people resort to simple metrics such as percent of replacement asset value; however, these metrics are misleading, as they fail to take account of individual circumstance. Even with these issues, it is still an important principle to bear in mind with any expenditure—money is limited. 3. Money Costs Money Sometimes this principle is a little less obvious than the first two. Everyone understands that if you borrow money, there will be interest to pay. Similarly, if a company has debt (and most do), then the cost of the debt can be easily determined. However, there are some other dynamics at play here. The discussion above, Principle 2, referred to the WACC. This is the way that companies determine the cost of money when they haven’t directly borrowed money for the purchase. This means that, at a minimum, money that is invested in spare parts inventory costs the company the equivalent of the WACC each and every year. Examples of the WACC at some well-known companies8 (at time of writing) include:

• Apple Inc.: 11.1% • ExxonMobil: 7.8% • BHP Billiton: 7.1% • General Motors: 6.9% • Samsung: 5.6% • Volkswagen: 4.4% Consider this: if Apple invests in a $100 spare part and does not use it for 5 years, then the opportunity cost of spending that $100 is 100 × 11.1% × 5 years = $55.50. This is more than half the original cost of the part! This cost doesn’t include the cost of storing and managing the inventory during that time. Which leads us to Principle 4. 4. Inventory Requires Management Which would cost more to manage: an inventory consisting of 10,000 different types of parts (SKUs) with an average of 10 of each (a total of 100,000 items) or an inventory of 100,000 SKUs with an average of 1 each? Without even thinking about it, most people would most likely say the second scenario, 100,000 SKUs, because this scenario will require: • More space, as each SKU will require a unique location. • Greater utilities costs due to the larger space. • More inward goods movements and with that more “put-away” activity. • More outward goods movement and transactions, requiring more labor. • More labor for stock takes and cycle counts. • Greater allowances for obsolescence, as there are many more parts to become obsolete. • More indirect labor for processing purchase orders and invoices None of the above are absolute, as each situation will be different, but this list does demonstrate that the costs of managing inventory include • Storage space (both the capital cost and opportunity cost). • Utilities.

• Direct labor. • Indirect labor. Some of these costs will have a linear relationship with the quantity of inventory held. For example, fewer SKUs and a lower number of items will most likely require fewer purchase orders and less labor for stock takes. Some of these items will more likely involve step changes in cost, as they must be “purchased” in discrete quantities. For example, if you have a 50,000 sq ft storeroom and can reduce the space needs to 30,000 sq ft, you will still have a 50,000 sq ft space. Therefore, reducing storage space requirements may only provide a significant benefit if it means paying less for space or relocating something else into the newly freed space. (Note that there may be other benefits from space reduction such as reducing “travel” times for parts put away and retrieval.) Every situation is unique; however, the generally accepted rule of thumb is that the cost of managing and storing inventory is 10% of the inventory value per year. 5. Timing Is Important There are two ways in which timing is important with respect to inventory. The first is that holding onto inventory, over time, costs the company through both the opportunity cost (as calculated through the WACC, as discussed in Principle 2) and the management cost (as discussed in Principle 4). By adding together these two costs, it is easy to calculate the annual cost of holding inventory. For example, and using the rule of thumb of 10% for inventory management cost, the annual cost of holding inventory at the companies mentioned previously is: • Apple Inc.: 11.1% + 10% = 21.1% • ExxonMobil: 7.8% + 10% = 17.8% • BHP Billiton: 7.1% + 10% = 17.1% • General Motors: 6.9% + 10% = 16.9% • Samsung: 5.6% + 10% = 15.6% • Volkswagen: 4.4% + 10% = 14.4% Previously the financial cost to Apple for holding a spare valued at $100 for 5 years was identified as $5.50. If we now add in the cost of managing that spare at 10% per year, the management cost is $50 for 5 years. Therefore, the total cost of owning that spare part for 5 years is: $55.50 + $50.00 = $105.50

This is more than the actual cost of buying the item. From this you can see that if a company can organize its spare parts management to hold less inventory for a shorter period of time, it can significantly reduce its inventory costs. In this case, time really is money. Another way in which timing is important relates to accounting accruals. One of the principles of financial accounting is that a company’s accounts must reflect the current value of its assets. In most companies the spare parts inventory is treated as an asset, which means that the accounts need to reflect the current value of this inventory. There are two problems with this: First, over time spare parts lose value and if sold are not worth what the company originally paid. Second, some parts will become obsolete or become nonfunctional through poor storage practices (sometimes referred to as spoilage). This means that if a company pays, for example, $100 each for 100 parts purchased today, that investment of $10,000 is unlikely to be worth $10,000 in the future. To account for this, accountants use what is called an accrual. An accrual is the way that accountants try to represent the real current value of inventory over time. For example, if a spoilage rate of 5% is assumed (that means that the accountant assumes that 5% of items will become nonfunctional each year) and a value reduction (called depreciation) of 5% is assumed, then the accountants will enter into the accounts an accrual of 10% each year, based on the value of the inventory that year. This accrual reduces the reported value of the items and so is the accountants’ way of reflecting the real value of the inventory. Accruals are recorded separately from the purchase value of the spare parts, which is why a spare part purchased 10 years ago for $100 can still be valued in the inventory list today at $100. The accrual is recorded elsewhere. A further explanation of accruals is beyond the scope of this book; however, it is important to understand that accounting principles require that the cost of inventory over time is recognized in a company’s accounts. This is one reason that accountants are often the people pressing companies to reduce their spare parts inventory.

1.10 Follow the Money-Accounting for Spare Parts Expenses Versus Capital Before explaining the accounting for spare parts, it is important to explain the differences between the type of capital and expenses. When a company spends money on spare parts, it is using its available cash (this includes funds made available through credit and other means, not just literally cash). How this expenditure is treated by accountants depends on why the purchase is made and when the utility of the expenditure is realized. Utility is the term used to describe the benefit that a company gains from its purchases. For example, if a company buys a machine and expects that it will operate for 10 years, then the utility is realized over 10 years. The accountants take account of this by reducing the reported value of the machine by 10% each year. This is called depreciation. If the company buys some spare parts and they are used immediately, then the utility is realized and depreciation is not necessary. Expenditures where the utility is realized during the current fiscal reporting period are generally referred to as expenses. Expenditures where the utility is realized in more than one

fiscal reporting period are generally referred to as capital. Put another way, capital is the money that a company spends on items that it does not expect to sell or use in the current fiscal reporting period. This is why spare parts inventory is treated as capital. There are two types of capital: 1 Fixed capital. This includes buildings and plant and equipment. Essentially these are the physical items used over time. 2 Working capital. This is the money invested to operate a business to act as a buffer between payment terms for purchases and the revenue from sales. While expenses and capital both require the use of cash, these expenditures are treated differently by accountants, and that is why there is a series of reports that the inventory manager must understand. Four Key Financial Reports The four key financial reports to understand are: 1. Balance sheet, as seen in Figure 1.3. 2. Profit and loss statement, as seen in Figure 1.4. 3. Cash flow statement, as seen in Figure 1.5. 4. Operating statement, as seen in Figure 1.6. Each of these is explained and represented in the accompanying pictograms. The balance sheet takes account of a company’s assets and liabilities to determine the net worth at a particular point in time.

Figure 1.3. The balance sheet

The profit and loss statement (P&L) is sometimes called the statement of financial performance and compares a company’s revenue to its expenses to determine if a profit was made. The P&L applies over a period of time such as a month, quarter, or year. The P&L does not include capital expenses.

Figure 1.4. The profit and loss

The cash flow statement reports on the cash that comes in and goes out, including both capital and expenses. The cash flow report includes every dollar into or out of a company, no matter the source or destination. The cash flow report applies over a period of time.

Figure 1.5. Cash flow

The operating statement (otherwise known as the budget) reports the actual expenditure versus expected or planned expenditure over a period of time.

Figure 1.6. Operating statement

Follow the Money Figures 1.7 and 1.8 show how companies account for the value of spare parts. As you can see in Figure 1.7, when a spare part is purchased as part of an inventory, the value is recorded as both an asset on the balance sheet and a cash-out expense on the cash flow statement. At this stage the value is not recorded on the profit and loss or the operating statement. This is why additions to inventory don’t impact maintenance budgets. In Figure 1.8, you can see that when the spare part is removed from the inventory for use by maintenance or engineering, the value is shifted from the balance sheet to the expense section of the profit and loss. At this stage the value is also added to the operating statement as a

measure of expenditure against the budget for the machine on which it is used or relevant department.

Figure 1.7. Financial allocation with purchase of a spare part

Figure 1.8. Financial allocation with use of a spare part

Accounting in this way uses the balance sheet as a kind of buffer for the accounting of inventory so that the inventory does not get counted as an expense until it is actually used. This helps to smooth out the reported operating cost for a company by only accounting for the cost of the spares in the reporting period in which they are used. Recalling that one of the principles of accounting is to reflect the actual value of a company, this buffer-type impact of the balance sheet does just that because the inventoried parts do have a value and that value is reflected in the balance sheet. To do otherwise would result in massive swings in expenses as a company might spend up big on spare parts in one year (say, for

new plant and equipment) but then spend very little as it uses up those parts over time. Some companies don’t use this buffering approach; instead they expense all spare parts when they are purchased. We can let the accountants and auditors argue whether this practice is in accordance with accounting principles, but it is important to note that both the buffering and expensing approaches do have their pros and cons. These are shown in Table 1.1. Table 1.1. The pros and cons of the balance sheet and expensing approaches

Approach Pros

Cons

Balance sheet

Improves asset management by aligning the timing of expense with operational activity and enabling budgets to be constructed to align with maintenance expectations

Reduces accountability for cash spent on spares, as there is generally no inventory budget or other direct accountability

Expensing

Direct accountability for cash used for spare part purchases on a monthly basis

Misalignment of the timing of parts expenses with actual use results in misleading maintenance cost reporting Monthly parts budget can constrain purchases of parts required, impacting operational output

The impact of the balance sheet versus expensing approach is not to be taken lightly. While the balance sheet approach may require additional accounting input, it does enable a company to more accurately reflect the actual maintenance expenses, which is important for asset management. On the other hand, companies that use the expensing approach have been known to put off completing maintenance tasks because the spares budget has been spent for the month. This might seem like prudent fiscal management until you realize that the budget may have been spent on items that have not been used and that may not be used for months or even years. This is clearly not good practice.

1.11 The Key Elements of a Spare Parts Management System Now that we have reviewed some of the issues and concerns relating to spare parts inventory management, we need to understand just what makes up a spare parts inventory management system. As a starting point, let’s look at what a spare parts inventory management system is not. It is not software. No matter whether you use a companywide enterprise resource planning program, such as SAP, PeopleSoft, or IFS, or whether you use a standalone inventory management program, these programs are not your spare parts inventory management system. These are tools that you use within your system, primarily for data collection and labor efficiency. Similarly, bar coding is not a spare parts inventory management system. Bar coding is also a tool used within your spare parts inventory management system. So just what is a system? An online search using Google9 provides the following definitions: 1. A set of things working together as parts of a mechanism or an interconnecting network, a

complex whole. 2. A set of principles or procedures according to which something is done; an organized scheme or method. Thinking about these definitions, we can see that an ERP and bar coding are both systems, but on their own they are not spare parts inventory management systems. Definition of a Spare Parts Inventory Management System Here is a practical definition of a spare parts inventory management system: A set of principles, policies, procedures, guidelines, and tools that enable a company to identify procure, control, account for, and dispose of spare parts. In effect, the spare parts inventory management system encompasses the entire life cycle of asset ownership from determining what to stock to disposing of a part at the end of its life. This is shown in Figure 1.9.

Figure 1.9. The spare parts management life cycle

Importantly, establishing a spare parts inventory management system does not commence with the spare parts themselves; it commences with getting organized. That is, it is first necessary

to determine how the parts that are ultimately selected will be identified, the holding quantities determined, and the parts then stored. Without this your spare parts inventory is likely to be nothing more than a pile of junk in the corner—just like Figure 1.10. Even with an idea as simple as getting organized, there is a scale of sophistication or maturity that needs to be considered. For example, a simple system of storage bins with a label that includes a part description and maximum holding quantity, where levels are checked weekly and top-up replacements reordered, might be perfectly adequate for a small manufacturer with a handful of machines, a few different types of parts, a small inventory investment, and minimal downtime consequence. However, that approach would not be suitable for a large, complex manufacturer or processing plant, with millions of dollars tied up in thousands of stock keeping units, with perhaps hundreds of cost centers and downtime costs measured in tens of thousands of dollars per hour. The system therefore needs to be fit for purpose, based on the circumstance and situation in which it is being applied. Some examples of this are provided in Table 1.2.

Figure 1.10. A pile of junk results from not having a spare parts system Table 1.2. Examples of increasing sophistication in the attributes of spare parts inventory management systems

Attribute

Basic

Sophisticated

Use of IT

None, visual management only

Fully integrated, bar coding, equipment BOMs, alternative SKUs, images of parts, electronic vendor catalogs

Reordering

Manual stock reviews and periodic reordering

Automated reordering of selected parts based on vendor matrix and preapproved agreements

Parts identification

User memory

Formal, simple, standardized approach to part descriptions and numbering

Storage

Whatever is available

Fit-for-purpose storage based on part maintenance requirements such as vibration isolation and humidity control

Determining holding levels

Best guess by maintenance team members

Fully documented and rigorous approach that differentiates among inventory types

Establishing and determining parameters such as identification, storage, and control, before establishing the rest of the spare parts inventory management system, sets the constraints within which the system must operate. Failing to understand this leads to many companies having misalignments between aspects of their spare parts inventory management system that drive inefficiencies and suboptimal outcomes. The following sections of this book explore the key elements of spare parts inventory management through the spare parts life cycle and under the umbrella of a spare parts inventory management system.

1.12 A Quick Word on Multiechelon Systems For spare parts inventory that is held by a company for the operations and maintenance support at its own sites, the vast majority of storerooms operate independently. That is, most typically, one storeroom services one site, or when there are multiple storerooms at a single site, each storeroom operates independently of the others. This arrangement, where one location acts as the buffer between the vendor and the user, is known as a singleechelon system (see Figure 1.11). This arrangement occurs even with very large companies that have many locations. Some companies, however, operate with a multilayered approach that is sometimes referred to as a hub-and-spoke strategy. This is where one company storeroom operates as a kind of distribution center for other company storerooms. In this case the vendor delivers to a central storeroom, and the company then distributes to its own storerooms, which then supply to the users. Just to complicate things, vendors may also deliver some items directly to individual sites and storerooms. This is known as a multiechelon system and is also shown in Figure 1.11. Multiechelon systems provide a number of inventory management opportunities that can result in reduced inventory holding levels and reduced procurement costs: 1. Slow-moving spares. If the central storeroom holds slow-moving spares, it saves each site from independently investing in the same slow-moving items. 2 Bulk procurement. If a vendor provides significant price breaks for quantities larger than a single site would order, or if the vendor supplies only in quantities greater than a single site should stock, then a central warehouse can be used as a distribution hub. Of course, care must be taken to ensure that the economics of this makes sense. 3. Excess parts redistribution. When one site finds that it has excess parts, the parts can be more easily redistributed to other sites via the central location. Care must be taken to ensure that the central location does not become a dumping ground for unwanted spares. 4. Repair management. For repairable items of significant value, utilizing the central hub to manage the repair process can provide improved repairs management and, with added

volume, reduced costs. 5. Improved response times. By holding spares that have a long supply lead time at a central location, a company can significantly cut the lead time for supply to its own sites and so hold less safety stock. 6. Shared safety stock. If executed correctly, a multiechelon system can enable companies to hold less safety stock across their entire network. However, there are also issues to be managed: 1. Visibility. To work effectively, each location needs to be able to see how much stock is held at the central hub and preferably at all sites in the network. 2. Management of demand distortion. In supply chain management there is a phenomenon (known as the bullwhip effect, and sometimes the Forester effect10) where the periodic demand at one location appears to the supplier to be a single major demand event. For example, if a company uses one item per week and reorders every eight weeks, the supplier will see demand as one order every eight weeks, which appears to be quite volatile. But actual demand is constant and not volatile. This appearance of variability can result in excess safety stock, and so the impact of demand distortion requires close attention in multiechelon systems. 3. Total cost of ownership. It makes no sense to utilize a multiechelon system if the total cost of inventory is greater than it would be using multiple single-echelon systems. In addition to the management costs, the likely way that costs will rise is if there is not a correct assessment of safety stock.

Figure 1.11. Single-echelon and multiechelon systems

Single-echelon and multiechelon systems require different approaches for stock decision making; however, many of the issues regarding the general management of the inventory remain the same. For this reason, this book makes no further distinction between single-echelon and multiechelon systems.

1.13 Inventory Prevention Before progressing any further, the issue of inventory prevention needs to be raised. Inventory prevention is not a topic that people talk about, and it is about time that it became part of the conversation. When setting up your spare parts inventory management system, you should approach the task with a view to inventory prevention rather than inventory optimization. Spare parts inventory optimization is great. It helps companies identify where they are holding too much spare parts inventory and correct those holdings to reflect their expectation of current and future needs. As a result, they can reduce their working capital and their inventory management costs. Spare parts inventory optimization helps; as the saying goes, ensure that you hold the right parts, in the right quantity, in the right place—and, it is hoped, at the right time.

But surely what companies really need is not spare parts inventory optimization but spare parts inventory prevention. Optimization happens after you have spent your money, whereas prevention happens before you spend the money. With health and safety, our approach is always prevention, so why not with inventory? Why Nobody Talks About Inventory Prevention Have you ever noticed that while the great majority of articles, literature, and software relating to spare parts inventory management focus on inventory optimization, there is almost none about inventory prevention? So isn’t it time we started talking about spare parts inventory prevention? In my mind, the answer is emphatically yes. Why is the literature on this so thin? I think that there are a few reasons why spare parts inventory prevention gets so little airtime: 1. It’s hard to measure—how do you measure “what might have been” or “what could have been?” It’s pretty hard if you are not keeping records of past decisions and using those as a comparison. To some extent spare parts inventory prevention requires a leap of faith that over time total inventory levels will remain low or even decrease, and that is something that we can measure. 2. There is no existing problem. OK, of course there is a problem— you hold too much inventory, but this is usually linked to optimization programs. The dirty secret of consulting is that you need to find and highlight the (potential) client’s problem in order to sell a project, and with inventory prevention it can be difficult to be definitive about the problem with respect to direct cause and effect. Hence, consultants almost never talk about this (well, except me). 3. There are no software sales in spare parts inventory prevention. Pretty much all optimization software relies on historic data, and with prevention there may not be any history because the parts are new (to you at least). So do you think that software vendors are going to talk about prevention? Of course not. 4. The spare parts vendors would sell you less. Spare parts inventory prevention is hardly in the interest of the equipment vendors that want to sell you a spare parts package with your next major capital upgrade, so they are not going to talk about prevention; they will only talk about things like “two-year packages.” Inventory Prevention Starts at the Beginning Ultimately inventory prevention is what you need, because it is through inventory prevention that you avoid buying too much inventory in the first place. It is through inventory prevention that you “optimize” your inventory from day one and preserve your cash in advance rather than trying to claw some back retrospectively through optimization. Figure 1.12 plots the typical influence versus the focus activity with spare parts inventory management. This figure shows that, while the greatest opportunity to influence spare parts

outcomes occurs during the create and stock phase, this is not typically a time where there is a great focus on the best long-term outcomes. The greatest focus typically occurs during the operations phase, when companies start programs of inventory optimization. The problem is that by this time the parts have been purchased and the money spent. This doesn’t mean that there can’t be an influence on the future, but the opportunity is much lower than it was in the beginning. Finally, toward the end of the spare parts life cycle, appropriate obsolescence management can significantly influence the results in terms of spare parts write-offs and disposal. Unfortunately, these issues are often not addressed until it is really too late to be fiscally responsible. For whatever reason, it is almost always the case that the focus of activity and the opportunity to influence the outcomes are out of phase. This is why, ideally, the concept of inventory prevention needs attention right at the beginning, when the spare parts inventory management system is being developed. If you are already past that point and have in place a legacy system that you must deal with, then the concept of inventory prevention should be part of your plan for policy development. Achieving and implementing a program of inventory prevention is unlikely to come from outside sources; it requires your management foresight and action. It requires the leadership of organizations that are managing spare parts inventory to stand up and tell all their vendors of the parts, services, and software that they want to prevent the accumulation of excess inventory, not try and address the problem with so-called optimization at some undefined future date. And it requires the development and implementation of a spare parts management system that directs those initial stocking decisions.

Figure 1.12. Inventory prevention—influence versus focus

1.14 Spare Parts Inventory Management Policies The cornerstone of a functional spare parts inventory management system is the development of an appropriate suite of policies. These spare parts inventory management policies provide the framework within which all spare parts inventory management decisions are made. They are not only the guidelines for spare parts inventory management but the mechanism through which the company communicates its intent, expectations, and requirements across the organization and over time. Not only will a policy, developed and implemented today, inform today’s personnel; it will also inform future staff when they join the company. Correctly formulated, your spare parts inventory management policies will guide your organization for years to come, ensuring that your spare parts inventory is maintained at a level appropriate for both operational needs and financial constraints. What Is a Policy? A policy is a statement of intent that provides a guide of acceptable business practice.11 This definition tells us that a policy provides the principles or rules to guide decision

making. This is different from a procedure, which generally provides a sequence of actions required to achieve a particular goal. For example, a company policy might be that cycle counts of spare parts are conducted weekly and that over the course of a year the cycle count should include all inventory. The associated procedure would then detail the steps required to conduct a cycle count, such as identifying what to count, arranging labor, preparing documentation, conducting the count, and entering data. In practical terms, the distinction between a policy and procedure is often blurred. This is because a document that informs on what needs to be done but provides no guidance on how to do it can be of little practical use. For example, a stocking policy that had the intent of providing guidance on stock-level decision making is of little use if all it says is “In determining the required stock holding the user must take into account the usage history, lead time, and expected future demand,” without advising how to use the information. The guidance might be to apply a specific formula or approach or to use a specific software package. While this level of specificity is argued by purists to be only for procedures, experience has shown that not including specific how-to details results in ad hoc decision making and effectively renders the policy pointless. In some organizations these documents are referred to as philosophy documents. As long as the documents contain both the intent and the how-to of spare parts inventory management decisions, this is a distinction without a difference. When Do You Need a Policy? Companies don’t need a policy for every single thing that they do; however, policies are essential when: 1. There is scope for taking different actions. 2. Deferring routine decisions to management would be inefficient. 3. Achieving the right outcome is important. Looking at safety as an example of the use of policies, we find that people all have different perspectives of risk, and so there is scope for different decisions to be made. Deferring decisions on daily activities due to safety concerns would be highly inefficient, not injuring people at work is both morally and legally important, and achieving the right outcome is a priority; hence all companies have policies relating to safety. Similarly, the following can be said about spare parts inventory management: 1. Spare parts decisions involve people from different departments, with different perspectives and goals, so there is scope for different actions. 2. There are many decisions to be made daily, and so they cannot be easily referred to management. 3. The right outcome is important, as mistakes can be costly through stocking either too much or too little.

Spare parts inventory management policies are vital to any company seeking to achieve an effective and efficient approach to spare parts inventory expenditure. Why Are Policies Important? There are three key reasons why policies are important: 1. By communicating the requirements of management, policies free up people to get on with their jobs. That is, by advising on what to do and how to do it, team members no longer need to spend their time working this out, thus freeing their time to do the job expected of them. 2. Policies provide the basis for consistent decision making. One of the drivers of both efficiencies and effectiveness in an organization is consistency. When tasks are completed in a consistent manner, the results can be expected to be repeatable and to fall within a desired range. Assuming that the approach is appropriate, then effectiveness is achieved. When there are many decisions to make on a regular basis, deferring these to senior management is inefficient, so communicating the approach and expectations drives organizational efficiency. 3. Policies provide a basis for continual improvement. Only by documenting the desired approach can the process be subject to continual improvement. This can be through examination of results or through auditing application. Key Policy Elements Developing policies is simplified if each policy follows a format template that includes: • Purpose. Describe why the policy exists. • Scope. What does the policy cover? • Definitions. Clarify any definitions that apply to this policy. • Responsibilities. Be clear about who is responsible for what. Should also refer to the separate responsibilities policy. • Policy details. What is the specific content of the policy? • Approval. Declare who approves this policy. • Review frequency. Be clear about how often the policy requires further review. The Recommended Suite of Policies When developing a system for spare parts inventory management, a suite of eight policies is

recommended:

1. Management policy. 2. Stocking policy. 3. Repairable items management. 4. Return to store. 5. Metrics and reporting. 6. Accountability. 7. Ongoing reviews. 8. Disposal. As every company has its own situation, financial drivers, existing structures, culture, and appreciation of the nuances of spare parts inventory management, each policy must be customtailored to the individual company. Therefore, the following sections don’t fully detail each policy but rather include the intent of each and suggest the content for each. 1. Management Policy Purpose To establish the guidelines and framework through which all spare parts inventory must be managed. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, work in progress (WIP), or finished goods. Policy Details This section should provide the overarching framework or philosophy. For example, this might include a statement such as “[company] is committed to a balanced approach to spare parts management. This requires ensuring that [company] holds an appropriate level of inventoried spare parts in a controlled manner while simultaneously preventing the excessive purchase of items.” This section should then set out expectations with respect to: • Applying the entire suite of spare parts policies to the management of the spare parts.

• Housekeeping and occupational health and safety. • Master data (such as item descriptions, part numbers, supplier information, etc.). • Using the spare parts stocking policy. • Processing transactional data (such as issues, receipts, and returns to the storeroom). • Setting realistic ROPs and ROQs. • Ensuring that all inventoried spare parts are controlled through the spare parts management system. • Eliminating the uncontrolled storage of inventoried spare parts. • Using satellite stores. • Identifying and disposing of obsolete stock. • Preserving spare parts. • Segmenting parts in storage areas. • Conducting cycle counts and stock takes. 2. Stocking Policy Purpose To establish the approach to determine which spare parts to hold as inventory items and how to set the holding parameters. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should: • Define the stock categories (to aid decision making). • Provide guidance on whether or not you should stock the item. • If you stock the item, provide guidance on how to decide how many to stock—this needs to be specific. (See Section 2.6 for a suggested approach.)

• Be clear about the data required and the process steps. • Also address any additional issues, e.g., OEM versus non OEM,-kits versus complete spares, etc. 3. Repairable Items Management Purpose To provide a set of guidelines that will ensure that repairable stock items are effectively controlled and managed. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should provide guidelines on: • Approval before repair. • The repair of items with stock already above the ROP. • The decision to repair or replace an item. • Expectations on the condition of repaired items. • The tracking of items undergoing repair. • Inspection or testing before returned to the storeroom. • The decision of when to scrap a repairable item. 4. Return to Store Purpose To provide a set of guidelines on the requirements for managing the return of a previously issued stock item to the warehouse. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should provide guidelines on:

• The acceptance only of returns for existing stock items. • The acceptable condition of returns. • The circumstance under which returns are acceptable. • The acceptance of returns if the return results in an overstock situation. • The value at which items are to be returned. 5. Metrics and Reporting Purpose To provide a basic set of measures for reporting and overseeing the application of good practice in stock items inventory management. To provide transparency in stock items management that enables both continual improvement and the application of good practice. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should provide guidelines on: • The metrics to report. • The purpose of each metric. • The frequency of reporting. • The person to whom the reports are made. 6. Accountability Purpose To outline the accountabilities and responsibilities for the main functions and tasks involved with stock items management. To ensure that the responsibilities and accountabilities for stock items management and maintenance are clearly communicated. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods.

Policy Details The application of a RACI chart to describe the accountabilities and responsibilities for inventory management functions is recommended. With the development of a RACI chart, the following definitions apply: R = responsible. Those who do the work to achieve the task. There is typically one role with this participation type, although others can be delegated to assist in the work required. A = accountable (approver). The person who is ultimately answerable for the correct and thorough completion of the deliverable or task and who delegates the work to the person who is designated “responsible.” In other words, the “accountable” person must sign off on (approve) work that the “responsible” person provides. There must be only one accountable person specified for each task or deliverable. C = consulted. Those whose opinions are sought, typically subject-matter experts and with whom there is two-way communication. I = informed. Those who are kept up to date on progress, often only on completion of the task or deliverable; usually a one-way communication. 7. Ongoing Reviews Purpose To provide a set of guidelines to ensure the continual optimization of stock items holdings through regular review, using a consistent process. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should provide guidelines on: • What process will be used for a review. • What will actually be reviewed. Selected items. Specific groups. Settings, actions, alternatives. • Who is responsible for the review.

• Whether the review will be a KPI (key performance indicator) for those responsible. • Whether the review will form part of a performance review process. 8. Disposal Purpose To provide a set of guidelines to ensure appropriate consideration and approvals when seeking to dispose of obsolete or excess stock items inventory. Scope Applies to all MRO and spare parts. This policy does not apply to raw materials, WIP, or finished goods. Policy Details This section should provide guidelines on: • Identification and confirmation that the items are obsolete. • Approval to sell or scrap. • Physical removal to a separate area, ensuring isolation. • Logistics issues—how to transport. • Valuation—asset register and profit impact. • Branding—are any items marked as your property? • Coordination and management of the process. • Sale approach. • State of the items—new or used? • Location—same item at multiple sites? • Complexity and magnitude of sale or disposal—value and process. • Time frame over which the material is sold. • Treatment of revenue. • Value on which to base sale.

1.15 Categories One important step in identifying spare parts and deciding what to stock is to define the way that

you will categorize individual items within your inventory. Categorization helps to aid decision making because different categories may be dealt with in a different manner. For example, items that are defined as being not critical are likely not to need any safety stock (see Section 2.5 for spare parts criticality and Section 2.6 for details on setting the reorder point and safety stock). The categorization helps guide your team through the decision-making processes. In addition, categorization should form part of the spare parts inventory KPIs and the related reporting. This helps in analyzing the inventory and determining whether the company is holding the most appropriate mix of inventory items. For example, if a company has a high proportion of items that are categorized as insurance spares or critical spares, then this should be investigated because sometimes the category is used to try and justify items that would not otherwise be held. This isn’t meant to suggest that companies shouldn’t have these types of items but rather that it is because of the categorization that they can be targeted for review. The following is a suggested list of categories, but please note that individual companies may use different categories or have slightly different definitions. Critical spare parts. Critical spare parts are those identified as critical using the spare parts criticality process defined in Section 2.6. It should always be noted that critical equipment and critical spares are not the same. For reporting and comparison purposes, these items must be identified as critical in the spare parts management system. Ordinary spare parts. These items are key for equipment operations but will not impact safety or operations if they are unavailable for a reasonable period of time. These may also be described as noncritical. Consumables. Consumable items have high consumption or usage but are relatively low cost. These items may be selected as “free issue” and so technically will not form part of the inventory. These items would also be key candidates for consignment or vendor-managed inventory (see below). Bulk items. These are usually consumable items but may be differentiated by issues such as supply, method of storage, and usage. For example, fuel, chemicals, and gases. Insurance spares. Insurance spares are the “must-have” spares that are not expected to be used during the life of the asset but that if not available would cause significant and extended downtime; therefore they are held as a type of insurance. These spares are defined as critical through the criticality process. Note that while all insurance spares will be critical, not all critical spares will be insurance. Capital spares. Capital spares are those provided with an associated capital purchase. They typically are initially entered into the system at zero value. When the time comes for reordering, these spares should be reviewed as though they were new items, and a decision should be made about whether they should continue to be stocked. At this point they should be recategorized.

Nonstock items. Nonstock items are not held as inventory and should only be ordered when required. The following are subcategories (a subset of the above categories) and will help with identifying spare parts ownership and the associated management approach: Company-owned spares. These are the items that the company pays for at the time of purchase and where the company then manages the replacement inventory procurement. These will most likely be the bulk of the spare parts held. Vendor-held stock. These items are paid for by the company and placed into inventory but then managed by the vendor, which arranges the procurement of replacement inventory. This removes a level of activity for the company while also providing the vendor with added flexibility in managing the resupply. Vendor-held inventory levels must conform with the defined stocking policy and, due to the contractual requirements, must be arranged through the appropriate procurement authorities at the company. This is sometimes referred to as Vendor-managed inventory. Consignment. This category is for spare parts that are still owned by the vendor but that are held in the company’s spare parts storeroom. The company does not pay for these parts until they are used. From an accounting perspective these items do not form part of the inventory, as they are not owned by the company. When any items in this category are used, the vendor invoices the company for the part. Often this occurs through an agreement with the vendor that usage will be reconciled and invoiced monthly. There is sometimes a temptation within companies to categorize spare parts based on attributes such as fast or slow moving. This approach to categorization should be avoided, because these time-based types of categories do not help add any information on how the items should be managed or the stock-holding levels determined.

1.16 Procedures If policies are provided to communicate a company’s intent of what to do in particular circumstance, then procedures are developed to communicate how to do it. Put another way, a procedure tells people the “established or official way of doing something.”12 Effective spare parts inventory management requires the establishment of procedures to ensure the correct and consistent way of performing important tasks. Primarily these procedures will target transactional activities, that is, any activity that results in the transfer of items or information. This includes, but is not limited to: • Procurement. • Inward goods. • Put-away.

• Issuing of goods. • Reordering. • Stock takes. • Creation of items. • Setting of holding levels. • Disposal. Often the procedural element of an activity is embedded in the policy document as a way of effectively ensuring that the correct information is shared in a convenient way. There are three major reasons why procedures are important: 1. Compliance. Communicating the “official” way of doing something does not guarantee that the task will be completed as required, but without this it can almost be guaranteed that it won’t be done as required. Procedures are a means of both communicating the required approach and establishing a basis against which to audit the compliance with that approach. In situations involving standards and regulation, procedures do demonstrate the existence of internal controls, and when backed up with records, they can demonstrate process capability and adherence. 2. Continual improvement. Only by documenting the process can there can be a formal and structured approach to continual improvement. The procedure provides the basis for measuring progress against outcomes, and from this, improvements can be identified, documented, and implemented. 3. Risk management. Risk is defined by the ISO Guide 73: 2009 as “the effect of uncertainty on objectives.”13 With spare parts inventory there is almost always a high degree of uncertainty that can impact the dual objectives of supplying what is required, when required, and not overspending to achieve that. Procedures help manage the effects of uncertainty by providing a consistent, known, and proven approach to completing tasks that, if left to be done in an ad hoc manner, could have significant negative impact on the organization. If procedures are so important, why hasn’t this book provided more detail? Simply because procedures are very dependent on the specifics of a company’s organization, geography, training, software, facilities, and industry. This means that it is almost impossible to write a generic set of procedures. Having said that, it is expected that through reviewing the content of this book, you will have a firm basis upon which to establish effective procedures that can be successfully applied within the framework of your organization.

1.17 Developing a Spare Parts Identification System

Typically, a spare parts inventory will consist of thousands of different items. It is common for there to be tens of thousands of items, and some companies have hundreds of thousands of items. No matter where you land on this scale, one thing is certain: you will need to establish a numbering and identification system for your spare parts inventory management system. When developing a numbering and identification system, one of the first hurdles that you are likely to face is the constraints of your existing inventory management software or ERP. Some systems allow the user to designate the identification number but may constrain the format, and some will create a number using a standard sequence. Before doing too much work on developing a spare parts numbering system, you should check for constraints imposed by your current or proposed software. The following discussion does not further consider those software constraints (there are just too many different software packages) and is intended to provide generic guidance on establishing a numbering and identification system. Note that data cleansing is dealt with separately in Section 3.8. What Is a Spare Parts Numbering System? A spare parts numbering system is a way to differentiate items within your spare parts inventory without constantly referring to long descriptions. It is a shortcut for spare parts identification. For example, a bearing may be described as a cylindrical single-row roller bearing with internal diameter of 20 mm, outer diameter of 47 mm, width of 14 mm, with a dynamic load rating of 28.5 kN and a limiting speed of 24,000 rpm, but using that description every time the bearing is specified on a work order or is part of a storeroom transaction would be tedious and prone to error. Better to refer to that bearing using a simple in-house part number. This part number then refers to an inventory catalog that contains all the technical details just mentioned. A company’s spare parts numbers should be different from vendor or manufacturer numbers, because not only do vendors and manufacturers change, but they may also change their own parts numbers as products are updated. While the vendor number is important for all procurement communications with that vendor, it is better to use your own part numbers and reference the vendor numbers in the data set associated with that part. Intelligent and Dumb Parts Numbers An “intelligent” parts numbering system is one in which the part number has some meaning beyond being a simple identifier. For example, all bearings may start with the designation “BRG,” followed by a size descriptor such as “OD047” indicating an outside diameter of 47 mm, and then end with a serialized suffix such as “001.” Thus, one bearing might be BRG-OD047001 and another, similar bearing may be BRG-OD047-002. While the intelligent number tells us something about the part, it also is used as a reference to the detail that is part of the catalog system. The main advantage of using an intelligent parts numbering system is that it can reduce errors because the users can look at the part and determine if it matches the description based on the number. For example, if given a bearing with an outside diameter of 35 mm but using the part number BRG-OD047-001, the users can tell that they have the wrong part. The main disadvantage of using an intelligent parts numbering system is the training involved to ensure that everyone understands the meaning of the part numbers.

A “dumb” parts numbering system is one where the part number contains no specific information about the part; it is typically a sequential number allocated purely as a reference to a database. In this case the bearing above may be part number 123456. The main advantages of a dumb system are that it is easy to generate parts numbers as they are usually sequential and that no training is required to understand the number. The main disadvantages are the potential for errors because the number has no meaning and there is a need to ensure that the descriptive data in the catalog is sufficient for identification. There was a time when intelligent parts numbering systems were very much in fashion, but the advent of modern search engine techniques seems to have largely shifted the balance to the dumb approach. This is workable just so long as the supporting description and data are consistent and have meaning to a person rather than just a machine or bar code reader. This requires adherence to a spare parts description naming convention. Spare Parts Naming Conventions One of the problems with spare parts is that there is a lack of standardization among manufacturers in relation to descriptions. In addition, people creating descriptions within a spare parts system may have different ideas about the best way to describe a part. Hence, without an adequate standard, the bearing discussed previously may be described by one person using a description such as “roller bearing with outside diameter of 47 mm” and by another as “BRG, OD47 . . .” To each individual, his or her description makes sense, but it may not have meaning to everyone. A user searching alphabetically for these items would find them in different parts of the catalog. When a free-form system is used, there are also issues with the attention to detail of the person entering the data. For example, not entering a space after a comma makes a world of difference when similar items appear on an alphabetized list. Operating a spare parts management system without adherence to standardized descriptions leads to confusion, duplication, and, often, extended downtime. The most common approach to spare parts descriptions is to use: Noun, qualifier 1, qualifier 2, etc. When using this approach, it is best to adhere to a guide or template with predefined values and categories. To help with this there are a number of conventions used for master data. For example, there is the “ECCMA Open Technical Dictionary,”14 developed with the support of the U.S. Defense Logistics Information Service. There is also a NATO codification system.15 In addition, individual providers of services in data cleansing will also apply a proprietary naming convention or technical dictionary. The best advice with naming conventions is to keep it simple and use a standardized approach.

1.18 Best Practice Spare Parts Management Research When most people think about best practice, they tend to think about outcomes. This might take

the form of the “best practice stock turns” or the “best practice number for purchase orders processed per full-time equivalent procurement staff members.” This is the most common approach. The problem with this type of best practice benchmarking is that knowing the benchmark doesn’t help you to achieve the benchmark. For example, if you accept that the best practice for stock turns in engineering spare parts is 3.8 for the steel industry in North America,16 and you know that your current practice is a stock turn of 1.0, the only thing you have learned is that there is a significant gap between you and a top performer in North America. This might be sufficient to get you motivated or to get senior management to commit the resources to closing that gap, but it doesn’t tell you what to do to close that gap. So this approach to best practice cannot directly inform your actions. It is great to set a goal, but action requires an understanding of the approach required to achieve that goal. Another issue that that needs to be addressed with best practice is understanding the difference between what to do and how to do it. Understanding this distinction is important, because if you work on the “how” without having the right “what,” you might become very proficient at tasks that won’t lead to the ultimate goal. One way to think about this is to consider that the “how” will change over time but the “what” really doesn’t. For example, think about the impact of mobile technology and connectivity and how in the past 10 years that has changed the “how” aspect of managing remote or mobile spare parts inventories. The connectivity makes the data transfer faster and most likely more accurate, and so the supply chain can be (and needs to be) more responsive. However, in terms of managing the inventory and reporting parts usage, the “what” aspects of spare parts management really haven’t changed. In my personal library I have a book titled, A Small Store and Independence.17 Chapter 12 of this book describes in detail the need for retailers to pay close attention to their stock turn. The book describes the concept of stock turn, the need for quick turnover, the impact on margin and markup (this is a book on retail management), and the impact of speeding up the stock turn. All great advice that any twenty-first-century retailer, whether a traditional bricks-and-mortar business or an online business, would do well to heed. Except that this book wasn’t published in the twenty-first century—it was published in 1945; that’s 70 years before I wrote the above paragraph! My point here is that the technology that a retailer uses to manage its stock turn has undoubtedly changed in 70 years (that’s the “how”), but the need to carefully manage the initial purchase and quickly quit excess and mistakes still holds true for retailing today. This is the “what” of inventory management. A third problem with best practice is that it may be possible to define a best practice “what” for almost everything that you do. But will implementing these practices actually make any difference to your overall results? For example, a software system or ERP system that has a best practice approach to work-flow decision making may well make decision making more efficient by ensuring that the right people are routed on the purchase order, but if your goal is to improve stock turn, then this best practice may not have much or any influence. Further, we are also faced with the problem that many discussions on best practice are not objective. Often what people define as best practice comes down to their own personal experience and opinion. At one level this makes perfect sense; after all, our actions are informed by our experiences, and we tend to think that if something worked well at one place, then why would it not at another? Of course, there are many reasons why processes are not transferable: culture, resourcing, legacy systems, to name just three.

The problem therefore is how to identify best practices that actually drive the results and outcomes that are universally required. Or put another way, how to identify the actions that actually make a difference in terms of producing better inventory management outcomes. Identifying Best Practice Spare Parts Management To overcome these problems, we applied a research-based approach18 to identify best practice spare parts management practices, the starting point for which was to define what we meant by best practice. For the purposes of this book, best practice was defined as: A technique, method, process, or activity that is shown to be more effective than other techniques, methods, processes, or activities at delivering a particular outcome when applied to a particular condition or circumstance. Breaking down this definition helps define the requirements of the research: • “technique, method, process, or activity.” This means that we are not looking to identify numeric benchmarks, and this comes from a belief that it is the process that leads to the outcome. • “shown to be more effective.” We need to be able to demonstrate that the “technique, method, process, or activity” is more effective at achieving the desired outcome. • “when applied to a particular condition or circumstance.” In this case it is spare parts inventory management. This doesn’t mean that the best practices will not be applicable to other types of inventory but rather that limiting the scope to spare parts inventory management improves the confidence that the identified practices are best practices in this area. The approach applied for this research was to use a combination of qualitative and quantitative measures. These measures form a materials and spare parts management matrix that evaluates 25 aspects of spare parts inventory management against four escalating levels of performance. See Figure 1.13. The results were then scored, with the lowest response receiving 0 and the top response 3 points. In terms of inventory management outcomes, we were most interested in: • Stockouts. Good performers have low levels of stockouts. • Inventory levels. Allowing for new capital expenditure, it is expected that constant refinement of inventory holdings will result in good performers having a reducing trend with the value of their inventory. • Stock turns. The good performers will have a high level of stock turns.

Each of these outcomes was also measured across four levels of performance (as mentioned above), and so a company with low stockouts (good) but also low stock turns (bad) is unlikely to score as an overall high performer. This was an attempt to recognize the balance between service and investment that is required in the management of any inventory. To maintain quality control and consistency of responses, the matrix is completed by a qualified individual who can interpret the responses from participants in a consistent manner. Over a period of five years, this tool was used to evaluate hundreds of storerooms and warehouses in many different industries and countries (see Figures 1.14 and 1.15). This means that there is a significant database of results from which to draw conclusions.

Figure 1.13. Extract from the materials and spare parts management matrix

Research Analysis While there is a temptation to look at the areas and issues that, on average, scored highest and those that, on average, scored lowest, this approach doesn’t help inform us on which actions most likely lead to better outcomes. That is, we were looking for a correlation that indicated some form of cause and effect. Therefore, to decide what constitutes best practice, we looked at the scores achieved in terms of the three outcomes and compared the responses of the companies that scored in the top 20% with those companies that scored in the bottom 20%. By correlating a range of inventory management actions with outcomes (in terms of inventory levels, stock turns, and stockouts), this tool provides unique insights into what works and what doesn’t with spare parts management— not just what some companies are doing better than others but what actually makes a difference. By definition, the matrix already identifies best practices in each aspect of spare parts management, so what this research does is identify the practices that make a real difference to the actual results. One of the key findings is that while many storeroom and warehouse managers focus on

issues relating to transaction management and control, there is not that much difference, in terms of the approach to these issues, between the high performers and the low performers. Thus, a focus on transaction management will not account for the difference between the high and low performance. Figure 1.16 compares the average scores of the top quintile of performers (in terms of outcomes) with the bottom quintile. This figure shows the results for: • Cycle counting. • Creating inventory items (the control of this). • Inventory labeling. • Standardization of descriptions. • Returns to store. Figure 1.16 shows that most companies pay attention to these transactional actions. Indeed, with cycle counting, the gap between the top performers and the bottom performers is minimal. With the other actions in this comparison, the gap does widen but in all cases is less than 1 point on this scale. This implies that if most companies pay attention to these actions, then these actions are unlikely to be the difference between high and low performance. This is not to suggest that these actions are not important, and certainly they are not to be ignored, but it does suggest that good performance in these areas is not sufficient to deliver top results

Figure 1.14. Participating industries

Figure 1.15. Locations of participating industries

Figure 1.16. High versus low performers, comparison 1

So just what does deliver best practice outcomes? Figure 1.17 shows a second comparison where the top performers significantly outperform the low performers. This comparison shows the results for nine aspects of spare parts management: • Reviews (timing of). • Reviews (process used). • Reporting. • Metrics. • Inventory policies (development and implementation). • Stocking policies (development and implementation). • Classifications. • Storeroom security. • “Squirrel stores” (management of).

In Figure 1.17 you can see that the difference between the scores of the high performers and those of the low performers is significant. In terms of reporting, the average score of the low performers was 0, whereas the average score of the high performers was 2.3. This means that the high performers were, on average, between our top two levels of practice, while the low performers consistently had no meaningful reporting. With little or no reporting, it is hardly surprising that the low performers are just that. Importantly, these low-performing companies are not small or inexperienced organizations; many are household names that you would expect to have a more sophisticated grasp of the requirements of spare parts inventory management.

Figure 1.17. High versus low performers, comparison 2

While this analysis might not stand up to the scrutiny known as the “scientific method,” it does clearly show that there are some actions that both high and low performers do similarly and some actions where high performers implement much better than low performers. This then suggests that there are some actions that make a real difference to spare parts inventory management results and some that don’t. From this research we have identified the best practices that this research indicates make a genuine difference to spare parts management outcomes, and these are discussed in the next section. Before describing those best practices, there is one more analysis to review. Figure 1.18 shows a “radar” chart of the top- and low-performer scores aggregated by section. While it is self-evident that the top performers will have higher scores in each section, what is perhaps more telling is the shape of the two curves.

Looking carefully at the two curves, it is clear that the main focus of the two groups is quite different. The top performers focus more on policies and procedures; inventory management and reviews; and culture, accountability, and metrics. The low performers focus more on stores management. In fact, the focus on stores management is very similar for high and low performers; it is the additional performance in the other areas that separate the high performers and help them achieve the much better results in terms of outcomes. This supports the earlier assertion that infrastructure and transaction management are a necessary but not sufficient focus for achieving best practice.

Figure 1.18. Research results aggregated by section

1.19 The Best Practices That Make a Real Difference Best Practice 1: Create Transparency This best practice requires that you create transparency in your spare parts inventory management through the use of classifications, metrics, and reporting. Transparency enables you to see what is happening with different types of inventory, with the value, and with the volumes of inventory. And this helps you to make better decisions, and that drives better results. To apply this best practice, you need to:

1. Develop classifications that segment your inventory in ways that help you understand the dynamics of their use, typically based on the reasons why you hold that inventory, not where the parts are used. 2. Create a set of metrics that give you the data you need to manage your inventory. At a minimum this should include inventory value, value used, stock turns, and overstocks. 3. Regularly report your metrics to a level in your organization that ensures that action will be taken when the numbers move to an unfavorable position. Sound easy? Unfortunately, it is not. Here are some of the traps: • Using classifications that target machine or production areas rather than inventory type such as critical, not critical, insurance, consumable, and so on. Targeting the machine or production areas means that you are not focusing on why you hold the inventory, and it is by understanding the purpose of the inventory that you will create better results. • Having too few or too many metrics. Too few don’t tell you the story. Too many create confusion, and the real issues get lost in a sea of data. This is especially the case with the “slice-and-dice” software that is widely available. I once saw a report that included more than 300 pieces of data every month. It was almost impossible to see the real picture. • Not reporting the data to the people who can drive action. It is not sufficient to say that your ERP has all the data; it must be reported and reviewed on a regular basis. Like the other best practices discussed here, creating transparency seems simple, but in reality it is not easy. It is, however, a fundamental building block for improved spare parts management. After all, if you don’t know what you have and whether it is being managed in an acceptable manner, then you have storage, not spare parts inventory management. Best Practice 2: Regularly Review the Currency of Past Decisions and Assumptions One of the major problems with spare parts management is the attitude of “set and forget.” You know this situation: at some point in the past the holding levels for an item were set, and they have not been reviewed since. The only exception, of course, is if you have had a stockout that was directly connected to downtime. In that case it’s very likely that someone reviewed the stock level and increased the holdings in a knee-jerk reaction! Stop and think for a moment about the implications of this. Logically, this situation means that if we only review the holding levels of the items that cause a problem, then almost all inventory items are never reviewed! That’s what I mean by set and forget. The best practice research has found a wide gap between top performers and the rest when it comes to regularly reviewing the settings for inventory holdings (the settings being the maxmin or ROP-ROQ). Top performers understand that things change, that past decisions may no longer be valid,

that past assumptions may no longer be viable. And that is why they take the time to regularly review the currency of their decisions and assumptions. This enables them to adjust their stock holdings in response to their needs, as they understand them now and as they expect them to evolve in the future. They are not stuck in the assumptions and frameworks of the past. They don’t allow their fate to be determined by decisions made years ago by people who might no longer work in their company (or in the same roles). Top performers know that they can manage 80% of their spare parts inventory investment by reviewing maybe 15% of their items, so they make sure that those items are reviewed every year—using their most recent understanding of what is really needed. Top performers also know that it’s not just about how many were used; spare parts stocking levels are influenced by many factors, and so top performers focus on inventory management process issues, not the suboptimal solutions of data analytics. And just as they do for other procedures, they ensure consistency by predefining the approach. Best Practice 2 is simple, but it requires time and resources. If you choose not to allocate the time or the resources, you are really just choosing to spend the company’s money buying more spare parts than you really need. Best Practice 3: Define Your Stock—Don’t Stock Criteria We have all been there: you are deciding whether or not to stock a spare part, and the first thought that pops into your head is “just in case.” After all, you don’t want to be the person that lets the team down by not stocking something that you should. Or maybe you don’t want the inconvenience of having to wait for an item to be ordered and delivered—much better to have it in stock so that you just get on with the work. Right? Well, maybe not. The problem is that these are both examples of ad hoc and even emotional decision making. This type of decision making leads you to stock items that you don’t need and maybe even to not stock items that you do need. Plus, if the reasons for decisions cannot be tracked, you can’t learn from both your good and bad experiences, and the results will be inconsistent. And that’s not what you want if your goal is best practice spare parts inventory management. What you need is transparency and consistency. Imagine if we operated the rest of our businesses by just letting people do what they thought was OK on any given day. Standards would go out the window, and safety would be a disaster! Thinking about safety, there is a reason why we don’t just let anyone decide whether or not to use personal protective equipment (PPE)—it’s because we know that different people have different views of the risk, and the consequence of getting it wrong can be enormous. So we impose PPE standards at all times. It should be the same with spare parts stocking. Set out the rules by which the decision to stock is made and then hold everyone to that standard. It’s quite simple really. If you want to achieve best practice spare parts inventory results, then you must develop and implement specific guidelines to aid decision making on when to stock an item and when not to stock an item. Best Practice 4: Develop Clear ROP and ROQ Logic and Guidelines Best Practice 3 required that you develop your stock—don’t stock criteria—that is, deciding whether or not to stock an item. Now for Best Practice 4 you need to be clear about how to decide how many to stock and how many to reorder. The point of this best practice is not to

dictate to you the method that you should use to decide these things; it is only that you develop clear stocking policies and procedures that provide the logic and guidelines for making decisions about stock levels and for calculating reorder quantities. The advantage of doing this is that the guidelines provide continuity in decision making and eliminate ad hoc decision making where the result depends purely on the mood on the day, and perception of risk, of the person making the decision. And from that the guidelines provide the basis for future audits of inventory holdings. In addition, by establishing a clear logic and basis for the stock-level decisions, you develop transparency that helps educate people in spare parts management, and thus you achieve more consistent decisions. The end result is almost always more appropriate stock levels. One surprising aspect of this best practice is how many companies do not have any documentation to guide this decision making, despite that these are the key two decisions for inventory management. And for those that do, how many are incomplete, mentioning only what to consider, not how to do the calculations. Another aspect of this best practice that surprises many people is that you don’t need sophisticated software for making your ROP and ROQ decisions. In fact, because 99% of companies have historic data that represents spare parts movement rather than spare parts usage, and that cannot be adequately cleaned (for reasons that I won’t cover right now), many softwarebased decisions can actually result in inappropriate holdings (either too much or too little). Worse than this, the use of the software distances the users from responsibility. A better way to determine your ROP and ROQ is to use a practical approach based on simple data that your team will know and trust. Because the data is simple and the assumptions are clear, the practical approach is transparent and can be applied by anyone. Better still, the application of a practical approach encourages discussion about the data and assumptions, and this helps educate the participants in the process so that they continue to make better decisions in the future. You don’t get that from software. This practical approach is described in detail in Section 2.6. If you want to achieve best practice spare parts inventory results, then you must develop and implement specific guidelines to aid decision making on the ROP and ROQ. Best Practice 5: Eliminate Squirrel Stores For those not familiar with the term squirrel stores, it refers to those unauthorized, uncontrolled, and unmanaged storages of spare parts that exist in just about every maintenance workshop. Actually they don’t exist in every workshop, because the survey work found that the top performers have worked hard to eliminate the squirrel stores at their facilities. Not surprisingly, the poor performers had not. The motivation behind holding spare parts in squirrel stores is usually well intentioned and based on one of two concepts. First, that holding the items in this way is more convenient and therefore more efficient in time and energy when the part is actually needed. Second, that it provides a kind of insurance and peace of mind that the part will be available. In both cases the benefits are usually overstated. The three reasons that you should not have squirrel stores are: 1. Squirrel stores massively increase what the main store carries. This is because the act of requesting items from the main store in order to top up the squirrel store results in a false level of volatility in the official records. This is explained in some detail in the second edition of my book Smart Inventory Solutions.

2. Squirrel stores increase obsolescence. It only makes sense that if you don’t control what you hold, you will end up with more waste through obsolescence. 3. Squirrel stores reduce reliability. In the uncontrolled storage environment of a workshop, parts are not stored correctly, risk being damaged, and have accelerated degradation, all of which reduce the effective operation of the parts when put to use. If you want to achieve best practice spare parts inventory results, then you must eliminate squirrel stores. The Unofficial Best Practice 6: Do Not Cherry-Pick Solutions Cherry picking can be described as “the act of pointing to individual cases or data that seem to confirm a particular position, while ignoring a significant portion of related cases or data that may contradict that position.”19 In other words, it means including only the data that suits you and ignoring the rest. In the case of the above five best practices, it’s not so much about ignoring data but ignoring the practices that don’t suit you and then thinking that you can still achieve a best practice outcome. This is cherry-picking solutions. If you really want to achieve spare parts management best practice, you need to sincerely apply all five best practices, not just choose the one, two, or three that suit you or that you think are easy to implement. For example, imagine having a system that ignores Best Practice 1, create transparency. You would have a system without genuine measures and reporting. This would mean that you wouldn’t know or understand the situation with different classifications of inventory. You would not have genuine control of your inventory. What if you ignore Best Practice 3 or 4? You would be stuck with ad hoc decision making, lacking in consistency, and your spare parts inventory will be dictated by the mood of whoever makes the decision on any given day. Also, you will not be able to audit any decisions because there are no criteria against which to conduct an audit. Not a good way to run any part of your business. Finally, imagine ignoring Best Practice 5, eliminate squirrel stores. In this case you can kiss goodbye any genuine attempt at achieving operational reliability. Ignore the unofficial Best Practice 6 at your peril.

10 Key Lessons: The Spare Parts Management System 1. Ensure that you mindfully and deliberately develop your spare parts inventory management system. 2. Spare parts are different from other inventory types and therefore require some different management techniques. 3. Many common inventory and supply chain management techniques are not applicable to spare parts inventory. 4. Improved maintenance won’t solve your spare parts problems. 5. Effective and efficient spare parts management requires the collaboration of many different departments. 6. No matter how the cost is allocated, spare parts cost money, and money isn’t free. 7. Inventory prevention is preferable to inventory optimization. 8. Policies are the cornerstone of a functional spare parts management system and provide the basis for consistent decision making. 9. A spare parts inventory management system should encompass the entire life cycle of spare parts management. 10. Achieving best practice outcomes requires the implementation of a suite of best practice processes

PART 2 Create and Stock SPARESOLOGY® STRUCTURE 1. The Spare Parts Management System Understanding Spare Parts | Finance | Policies & Processes | Parts Identification | Best Practices 2. Create & Stock • Deciding What to Stock • Spare Parts Standardization • Capital Equipment • First Time Buy • Critical Spare Parts • Setting the Re-Order Point • Setting the Re-Order Quantity 3. Operations • Forecasting • Inventory Optimization • Managing Repairable Spares • Storeroom Management • Data Management and Cleansing • Inventory Accuracy • Conducting Stock Takes • Bar Coding • Integrating Maintenance and Spare Parts Management • Bills of Material • Spare Parts Procurement 4. Obsolescence and Disposal • Managing Obsolescence • End of Life Management • Last Time Buy • Spare Parts Disposal

2.1 Introduction Having established the system or framework within which you will manage your spare parts, you now need to decide exactly what to stock and how many of those items to stock. (Of course, the process is not as linear as it appears in a book!) Part 2 of this book explores the issues to consider and provides some practical tools and techniques for making the necessary decisions. When I was a young maintenance engineer, the company that I worked for set about upgrading the production equipment by moving to the latest generation of production machines. At the time these machines were at the leading edge of production capability, and so, almost by definition, they were not only new to the industry but also new to the company for which I worked. At this time, I was only two or three years out of university and had only one to two years’ direct experience in this industry. I had almost no experience in the scientific management of maintenance, having just moved into this area and not yet completed any studies to build an understanding. Despite all this inexperience, I was tasked with identifying not only which spare parts we should hold but how many. This decision effectively put the future operational support capacity of the organization into the hands of the most inexperienced person available! At the time I did what just about everybody in this situation does: I followed the recommendations from the vendor. Unfortunately, whatever assumptions the vendor’s recommendation was based on did not seem to apply to our operating environment. There were some items that we stocked out of, requiring emergency ordering and delivery, and other items that are probably still on the shelves 30 years later! This is not to suggest that all vendor recommendations are wrong; it’s simply to make the point that selecting what to stock and determining how many to stock are really situational decisions that can only be taken within the context of your unique operating environment. In Part 2, we will work through the decision on what to stock—a decision that requires an understanding of the two reasons why any item would be stocked. Then, to help you determine if an item should be stocked, this section provides a series of seven questions to ask and answer. These questions will guide your thinking through the initial stages of the “create and stock” activity. This section then goes on to explore issues such as spare parts standardization, spare parts that are provided as part of a capital equipment purchase, “first-time buy” and the implications of this, and, crucially, the identification of critical spare parts. Determining spare parts criticality is actually more complex than most people realize. Importantly, a key lesson here is that a machine-critical part is not necessarily a critical spare part. Spare parts criticality actually depends on a combination of your company’s ability to detect failure (a reflection of both the failure mode and maintenance sophistication) and the ability of the vendor to supply in a time-effective manner. Finally, this section moves onto working through a logical approach for setting the reorder point and reorder quantity for any spare part. These are the two most critical numbers in inventory management, but unfortunately the theoretical basis for calculating these values doesn’t directly translate into practice, due to a whole range of real-world issues. Fortunately, the techniques shown in this section not only work to provide appropriate holding levels but can, in the words of one client, “be practically applied on a daily basis by almost anyone and without the need for expensive software.”1

2.2 Deciding What to Stock Before deciding on how many of an item should be stocked, the first question to ask is, should the item be stocked at all? One of the issues with managing spare parts inventory, used for operations and maintenance support, is that deciding what to stock can often be an emotional rather than rational decision. This doesn’t generally happen with other inventory types, such as raw materials, finished good, or even retail inventory where decisions are generally based on rational criteria such as agreed forecasts or production plans. However, with spare parts the decision is often left to the perception of an individual who uses little or no data and who decides on a “just-in-case” basis. Even those who use data often assume, and often without realizing it, that historical usage is a good proxy for future usage even if there is no real basis on which to make that assumption. (On one occasion the members of a client team presented me with a list of 40 reasons why they stock the inventory that they do.) Logically, however, there are actually only two reasons why a company would hold a spare part as inventory: 1. The company can’t source the item within the planning horizon. 2. The company wants to enable purchasing and manufacturing efficiencies. These are explained below. The Planning Horizon The planning horizon is the time between when you know that you will need a spare part and the time that you actually need to have it available for use. This may be measured in months, days, minutes, or seconds. This is shown in Figure 2.1.

Figure 2.1. The planning horizon as a timeline

With spare parts inventory management, understanding the planning horizon is important because this is one of the main factors that influence the decision of whether or not to hold an item as inventory. If there is no perceivable prior warning of a part failure, then the time between the realization of the need and the actual need is effectively zero, meaning that a spare may be

needed in inventory. However, if failure or need can be predicted or planned and if the part can be sourced before the actual need, then it may not be required as inventory. Hence it is important to understand failure modes for the parts being considered for inventory. Consider the humble car tire. A car tire has, effectively, two failure modes: wear-out and puncture. In a domestic situation (such as the family car), nobody holds a spare tire because of the potential for wear-out. This failure mode is easily inspected and managed. However, almost everyone holds a spare tire to account for punctures. In this case the failure is sudden, unpredictable, and catastrophic. The planning horizon is zero. When the failure mode is not sudden and catastrophic (or usage is planned without waiting for failure), then the key consideration is the total lead time compared with the planning horizon. If the lead time is less than the planning horizon, then there is no logical reason to hold the spare part as inventory (see Figure 2.2). In this situation you are able to source and supply the spare before the actual need. Note that the total lead time includes all related activities: internal procurement processes, supplier delivery time, and internal receipting.

Figure 2.2. The lead time is less than the planning horizon

If the lead time is greater than the planning horizon (see Figure 2.3), then there is a rational justification for holding the spare part because you could not possibly source the item before it is needed.

Figure 2.3. The lead time is greater than the planning horizon

Purchasing and Manufacturing Efficiencies The second logical reason for holding a spare part as inventory involves purchasing and manufacturing efficiencies. Sometimes these issues constrain your opportunity to purchase

exactly the quantity required. The most frequent incidence of this is when an item can only be purchased in quantities greater than the immediate need. For example, if you need a pair of bearings and the vendor only supplies them in boxes of six, you will need to purchase six, use two, and put four into inventory. This packaging arrangement might be due to the vendor’s own manufacturing efficiencies, or it may be a marketing tactic to increase sales. Either way you will need to purchase six. Working with vendors to have them supply in the quantities required can have a big impact on inventory holdings and is one of the major benefits of consignment inventory. Another example of a purchasing efficiency is when a vendor provides bulk discounts. With the caveat that you need to be certain about using the items in a short period of time, this can be an effective way to minimize operational expense, but it will result in an increase in inventory holdings. In a multiwarehouse or multiechelon environment, it may be that having the central warehouse buy in quantities that take advantage of price breaks and then internally distribute to other warehouses will also save on operational parts expense. This will, however, increase internal warehouse management costs, as someone needs to manage the process. It is because buying spare parts for purchasing and manufacturing efficiencies can increase both the inventory investment and the warehouse management costs that these decisions should be subject to significant scrutiny. Seven Questions to Ask Before Deciding to Add an Item to Your Inventory There may be only two reasons why you really need to stock an item in your inventory, but there are many reasons why, despite this, you may not want to stock the item as inventory. The following is a suggested series of questions that should be asked for each potential inventory item. These questions will help you work through the management and supply alternatives to stocking an item. If the answer to any of these questions is yes, then the item should not be stocked. 1. Can the item be acquired within the planning horizon? Don’t just assume that the planning horizon issue has been considered—ask the question. 2. When required, can the item be delivered by a vendor in an acceptable lead time? This may seem like a way to reask the first question (and maybe it is!), but it is included because sometimes the need for an item can be delayed. For example, a part failure may not result in a complete shutdown, and so repair may be delayed until a suitable production window. 3. Can the failed item be repaired within an acceptable lead time? This is a repair rather than replace strategy. 4. Can an item already stocked be used as a substitute? Substitution may be a short-term measure, or it may be possible due to the existence of old stock of a different make or model that needs to be used up, or it may be that the item under consideration just isn’t really needed.

5. Is the equipment on which the item is to be used likely to be obsolete within 12 months? Determining the appropriate time period for consideration will be based on the equipment and the company circumstance; however, the key to this question is to reconsider the expenditure on an item if the equipment will shortly be obsolete. Obviously the reliability issues will also need to be taken into account. 6. Is the item being ordered for a project? If an item is needed for a project, it makes sense that its usage will be planned, and therefore it does not qualify as inventory. Plus, there is no reason why a project item should become part of the ongoing inventory unless there are reliability issues to consider. In any case, just being needed for a project is not sufficient reason to create an inventory item. 7. Can the need for the item be eliminated through reengineering? This question will apply to high-cost items when it is valid to investigate if engineering changes can eliminate the need for a particular item at a reasonable cost. It may be that with some minor changes an existing inventory item could be used.

2.3 The Pros and Cons of Spare Parts Standardization Standardization: An Enduring Debate Whether or not to standardize equipment and spare parts is one of the enduring debates of engineering, maintenance, and spare parts management. On the one hand, standardization is said to lead to improved operating and workforce efficiency, as well as reduced inventories; on the other hand, not standardizing is said to enable companies to take advantage of technical developments and innovation. One thing that is certain is that the impact of explicit pros and cons is hard to quantify and will be specific to the individual circumstance. In order to enable a more informed debate, this section addresses the pros and cons of spare parts standardization and suggests the three questions to ask before commencing any spare parts standardization. First, let’s define standardization using a simple definition2:

To change things so that they are similar and consistent and agree with rules about what is proper and acceptable Standardizing for spare parts management usually means agreeing that a certain type or model of equipment will be used, and with that the spare parts required for each installation will be the same. This is different from industrywide standardization such as the use of metric nuts as bolts. The Most Common Pros and Cons So just what are the pros and cons of standardization? Here are the most common arguments on

both sides: PROS 1. Fewer parts to manage. If you standardize equipment, there will be fewer stock keeping units (SKUs), and this has advantages in terms of spare parts management activities such as providing storage space and taking stock. 2. Lower inventories. With fewer items to store and manage comes the benefit of lower inventory values. This benefit will be mostly realized through eliminating any duplication in safety stock. 3. Operational familiarity. Reducing the range of equipment types or models reduces the range of items with which your maintenance and operations teams must be familiar. This can lead to fewer mistakes and less training. 4. Improved maintenance efficiencies. Similar to the operational familiarity, equipment and parts standardization can lead to less confusion over the parts required at any one time and, with that, improved accuracy with spare part selection when managing maintenance tasks. All of this leads to improved workforce efficiency (sometimes called wrench time). 5. Improved purchasing efficiencies. Ordering fewer spare part types also means fewer purchase orders, which means less work for the procurement team. 6. Fewer invoices to process. Fewer purchase orders also means fewer invoices, which means a lesser workload for those both authorizing and processing the invoices. 7. Lower parts costs. One possible benefit from standardization is that for the items you do purchase and use, you will purchase greater volumes, and this may lead to lower per-unit costs. CONS 1. Missed innovation. The major argument put forward for not standardizing equipment is that the company will miss out on the benefit of new innovations and efficiencies from improved equipment design. 2. Reduced operational efficiency. Missing out on equipment innovation will mean also missing out on any operational efficiencies that may result from that innovation. 3. Increased obsolescence risk. Sticking with a particular type or model means that when that type or model and its related spare parts are no longer available, you will need to find a way

to manage or replace all units at once. This has implications for reliability and capital expenditures. 4. Increased parts costs. Moving from a lowest available cost approach (which results in spare part proliferation) to a life-cycle cost approach (which often leads to standardization) usually also means paying more for the spare parts. 5. The perceived risk of using parts that are not produced by the original equipment manufacturer (non-OEMparts). Proponents of standardization are usually driven by cost cutting, and this inevitably means using non-OEM parts. Some will argue that this leads to an inherent reliability risk.

This list demonstrates why the arguments for and against standardization are not straightforward: one of the pros is the potential for reduced parts costs, and one of the cons is the potential for increased parts costs! How can both arguments be true? It all depends on the specific circumstance. Three Spare Parts Standardization Questions In deciding whether or not to standardize on a particular type or model of equipment, and the associated spare parts, a detailed examination of the specific circumstance needs to be completed. This will include determining the real impact on your company of any change of policy and ensuring that the motivation for ordering nonstandard equipment is justified. These are the three key questions to ask: 1. Is there a genuine innovation or operational advantage? 2. How much more inventory or less inventory is required, and what does that cost or save? 3. If a change in the type or model is agreed, is there a way to gradually move to the new type or model as the old one is used up (meaning that the old type or model will no longer be ordered)? When working through the decision of whether or not to standardize, there is a need to be mindful of the motivation. Is it because someone just wants the latest thing? (Some might call this the “cool factor.”) Is it motivated by vendor bias? (This refers to a preference for or dislike of a specific vendor.) Is it motivated by a perception of quality for high-priced components? (This is sometimes referred to as “goldplating.”) Standardization is not trivial. At a minimum it requires a quantification of the costs or savings that might arise and an assessment of the associated risks. Like all management and investment decisions relating to spare parts holdings, it is not simply an engineering, operations, storeroom, or procurement decision but the result of the consideration of all functions that are involved.

2.4 Capital Equipment and the Spare Parts First-Time Buy One of the key milestones in the life cycle of a spare part occurs when a company purchases new capital equipment. Almost universally this action requires consideration of the initial sparing provision to support the installation, commissioning, and transition to operation of that equipment. This precipitates the first-time buy of the spare parts inventory that is required to support the continued maintenance and operation of that equipment. It is also fairly typical that the capital value of equipment is an order of magnitude greater than the value of the spare parts being considered. This means that the equipment becomes the prime focus of the procurement team. The capital equipment procurement process then focuses on the actual equipment and issues, such as technical capabilities, capacity, warranties, installation, logistics, pricing, and terms of payment. With all that being considered, it is understandable that the people in procurement will often just accept the vendor-recommended “two-year” spares package as part of the deal. But should they? The Two-Year Spares Package The idea of the two-year spares package is quite enticing. It is reasonable to expect that the vendor’s employees know what is required for commissioning and maintenance; after all, they must be the experts on their own machines. In addition to understanding the reliability of the equipment, they would also have access to the history of parts demand from previous installations. Wouldn’t they? The very idea of a two-year spares package raises several questions: • What is the basis of the spare parts selection? • Does the vendor really expect all those parts to be used in a two-year period? • Why even buy a two-year supply if you can get the parts needed in an acceptable time frame? • Why can’t a reasonable reorder point be determined and parts ordered as per the normal process during those two years? • How responsive is the vendor’s supply chain if you actually need to buy parts two years in advance? • How reliable is the equipment during the “early-life” phase of operation? One of the drivers of the two-year spares package is the accounting treatment that these parts receive. Usually the cost of these parts is capitalized with the equipment purchase, and the parts are then used as “free issue” parts. This is quite attractive to the maintenance and operational teams, but parts procured in this way usually bypass the normal scrutiny required for operational expenses. The post-installation maintenance and performance of the equipment will rely on a supply of spare parts, as will the commissioning phase. But companies need to be careful about

spending large sums of cash on parts that are not needed in the near future, which can be purchased in due course, or that may not be needed at all. It is common in storerooms and warehouses all over the world that parts that are written off as obsolete were purchased as part of the first-time buy and then never used. (See Part 4 on obsolescence.) In addition, the sudden influx of what may be thousands of parts imposes a spike in workload on the storeroom team that receives the items, creates the initial record, processes the parts, and then stores them. This is not to suggest that all two-year spares packages are wrong or are oversupply, but companies do need to spend an appropriate amount of time and resources to ensure that they purchase what they need for when they need it. Which brings back the issue of relative cost. If the spare parts package is a small percentage of the overall capital cost, it can be perceived to be of little importance and so gets relatively little attention compared with what the main capital item gets. However, in terms of ensuring ongoing operational performance and appropriate cash expenditure, nothing could be further from the truth. The spares package may actually cost thousands, tens of thousands, or even millions of dollars. Examining the Recommended Parts Package Ultimately, any spare parts stocking problem is a forecasting problem. That is, there needs to be some kind of forecast on what parts might be required during the forecast period. Creating that forecast with appropriate rigor and with acceptable accuracy (or error) is at the very heart of determining the spare parts holdings required. The problem is that the nature of spare parts usage means that it is unlikely that there is any one forecasting technique that can be universally applied. Some parts fail randomly; some experience early-life failures, but once through that period, failure rates drop off. Some parts do the opposite and experience wear-out failures where the failure rate increases over time. Some parts are used in predictable, time-based preventive maintenance tasks. Figure 2.4 shows the generally accepted six modes of failure for equipment— and by extension spare parts. This is based on the reliability-centered maintenance work of John Moubray. The modes are categorized as follows:

Figure 2.4. Six failure modes

Mode A is the traditional view of wear-out failure where the parts operate at a low random failure rate during most of their life and then have a large increase in failure rate toward the end of their life. Mode B is the bathtub curve. This is not to be confused with the bathtub principle discussed in the book Smart Inventory Solutions. The bathtub curve suggests early-life failures (sometimes referred to as infant mortality) followed by steady low rates of random failures, with an increase in failure rate toward the end of life. Mode C suggests a gradual increase in the failure rate during the life of the part. Mode D relates to parts that are highly reliable in the early stages of use but then settle into the pattern of constant random failure. Mode E suggests that the part experiences a pattern of random failure during its entire operational life. Mode F relates to parts that experience early-life failure and then settle into a mode of constant random failure.

It is important to note that many reliability experts say that parts don’t truly exhibit constant failure rates and that generic random failure does not exist. In addition, the curves shown in Figure 2.4 are purely theoretical. However, if these curves are used as a qualitative view of the potential failure mode, then they can be useful in questioning and discussing the likely spare parts requirement.

A Word of Warning on MTBF One of the much discussed metrics in failure analysis is the mean time between failures (MTBF). The MTBF is sometimes promoted as an indicator of the likely demand requirement for a spare part. The logic goes that if the MTBF is (for example) 365 days, then you can plan to need that part only once per year. The problem with this approach is that the MTBF is not a reliable predictor of spare parts requirements. The part with a 365-day MTBF may have had a failure on day 1 and another on day 730 (2 years later). This leads to an MTBF of 365 days. Or maybe the part had no failures for three years, and then three parts experienced a wear-out failure (Mode A) in a short period. This would also produce an MTBF of 365 days, which is misleading in terms of an actual failure profile. MTBF is best used at a macrolevel to indicate if equipment maintenance strategies are having the desired effect of increasing reliability. It should not be used at a detailed level to indicate parts requirements or even equipment maintenance frequency.

Therefore, the starting point for evaluating a proposed spare parts package is to understand the equipment needs and the potential failure modes and then, using that information, to categorize the parts into the following hierarchy (see also Figure 2.5): 1. Commissioning. These are the parts required for the early-life failures that occur due to the stresses of commissioning the equipment. 2. Planned scheduled. These items can be tied directly to the planned maintenance schedule. 3. Unplanned usage. These are parts that cannot be otherwise categorized and might be generically referred to as spare parts. 4. Consumables. The items in this category are consumed during the production process. It is arguable that these are not actually spare parts, but they are included here for the sake of completeness. The unplanned usage items (Spare Parts) can then be further segmented into: • Insurance spares. These spares are technically long lead time items that you don’t expect to use during the life of the equipment—literally, the just-in-case inventory. • Corrective spares. These are the parts that are held to replace failed parts where the usage is unscheduled. This category can be further segmented into:

• Critical. • Not critical.

Figure 2.5. Recommended segmentation for a recommended spare parts package

There is a detailed discussion on determining spare parts criticality in Section 2.5. In all cases, care needs to be taken to identify items that are already stocked by your company and parts that might fit into more than one category. For example, a spare needed for commissioning may also be needed in due course for unplanned coverage. Without due care in planning, it is possible that parts are ordered in both of these categories, that the commissioning parts are not used, and that the part is overstocked from day 1. Once the recommended spares package is segmented in this way, your team can then examine each recommendation in light of its intended purpose. As part of this process, the team can then apply the Inventory Cash Release (ICR) process to each part to determine the most appropriate initial order quantity, reorder point (ROP), and reorder quantity (ROQ) for each part. The ICR process is explained in detail in the book Smart Inventory Solutions,3 but a summary explanation is also included in “Process Review and Analysis” in Section 3.3. The recommended approach to determining the ROP and ROQ is explained in Section 2.6. Finally, another technique that can be applied at this stage of the life cycle is known as logistics support analysis. This is most often used in military applications and generally speaking is beyond the needs of most industrial applications. The High Cost of Free Parts Often when companies upgrade their existing plants, expand their facilities, or build new

greenfield sites, the new equipment comes with a spare parts package. As discussed above, this is sometimes called a two-year spares package. The cost of these parts is then absorbed into the capital cost of the project, and the parts are entered into the spare parts inventory at zero cost. When issued for use, they are treated as “free of charge.” Of course, they weren’t free; the company paid for them. It’s just that the allocation of that cost went into a different accounting bucket. The problem is that these “free” parts can have a very high cost for the company in some very important ways that lead to higher costs in the long run. Superficially, the issue of free parts seems like a bonus for the maintenance team. After all, the cost of these parts is not allocated to the maintenance budget when the parts are used. The work gets done, and someone else pays—seems like a good deal! Of course, this also means that the cost center doesn’t accurately reflect the actual cost of maintaining the equipment. Hence any decision making or benchmarking on costs is pointless at best and misleading at worst. For example, most companies set their budgets by reflecting, in the coming year, the cost of the previous year, so when it comes to the budget allocation in year two of the life of this equipment, the budget is likely to reflect artificially low records from the previous year. When the “free” parts are replaced in the storeroom at full cost and subsequently used by the maintenance people, they then struggle to maintain the equipment within the artificially low budget. Then when the budget is exceeded because the actual parts cost is now allocated to the equipment, pressure is brought to bear to reduce the maintenance expense to meet the artificially low budget. In order to achieve this, maintenance may need to take shortcuts, reduce some of the work, and/or lay off workers and reduce overtime. With reduced maintenance the equipment will, in time, experience increased operational downtime. This is a cost that could have been avoided if the parts cost had been properly allocated in the first place. So much for free parts. While all that is happening, a problem also develops in the storeroom. As mentioned above, when the “free” parts are used, they will be replaced with parts purchased at full value. This will result in an increase in the reported value of the inventory—even though there are no more inventory items than there were previously. This apparent increase in working capital commitments gets the attention of the same accountants who thought it a good idea to put zero-cost parts in the storeroom in the first place. Keen to manage the working capital, the accountants put pressure on the manager responsible for the storeroom value, whose only choice may be to delay reordering of parts or reduce the quantity held. Wanting to ensure an immediate impact, in order to get the accountants off his or her back, the manager takes an active management approach that targets the fast-moving spares. This is because the parts that turn over the fastest provide the quickest opportunity for impact. However, because these are also the parts that are used, the impact of parts shortages also becomes apparent fairly quickly. Parts shortages then lead to a lack of trust in inventory management, operational downtime, and the added high cost of expediting replacement parts. Again, these are costs that could have been avoided if the original parts cost had been properly allocated in the first place. So much for free parts.

And what about the influence that being “free” has on other decision making? Too often I have heard maintenance people recount stories where they replaced a component, not because the one in service really needed it just yet, but because the replacement was free, so, their logic goes, “Why not?” Of course, the part wasn’t free, the company did pay for it, and the action of replacing the in-service part sooner than necessary means that the storeroom will now order replacement stock sooner than would have been necessary. Which means that the company has spent more money sooner than necessary. So much for free parts. None of the above is meant to suggest that the free parts are the only cause of operational, maintenance, and spare parts problems. Of course they are not. But they do have an influence on people’s behavior and decision making, and the decision to make the parts “free” is completely within our control. And of course there are uncertainties about the commissioning of new equipment and the potential for early-life failure. But these are issues that require that you have spare parts on hand, not that you set them up as free issue. There is a point at which the equipment transitions from commissioning to “normal” performance, and this is when the parts should go from free (that is, part of the commissioning expense) to regular parts that are charged out. Unfortunately, the consequences of actions are not always immediately obvious. So while it may seem like the right decision at the time, there can be a high cost for those “free” parts.

2.5 Spare Parts and Criticality Oil rigs are, almost by definition, isolated places. This is especially the case if the rig is offshore. In the event of a spare parts shortage emergency, there is no supplier base just down the road to help out. Most supplies are brought in by boat or, in an emergency, by the chopper being used for crew transfer. If you are managing an oil rig, you really need to know not only what is critical and what isn’t but also how to manage the critical parts. Therefore, it came as quite a surprise to the supply chain manager responsible for an oil rig off the coast of Thailand that the rig was down because it did not have a critical spare part on hand. Perhaps even worse, this part was a $147 proximity sensor. The part had been correctly assessed as critical and a min-max holding of 0-1 was established. Proximity sensors are inherently reliable items, and this arrangement had worked fine—until the night that a team member damaged the only spare when replacing a failed unit. There was no backup, and as this was safety related, production stopped. A full day’s production was lost while a replacement unit was sourced and flown in— at great expense. The problem here wasn’t that the part wasn’t identified as critical—it was. The problem was that the approach to managing critical items was too simplistic and failed to take account of the full range of issues that impact the management of critical spare parts. The Range of Criticality-Related Issues Is Complex

Here are seven issues that need to be considered when determining a spare part’s criticality: 1. The system hierarchy. Where does the spare part fit within the equipment hierarchy—is it a part that the entire system relies on (as with the proximity switch), or is it an almost inconsequential part of a subsystem? 2. The consequence of failure. What are the financial, safety, quality, and environmental consequences? 3. The likelihood of failure. What is the inherent or expected failure rate of the part? 4. Operational alternatives. In the event of failure, is there an operational alternative, such as spare capacity or standby equipment? 5. Inspection and condition monitoring. Can the need for the item be reliably predicted through inspection or condition monitoring? 6. Vendor lead time and reliability. How quickly can the vendor supply a replacement item, and can the vendor be relied upon to keep that promise? 7. Vendor minimum order quantity. Can the vendor supply the quantities required? Companies that fully understand these issues and get criticality right not only can reduce downtime by holding the right spares but can reduce inventory holdings by holding fewer of the noncritical items. Understanding criticality and identifying critical spare parts is not a trivial activity. Before we go any further, it’s important to define a critical spare part: It is a component that, if unavailable, would prevent the plant from operating . . . and for which there is no viable alternative. A Critical Machine Part Is Not the Same as a Critical Spare Part One of the key causes of incorrect criticality assessment of spare parts is a failure to recognize that a spare part that is critical to the operation of a machine or a part of a machine is not necessarily a spare part that must be held in inventory. The difference is that the criticality of a machine part is based only on the need of that part by the machine in question, but the criticality of a spare part in inventory also relies on the supply of the part and whether it can be supplied with the planning horizon (see Section 2.2). This difference is demonstrated by the following example.

Why We Hold Spare Tires but Not Spare Brake Pads It is reasonable to say that most people would consider both tires and brake pads as critical to the functional operation of a motor vehicle. A car does not operate effectively with a flat tire, although it is still possible to drive, albeit with resulting damage to the wheel rim. Similarly, it is technically possible to drive with failed brake pads, but again, significant damage to other components will result (in this case the brake discs). Yet while almost everyone carries a spare tire, almost nobody carries spare brake pads. How can this be if they are both critical? The answer lies in understanding failure modes, the ability to inspect for those failures, and the systems in place for the supply of replacements. A comparison of these considerations is shown in Table 2.1. Referring to Table 2.1, we can see in the descriptions that the failure modes under consideration for tires and brake pads are quite different. (Yes, tires also wear out, but that is not why people hold a spare tire in the trunk of their car.) Tires. The failure is often catastrophic and unpredictable. Think about a flat that occurs because of running over a sharp object. When this failure occurs, the vehicle is, for all intents and purposes, almost instantly immobilized. When this happens, unless lucky enough to be directly outside a tire service center, the driver is stuck. Table 2.1. Comparison of criticality considerations for tires and brake pads

Consideration

Tires

Brake Pads

Failure modes

Puncture

Wear-out

• Unpredictable

• Long time frame

• Catastrophic

• Inspectable

No

Yes

Acceptable supply time

Brake pads. The failure is due to wear-out, and the wear can be inspected and measured. This means that the need for replacement brake pads can be predicted. However, even if the failure is not recognized before the car is serviced, replacement brake pads can be provided during the time it takes to service the vehicle. In both cases, the driver is at risk of a delay while waiting for a repair; however, with the brake pads the driver can plan alternative arrangements and so is much less inconvenienced. It is this ability to predict need and arrange supply in an acceptable time frame that results in people not routinely holding spare brake pads. When Is a Critical Spare Part Really Critical? A critical spare part is critical when: It halts operations . . .

and There is no viable alternative . . . and The need cannot be predicted . . . and Replacements cannot be supplied in an acceptable time frame . . . and You are not prepared to risk a stockout. In the example of the proximity switch given at the beginning of this section, the error was to make a plan based on an electronic failure mode, which is unlikely in a device that is inherently reliable, rather than based on failure due to mechanical damage, which is the most likely cause of failure for this type of sensor. How to Determine Spare Parts Criticality There are six steps to take to determine the criticality of spare parts: Step 1. Understand the Operations Hierarchy This requires the input of maintenance and helps to understand the types of criticality in subsequent steps. Step 2. Identify if the Part Is Machine Critical A part is machine critical if the subsystem in which the part is used will not operate without the part functioning correctly. Note that this does not mean that the machine stops only the subsystem that uses the part. In a motor vehicle the following parts can all be considered machine critical: • Spare tire. • Battery. • Fan belt. • Brake pads. • Headlights. Step 3. Determine the Operational Criticality

For the purposes of this process there are three suggested definitions of operational criticality: • Low. Can substitute the part or repair the part in an acceptable time frame, or have backup equipment, or are willing to wait for the part to be delivered. • Medium. Even though failure is inconvenient, can maintain production and output until a spare is available. • High. Occurs when condition is unsafe (people or environment), or not willing to wait for rectification, or plant output not maintained, or significant quality issue. Step 4. Apply the Criticality Matrix Figure 2.6 shows the suggested criticality matrix. Using this matrix indicates that if: • An item is not machine critical and its operational criticality is rated at either low or medium, then it is not a critical spare part and should be ordered as required. • Similarly, even if it is machine critical but has low operational criticality, then it is not a critical spare part and should be ordered as required. • If the operational criticality is high, then no matter the machine criticality, the opportunity for condition monitoring should be investigated (inspecting condition as with the brake pad example). If the part can be reliably condition monitored, meaning that supply is possible within the planning horizon, then follow that path. If the part cannot be successfully condition monitored, then move onto Step 5 and apply the supplier matrix. • If the item is machine critical and operationally critical, then it may not warrant the work required for condition monitoring. If this is the case, move onto Step 5 and apply the supplier matrix.

Figure 2.6. Criticality matrix

Step 5. Apply the Supplier Matrix The supplier matrix (see Figure 2.7) considers the issues relating to both supply lead time and supply quantity. Using this matrix indicates that if: • The supplier can supply in the exact quantity required and the lead time is acceptable, then there is no need to hold the spare in inventory; it should be ordered as required. • However, even with an acceptable lead time, if the supplier will only supply in quantities that are excess to the immediate requirements, such as packs of six when you only need two, then you will need to create the item as an inventory item in order to manage the excess left over. In this case the ROP should be set at zero, and there should be no automatic ordering. After the stock level reaches zero, there is no need to reorder until the need again arises as the lead time is acceptable. • If the lead time is unacceptable, then no matter the supplier quantity, the opportunity for condition monitoring should be investigated. If the part can be condition monitored reliably, then it can be ordered as required. If the part cannot be successfully condition monitored, then move onto Step 6 and apply the risk matrix.

Figure 2.7. Supplier matrix

Step 6. If Necessary, Revert to a Risk Matrix Most companies utilize a risk assessment approach using matrices similar to those shown in Figures 2.8 and 2.9. This part of the process is actually two steps. First, determine the “consequence” and “likelihood” scores using Figure 2.8. Then use the decision matrix to determine the course of action. Please note that in these examples the “$” and estimated times have not been completed, as each company is different and different values will apply. Example: Using This Process to Demonstrate Why You Hold a Spare Tire but Not Spare Brake Pads First the tire: thinking about a puncture failure rather than wear-out 1. Understand the operations hierarchy. The tire is part of the subsystem of wheels and is not involved in creating the power required to propel the vehicle. 2. Identify if the part is machine critical. The tires are machine critical since the wheel subsystem will not functionally operate without a functional tire. 3. Determine the operational criticality. The criticality for tires is high—the car can’t functionally operate without all tires.

4. Apply the criticality matrix. This suggests investigating condition monitoring (see Figure 2.10), which is not possible for a puncture failure, so the process moves onto the risk matrix, passing over the supplier matrix. 5. Apply the supplier matrix. Not required for this example. 6. Apply the risk matrix. The risk matrix shows that the consequence score for the tire failure is 5, classified as a total product defect, as the vehicle will not be operable; and assuming that the failure happens as infrequently as every five years, the likelihood score is 2.

Figure 2.8. Risk “likelihood” and “consequence” scores

Figure 2.9. Decision matrix

Comparing these scores with the decision matrix suggests the solution of “purchase spare,” which is the expected answer (see Figure 2.11). Now the brake pads: thinking about a wear-out failure 1. Understand the operations hierarchy. The brake pads are part of the subsystem for brakes. They are not involved in creating the power required to propel the vehicle. 2. Identify if the part is machine critical. The brake pads are machine critical since the car is not truly functional without brakes. 3. Determine the operational criticality. The operational criticality for the brake pads is medium—the car can maintain sufficient operation to get to the repair center. 4. Apply the criticality matrix. This suggests going to the supplier matrix (see Figure 2.12). 5. Apply the supplier matrix. Because the lead time is acceptable (the brake pads are readily available) and the brake pads can be purchased in the exact quantity required, the supplier matrix (see Figure 2.12) suggests that they are ordered as required, which is the expected result. 6. Apply the risk matrix. In this example the risk matrix is not required.

Figure 2.10. Use the criticality matrix to evaluate the spare tire

As a further test of this process, you might consider doing the above brake pad analysis with the following assumptions: • Not machine critical. Results in a finding of “order as required”. • High operational criticality. Also results in “order as required,” as the brake pads can be condition monitored.

Figure 2.11. Risk consequence and likelihood scores and the decision matrix for the spare tire

Figure 2.12. Use the criticality matrix and the supplier matrix to evaluate the brake pads

These matrices are provided here as examples only; before using them in your

organization, please ensure that the definitions are fully understood and the risk matrices are calibrated for your business.

2.6 A Practical Method for Setting Spare Parts Holding Levels Theory Versus Reality Before explaining the suggested method for setting spare parts holding levels, it is important to understand the differences between inventory management theory and the realities of spare parts inventory management. The classic sawtooth diagram demonstrates the theory associated with inventory management and control. This diagram shows the available quantity of an SKU over time. Figure 2.13 shows an example of this diagram. Here the horizontal axis represents elapsed time, and the vertical axis represents the quantity on hand. This figure also includes reference to some of the common terms and definitions as they relate to the classic sawtooth representation. The two key simplifying attributes of the theoretical model are that linear demand is assumed (that is, average demand is constant over time) and that replenishment is instant and complete. The problem is, of course, that reality almost never looks like this. The truth is that for engineering and spare parts, the chart in Figure 2.14 is far more likely to be representative. This graph has two characteristics that separate it from the theoretical profile. First, this item has long periods of no movement followed by short periods of multiple movements. Compare this with the theoretical model that assumes a constant and linear usage of items. As a result, the average demand value (so often used in theory) varies enormously depending upon the period in the timeline; it is not constant or linear. Second, the large spike in holdings on the right-hand side (at the end of the timeline) is not a result of additional purchasing; it comes from a massive and sudden return to store of items previously removed. Thus the apparent cycle of usage in the preceding parts of the chart did not reflect actual usage at all (although employees did remove the items from the storeroom). This means that the purchases made to replace these items in inventory were not actually necessary. (However, those doing the purchasing did not know this at the time; they were following their process.) The problem was that the maintenance people who removed the items did not use them and did not advise anyone of this. So when they eventually had a cleanup and returned the items to the store, the items became overstocked, compared with the expected maximum, by 210%! This example shows that the theoretical model and the actual situation can be sufficiently different so as to make the application of simplistic theory-based solutions not only pointless but also even dangerous to operational goals and company finances. A smart inventory solution is to ensure that the influence, impact, and complicating factors of all the elements of materials and inventory management are considered. Max-Min or ROP-ROQ? There are essentially two ways that people express the inventory control settings: as either maxmin (sometimes, confusingly, min-max) or ROP-ROQ. It doesn’t really matter which you use, just as long as you understand the logic and the definitions. First the definitions:

Min = short for minimum. Most typically, the point at which the need to reorder is triggered. Sometimes, however, computer systems are configured so that the reorder point is one less than the min value.

Figure 2.13. The classic theoretical sawtooth diagram

Figure 2.14. Actual component demand-supply chart

You need to check on this configuration with the system you use, as different definitions will change the resulting holding level. Max = short for maximum. Most typically, the targeted maximum holdings of the item. Usually, in a max-min system, the quantity reordered after reaching the min is the quantity required to get back to the max. For example, if the max-min is 5-2, when the quantity in the storeroom reaches 2, procurement would need to order 3 to get back to the max. ROP = reorder point. As the name suggests, the holding level at which the need to reorder is triggered. ROQ = reorder quantity. The quantity to be reordered after the ROP is reached. Now the logic. The min-max and ROP-ROQ approaches are not simply interchangeable. So if you change IT systems or are comparing holding levels with another company or site, then you need to be aware of the differences in the approaches being used. For example, in general terms, min = ROP, except if you have a system set up for reordering at a point of min – 1. Plus, max ≠ min + ROQ if the item is fast moving in a way that stock is issued before the newly ordered stock arrives. Confused? Well, just to add to that confusion, some software systems use the term safety stock to represent the min holding level. They then set the ROP at min – 1. This different nomenclature means that you need to be absolutely certain about the operation of the system that you use and how it compares with the advice that follows. A Quick Lesson in the Classic Theory There are plenty of books that describe the classic theoretical approaches to inventory management, so this will not be explored here in detail. Instead, this section will explain why you should ignore this theory for spare parts inventory management. In the classic theory there are two ways to determine the ROP for inventory. One is the Normal (or Gaussian) distribution, and the other is a Poisson distribution. Both of these are used to determine the appropriate ROP for the inventory in question. The Normal distribution is the classic bell-shaped curve (see Figure 2.15). This distribution curve is used when there is a variation in both the quantity required and the frequency of demand. Because it requires significant data, it is usually applied to fast-moving items. Use of this approach requires knowledge of statistics and an understanding of the desired service level. The service level is the percentage of time that you have sufficient stock to meet the demand. So a service level of 98% means that 98 times out of 100, the storeroom has sufficient stock to meet the demand at that time.

Figure 2.15. The “Normal” bell-shaped curve

The simplified classic formula for this approach is: ROP = (lead time × demand) + CSF × MAD × SQRT (lead time) where: CSF = customer service factor (based on the MAD scale, not the standard deviation of a normal curve) MAD = mean average deviation (this is a simplified way of determining the deviation and is calculated by determining the average value by which demand deviates from the mean, in absolute terms— this is not a standard deviation) SQRT = square root

In addition to requiring a good understanding of statistical analysis, the key problems with using this approach for spare parts inventory management are: 1. It requires accurate data of parts demand and use. Recall the example above in the section “Theory Versus Reality,” where the recorded demand was not real usage; it was movement from the storeroom. This is typical for spare parts inventory, and this lack of accurate usage data means that the classic formula cannot be used reliably. 2. The service level can lead to a false sense of security. If measured across the entire inventory, the service level is of no value if the items that you don’t have are critical spare

parts and your plant stops. If measured at an individual level, this approach encourages overstocking, as that may be the only way to achieve a 100% service level. The Poisson distribution is simpler than the normal distribution because it uses only the variation in frequency of demand, that is, the number of times that an item might be required during a time period. In a Poisson distribution this is called an event. To apply this approach requires that the quantity issued be the same each time; it is only the frequency of demand that varies. The basis of a Poisson distribution is that events occur at an average rate and that each event is independent of the last event. This is attractive for items that are issued in set quantities (even if the quantity is one) and are relatively slow moving. A Poisson distribution would be used to determine the probability of further demand for an item during the lead time for restocking that item after the ROP is reached. Problems with the Poisson distribution for spare parts management include: 1. The lead time for restocking an item is not a constant; it varies, and in some cases it varies significantly. 2. If the requirement for an item is not independent, such as with time-based or opportunistic maintenance, then a Poisson distribution cannot apply. For determining ROQ, the classic approach is to use the formula for the economic order quantity (EOQ). This formula is:

Issues with the classic formula include: 1. The order cost is crucial to the calculation. If the order cost used does not accurately reflect the actual order cost, then the results will be misleading. It should be noted that very few companies have a genuine evaluation of their ordering cost and mostly use estimates. 2. The formula assumes that the order cost is fixed. The order cost is not simply the cost of raising and processing a purchase order (P.O.). A P.O. may include one item one time and multiple items another time. This means that the order cost varies, and so if applying the theory, you would be required to order different quantities each time. Thus the calculation becomes iterative. 3. The formula assumes that the demand is constant. Very few items have a consistently constant demand. 4. The formula assumes one delivery per order, no allowance for scheduling or batching. Not all orders are delivered in one delivery. Sometimes orders are delivered in multiple

deliveries. These issues mean that the EOQ formula is more likely to be misleading than definitive. Three Steps for Determining Holding Levels If the standard theory is not going to provide definitive answers and is complicated to use, then why use that approach? Instead, a practical, logical-based approach is recommended. Instead of theory, try thinking of inventory management as a type of process control. The goal is to try and manage the inventory within two predefined limits—in this case the min and the max. See Figure 2.16. This approach enables us to think logically about the actual goal and not get too tied up in the data and calculations. In fact, it significantly simplifies the entire process. For determining the inventory holding levels, the recommendation is to use ROP and ROQ, and there are three values to determine: 1. The cycle stock 2. The safety stock 3. The ROQ Step 1. Determine the Cycle Stock When the available quantity of an item in the inventory reaches its ROP, an order is placed for stock to replace the items used. Let’s call this the replacement stock. The cycle stock, then, is the stock that is used during the lead time for delivery and processing of the replacement stock. Another way to express this is as the consumption during the lead time. See Figure 2.17. To determine the cycle stock, you just need to compare the lead time (LT) with the demand rate (DR), which is the number of units required during the nominated time unit, and apply the following rules:

Figure 2.16. Inventory management as a type of process control

• If LT > DR: You will need cycle stock because there is likely to be a demand for the item before the replacement stock arrives. Cycle stock = DR × LT Note that in applying this approach, you need to be consistent in the units of time used:

• DR = units per period of time • LT = time • If LT < DR: You will not need cycle stock, because the delivery of replacement stock is expected before the next demand for the item. Step 2. Determine the Safety Stock Before determining the safety stock, it is important to be clear about the spare part criticality. There are three points to be aware of: • As discussed in Section 2.5, “Spare Parts and Criticality,” a critical machine part and a critical spare part are not the same. • Confusion between critical spares and critical parts leads to overstocking. • The spare parts criticality only impacts the quantity of safety stock, not the quantity of cycle stock. To determine the level of safety stock, apply the following rules: 1. If the item is not a critical spare, then you don’t need safety stock. 2. If the item is not a critical spare but you don’t want to wait for delivery (due to labor efficiency issues), then you may set a value for safety stock, but it should be defendable. 3. If the item is a critical spare, then you need to consider the variations in lead time and demand—use your judgment or a risk matrix; either way will work just as well as the theory. 4. If you do hold safety stock, check that the safety stock value is greater than any expected peak usage demand.

Figure 2.17. Determining the cycle stock

The expected peak usage is the quantity of an item that likely will be required at a single demand event. For example, suppose a generator in a power station requires 10 studs to secure part of the machine; however, on average only 7 studs are used, as not all studs necessarily need to be replaced each time. Then the peak usage value is 10, and the storeroom at the power station should have 10 studs in stock, just in case. Step 3. Determine the ROQ Determining the ROQ (see Figure 2.18) is actually quite simple because there are commercial and operational constraints that limit the range of choices. Therefore, to determine the minimum possible value for your ROQ, use these guidelines: • The ROQ must be at least equal to the cycle stock. This is the minimum quantity that you can order; otherwise you would never return the stock level back to the ROP. • The ROQ must be at least equal to the minimum order quantity (MOQ) of the supplier. There is no point in determining a theoretical value for the ROQ if the supplier will not sell you that quantity.

Figure 2.18 Determine the ROQ

The maximum possible value of your ROQ then becomes a function of how often you are comfortable reordering: • Consider the reorder frequency; it should not be too short, but don’t let it be too long. If you have an item that is used weekly, then reordering every week does not seem too efficient, but ordering a year of stock because it reduces the procurement and put-away workload may be financially inefficient. • As a rule of thumb, if the cycle stock and MOQ guidelines above don’t definitively decide the ROQ, then the recommendation is to allow a reordering frequency no greater than three months.

Example 1 Demand rate: 1 unit per month Lead time: 2 months Critical: No Peak usage: 1 Supplier MOQ: 1 Applying the guidelines suggests:

Cycle stock =2

The lead time is 2 months, and 1 unit is used per month.

Safety stock =0

The item is not critical, and so safety stock is not required.

ROP = 2 + 0 =2

The ROP is the sum of the safety and cycle stock.

ROQ = 3

This means that after the replacement stock arrives, there should be 3 in stock, and this results in a reorder frequency of 3 months.

Example 2 Demand rate: 1 unit per month Lead time: 2 months Critical: Yes—this is the only difference from Example 1. Peak usage: 1 Supplier MOQ: 1 Applying the guidelines suggests: Cycle stock = 2

The lead time is 2 months, and 1 unit is used per month.

Safety stock =1

The item is critical, and so safety stock is required. A level of 1 is determined, as this is a full month’s requirement.

ROP = 2 + 1 =3

The ROP is the sum of the safety and cycle stock.

ROQ = 3

This means that after the replacement stock arrives, there should be 4 in stock, but the reorder frequency is still 3 months.

Example 3 Demand rate: 1 unit per year Lead time: 3 months Critical: Yes Peak usage: 1 Supplier MOQ: 1 Applying the guidelines suggests: Cycle stock =0

The lead time is 3 months, and so it is unlikely that a unit will be required during the lead time.

Safety stock =1

The item is critical, and so safety stock is required. A level of 1 is determined, as this is the minimum quantity that can be held.

ROP =0+ 1=1

The ROP is the sum of the safety and cycle stock.

ROQ =1

This means that after the replacement stock arrives, there should be 2 in stock. This may seem excessive, but the deciding factor is the safety stock. If it is decided that it is OK to not have any stock during the 3-month lead time period, then the ROP could be set to 0. The reorder frequency is 12 months.

Case Study Figures 2.19 and 2.20 apply the “practical” approach for determining holding levels (detailed above) to real spare parts data, covering a period of 30 weeks. The item in question is a highpressure gasket. The “before” settings were determined using a combination of procurement data, guesswork, and opinion. The “after” settings were determined using the practical approach described in this book. As you can see from Table 2.2, adopting the practical approach to setting the ROP and ROQ results in a 65% reduction in the average inventory level with no stockouts. The downside is six orders being placed instead of three, but this is still a reorder frequency of an average of 5.5 weeks, which is not too arduous. In fact, as a regular order from an approved vendor, this order would be appropriate to set up as an automatic reorder.

Figure 2.19. Gasket stock holdings before

Figure 2.20. Gasket stock holdings after Table 2.2 Comparison of application of the practical approach - ‘before’ and ‘after’

Parameter

Before

After

Average demand rate per week

17

17

Lead time (weeks)

4

4

Cycle stock

—

68

Safety stock

—

34

ROP

250

102

ROQ

Variable

100

Average stock on hand

377

131

Inventory reduction

—

65%

Stockouts

Nil

Nil

10 Key Lessons: Create and Stock 1. Before deciding how many to stock, always ask, “Should this item be stocked?” 2. The planning horizon and lead time determine if an item should be stocked. 3. Spare parts standardization is not trivial and requires a thorough assessment of the costs and benefits. 4. The so-called free parts provided with a capital purchase can come at a high operational cost. 5. Critical machine parts are not automatically critical spare parts. 6. Applying simplistic theory-based calculations for spare parts holdings may be dangerous to operational goals and company finances. 7. The reorder point is the sum of the cycle stock and the safety stock. 8. If the lead time is less than the demand rate, you will not need cycle stock. 9. If the item is not critical, you will not need safety stock. 10. Commercial and operational constraints limit the range of options for the reorder quantity.

PART 3 Operations SPARESOLOGY® STRUCTURE 1. The Spare Parts Management System Understanding Spare Parts | Finance | Policies & Processes | Parts Identification | Best Practices 2. Create & Stock • Deciding What to Stock • Spare Parts Standardization • Capital Equipment • First Time Buy • Critical Spare Parts • Setting the Re-Order Point • Setting the Re-Order Quantity 3. Operations • Forecasting • Inventory Optimization • Managing Repairable Spares • Storeroom Management • Data Management and Cleansing • Inventory Accuracy • Conducting Stock Takes • Bar Coding • Integrating Maintenance and Spare Parts Management • Bills of Material • Spare Parts Procurement 4. Obsolescence and Disposal • Managing Obsolescence • End of Life Management • Last Time Buy • Spare Parts Disposal

3.1 The Longest Part of the Cycle The operations phase is where most of the work gets done! While a spare parts inventory is made up of many inanimate objects, taken as a whole, in many ways it takes on the attributes of a living thing. Establishing your systems and creating your stock are not sufficient for ensuring a healthy inventory that will support the ongoing needs of your maintenance and operations. Achieving this requires ongoing care and attention. Otherwise the inventory can become bloated with items that are not needed, wasting huge sums of money. The inventory can waste away as the items deteriorate if they are not properly stored and cared for. Repairable items don’t get repaired, or maybe even worse, they are repaired one time too many and are unreliable. These statements are not hyperbole used for dramatic effect in a book; these statements represent some of the states of inventory that I have seen in my work around the world over the past 30 years: • Inventories where the stock accuracy has been as low as 30%. • Inventories where stock takes have been conducted without actually entering the storeroom (in this case the reporting forms were completed from the desk of the supervisor, who just wrote down what was recorded on the computer—and, of course, he always recorded 100% accuracy!). • Storeroom managers who never talk to maintenance, except to argue about spare parts issues. • Planners who stock the inventory as a means of avoiding any actual planning. • Desperate managers who recommend bar code systems as a way of improving inventory management (even though it won’t). • Inventories that hold the equivalent of a 20 years’ or more supply of individual items. • Repairable items that have been misplaced when sent for repair and then not repaired properly when needed in a rush. • Storerooms where limited-shelf-life stock is not rotated, resulting in much of the on-shelf stock being useless. • Procurement personnel who place orders based on their perception of need, not on the actual need. • Inventories where people don’t know what the items are or where they are used, but all agree that they should hold onto them “just in case”.

The list is a long as it is remarkable. These issues and more are addressed in this part of the book. Part 3 starts with a discussion of forecasting, the different methods of forecasting, and four rules that will help you to determine which method is the right one for any situation. Following on from this, there is an extensive discussion on inventory optimization, providing insight into the three different techniques that are generally in use: data analysis, demand analysis, and process review. This is accompanied by a warning on the optimization trap—where companies unknowingly go down a path that they think will lead to optimization but that, in reality, does not. The operations phase requires the appropriate setup of the storeroom, the management of repairable items, proper stock takes or cycle counts, and the maintenance of inventory data. Better still is the establishment of a data governance plan to ensure that the good work of the past is maintained. Inaccurate inventories not only create chaos when parts are not available; they also create an environment of mistrust in the system, and this results in people doing what they feel they must in order to have the parts that they need, including hoarding spares that could otherwise be used by others. This negative cycle reinforces the mistrust, and it is difficult to break. Part 3 shows you how. In most reviews of spare parts management, the majority of attention is placed on the logistics of the physical movements, that is, stock in and stock out. Of course, this is important, but equally as important, if only as a means of facilitating efficient logistics and decision making, is the flow of information. In all companies there are linkages between production, maintenance, the warehouse or storeroom, and procurement. It is the missing links in these linkages that cause the major problems between these functions. The missing links result in the poor integration of maintenance and spare parts planning, and this, in turn, has the potential for causing significant business losses. Addressing this requires some improved avenues of communication, and in this part of the book a complete process for the integration of maintenance and spare parts planning is suggested. Finally, recommendations are made on procurement policy, and five common procurement problems are identified.

3.2 Forecasting Spare Parts Requirements Essentially all inventory stocking decisions can be resolved as a forecasting problem. This is because the essence of inventory management is determining the most appropriate level of inventory to hold to service the expected future demand for that inventory, based on the expected supply constraints. Thus all inventory management requires a forecast of both demand and supply in order to establish the buffer that needs to be held to match these two factors. This is no different with MRO and spare parts, except that demand based on random failure events is, by definition, impossible to forecast. The following is a discussion of forecasting techniques and their applicability to MRO and spare parts inventory management.1 Techniques for Forecasting Spare Parts Requirements All forecasting methods can be grouped into one of two classes:

1. Extrapolation of historical data. 2. Causal or predictive models. Extrapolation of historical data can vary from simplistic to highly sophisticated, but all historical data methods are based on the premise that the future can be predicted by looking at the past. The methods are typically quantitative and can appear to be rigorous, but the accuracy is driven by both the validity of the fundamental premise, that is, that the future can be predicted by looking at the past, and the quality of the data, rather than the sophistication of the modeling. Causal or predictive methods can be either quantitative or qualitative. A quantitative approach might rely on forecasts of future planned maintenance activities and the expected usage of spare parts for each activity. A qualitative approach might rely on the opinions of people involved in spare parts usage and procurement. For example, members of the maintenance team want to have a spare part stocked, and their view of how many to stock is based solely on their opinion, on the day that the decision is made, of what is “safe.” Unfortunately, this happens too often with spare parts inventory, and the natural conservatism of maintenance personnel results in significant overstocking. This aspect of causal or predictive methods often makes people think that all such approaches are unscientific and less accurate than historic data-driven (extrapolation) approaches. However, this is not the case, because causal approaches and the use of forward-looking information are more appropriate for deciding future inventory holdings than relying on the extrapolation of history. Forecasting Methods Based on Extrapolation of Historical Data The strengths and weaknesses of the extrapolation of historical data, with respect to spare parts inventory, are most easily explained by reviewing some different methods. It is worth noting that all these methods manipulate history and present the result as a forecast. Moving Average This is the simplest form of forecasting. This approach assumes that a reasonable estimate of future demand can be determined by using an average of the demand for the most recent periods. This is only a reasonable approach if demand is steady, if there is no growth, decline, seasonal effects, or cyclical effects, and if no other factors are present that will influence future demand. Moving average is a poor forecasting model for any component where demand is lumpy or inconsistent or where there are other factors that will influence future demand. Exponential Smoothing Exponential smoothing is a refinement of the moving average. It attempts to capture the dynamics of changing demand by assuming that the most recent period gives the best insight into demand and that each preceding period gives less insight. Essentially it requires a weighting of the demand in each period based on how recently it occurred. Exponential smoothing is better than moving average when the demand is changing (either increasing or falling), but it is subject to all the same errors if demand is lumpy, unpredictable, or seasonal. Linear Regression This approach, sometimes referred to as the line of best fit, is used when demand exhibits a clear trend (either increasing or falling). Linear regression also averages the demand from previous periods, but it is poor at handling variable or seasonal demand.

Multifactorial Methods Forecasting algorithms have been developed that attempt to accommodate all the major demand variation factors (age of data, trends, seasonal factors, etc.). These models are generally complex, but this apparent sophistication does not necessarily deliver greater accuracy, because the models cannot overcome the weakness of predicting the unpredictable. The extrapolation of historical data does have a role in predicting demand for some types of spare parts when demand is stable or changing in a predictable way. But care must be taken in use of these techniques, as their convenience can make them easy to apply incorrectly. In practice, the assumption that the future can be predicted by looking at the past has limited validity, and thus these methods have limited practical applicability. Forecasting Based on Causal or Predictive Methods Causal or predictive methods can use sophisticated models based on detailed causal relationships, but for spare parts management it will more likely involve simple, qualitative approaches based on maintenance plans, condition-monitoring feedback, and experience. The spare parts planning method known as reliability-centered spares (RCS) is based on determining spare parts requirements from knowing the equipment failure modes and maintenance requirements (RCS is explained further in Section 3.3). This is a causal predictive method. For example, knowing that a compressor requires an oil filter change after 1,000 hours of operation and that the compressor runs for 50 hours per week, it is easy to forecast that the compressor will need a new filter to satisfy this need every 20 weeks. Whether or not you need to stock that filter in your inventory then depends on other factors such as the supply lead time, the ability of your organization to plan for the routine maintenance task, and the likelihood that a filter might be needed between routine changes due to unknown factors. The last of these issues is an example of a predictive approach based on experience. Another commonly discussed predictive approach is the condition monitoring (CM) of equipment. Condition monitoring is an example of a predictive technique that is often used for planning maintenance activity and with that the associated spare parts usage. CM techniques most commonly include: • Vibration monitoring. • Ultrasonics. • Temperature monitoring. • Oil analysis. • Motor current analysis. It is almost always the case that one of the key selling points for vendors of CM tools is the potential for spare parts inventory reduction due to an improved ability to forecast usage. However, in the author’s experience, this is not a typical outcome. The problem is that CM has

not really delivered on its core promise of predicting failure. While the details of CM and the related analysis are beyond the scope of this book, the following is a summary of the general approach. CM is based on the idea that one or more of the above techniques can be used to identify when a component in a machine begins to decline in performance, and from this decline, assuming that the rate of decline is known, the time to ultimate functional failure can be predicted. The time between detecting the decline in performance and the functional failure is known as the p-f interval. The theory suggests that this p-f interval is definitive and can be used for planning and scheduling purposes. However, in practice the p-f interval is really more conceptual and therefore cannot be reliably used to predict failure. This is most probably one of the reasons that, reportedly, only 5 to 15% of reliability-centered maintenance programs are implemented successfully.2 Which Method to Use? The choice of which forecasting method to use is determined by the situation and the information the forecaster can access. However, as a general rule of thumb, if causal information is available, it should be used in preference to relying on historical data. The following rules are helpful in determining which forecasting method to use: 1. When the forecaster has access to clear information regarding factors that will influence demand, this information should always be used to generate the forecast. Predictive information should take priority over extrapolation of history. 2. When the forecaster does not have access to useful causal information and the demand for the spare part is consistent and stable, moving average is a simple method that should produce acceptable results. 3. When the forecaster does not have access to causal information and demand for the spare part is known to exhibit clear patterns relating to growth, decline, or seasonal behavior, it will be appropriate to use a more complex technique that specifically addresses the known demand profile. 4. When the forecaster has no causal information, and the demand is thought to be unpredictable, and the item is considered to be critical, then it is best to openly acknowledge this situation and apply a risk-based approach. An everyday example of this last rule is the holding of a spare tire. In this case, and thinking about a puncture as the potential failure, it is clear that there is no causal information and that the past is no indicator of the future. That is, the fact that a puncture was experienced last month is no indicator that another will be experienced this month. The decision to hold that spare tire is therefore entirely dependent upon the impact of a puncture and the other options available at the time. These options may include buying expensive “run-flat” tires so that you are not stranded, holding a can of puncture repair “goo” (effectively, a different type of spare),

accepting the inconvenience and waiting for a repair, or holding a spare tire. This decision is not based on any history or causal information but rather an assessment of the impact of a failure with the expectation that a failure (puncture) is probable.

3.3 Inventory Optimization Inventory optimization is a major goal for companies during the operations phase of the spare parts inventory life cycle. In fact, in addition to storeroom management, it is one of the major activities during this phase. The Concise Oxford Dictionary defines optimization as: The best compromise between opposing tendencies. With spare parts inventory this means finding the best balance between the cost of holding inventory and the cost of not holding inventory. Put another way, this is the balance between the cost of spending money to hold a spare part in inventory and the cost of the additional downtime that is incurred if the part is not available. The cost of holding inventory is explained in detail in the section “Financial Considerations” (Section 1.9) and is represented diagrammatically in Figure 3.1.

Figure 3.1. The cost of holding inventory

Figure 3.1 shows that the cost of holding inventory is the cost of the inventory (that is, the purchase price and related purchasing costs) multiplied by the annual finance and other holdingrelated costs, such as the cost of capital, obsolescence, spoilage, and management. Importantly, the cost of the inventory is paid just once, but the cost of holding the inventory is incurred each and every year that the spare part is held.

Why Even Review the Inventory? One of the questions often asked about inventory optimization is, why should we even review the inventory—aren’t the holding levels optimized when the item is created and first stocked? The answer to this question is that inventory needs to be reviewed because spare parts inventory requirements are dynamic. This is not because of the parts themselves but because of the environment in which they are required. There are at least five reasons that the current inventory settings could be no longer appropriate: 1. Wrong initial settings. There is no guarantee when the initial ROP was set that the value was appropriate. For confirmation, see the case study of the practical method for setting spare parts holding levels in Section 2.6. 2. Improvements in reliability. Continual improvement in maintenance activities may be improving reliability in ways that impact the spare part in question. For example, improved methods for both lubrication management and shaft alignment have been shown to have a significant impact on equipment longevity. 3. Changes in criticality due to market changes. Demand for products can ease and some products get superseded in the marketplace, which can mean that the demand on the equipment that produces these products eases, and this, in turn, impacts both the demand for spare parts and the perceived cost of downtime. 4. Changes in technology. The spare part in question may be on track to become superseded, and you want to be sure to manage that transition effectively (see Part 4 dealing with obsolescence). 5. Changes in the supply chain. Just as improvements in reliability can have an impact, so too can improvements in supply chain management. These changes don’t even need to be implemented by your company; suppliers are constantly seeking to improve their supply chain efficiencies. In addition, as reported in the section “Best Practice Spare Parts Management Research,” conducting regular reviews was found to be one of the five best practices of spare parts inventory management (see Section 1.18). Three Ways to Review and Optimize Inventory There is only one main reason that companies hold “nontrading” spare parts in inventory: to provide a buffer between the supply time and demand needs for maintenance and operational support—that is, to ensure that the parts are available in a timely manner when needed. Not all parts need to be held in inventory, only those that cannot be supplied in a timely manner when needed. So it makes sense that if you are holding these spare parts for maintenance and operational support, then you had better understand the needs of maintenance and operations. This drives the demand side of the spare parts stocking equation, and that contributes to determining the holding

requirements (with other factors that are driven by the supply side of the equation). There are three techniques that are in general use for determining spare parts holding requirements and from that optimizing inventory: 1. Data analysis. This is where, typically, a software package uses an algorithm to analyze your spare parts needs based on history. This approach is popular because it addresses both supply and demand and promises the convenience of having the software do all the work. However, there are three obvious flaws with the data analysis approach. First, the history doesn’t represent actual operational and maintenance usage; it represents the transactions from your storeroom, and in nine times out of ten, these values will be very different. For example, the data gets skewed when parts are used for capital projects or when taken out “just in case.” Second, because it is based on history, this type of analysis cannot reflect your future plans, and your planned activity may be different from your past activity. Third, it cannot anticipate changes that are made to improve the effectiveness of your maintenance or procurement and supply. These flaws make spare parts data analytics useless as a stand-alone maintenance spare parts support tool and show that it is really just a snapshot of past storeroom activity. 2. Demand analysis. This is where you determine, in detail, the needs of the equipment being supported and the implications of not having the required parts available. Because it is based on your maintenance plans, it is forward looking and can adjust for changes before they happen. This technique is the basis of RCS. 3. Process review and analysis. This is where the actual actions, both supply and demand, that drive your spare parts holding levels are systematically examined and adjusted in order to optimize the holding level of individual spare parts. This is the only technique to provide true inventory optimization, because it addresses all the necessary parameters, enabling you to look to the future and review both supply and demand issues. This approach is the basis of the Inventory Cash Release (ICR) process. These are each discussed further below. Data Analysis Inventory Optimization The traditional approach to inventory optimization is the historic, or data analysis, approach that is the core of most software evaluation programs. This approach involves calculating the holding cost of inventory across different reorder points (ROPs) and selecting the ROP that gives the lowest total cost, taking into account the cost of holding inventory and the cost of stockouts. The focus is on the ROP because the reorder quantity (ROQ) is driven by procurement issues. Traditional inventory optimization is usually represented by a graph similar to that shown in Figure 3.2. As this type of inventory optimization is widely discussed in generic inventory

management books, it will only be dealt with briefly here. The traditional approach to spare parts optimization is very data intensive. Applying this approach effectively requires the development of a set of highly reliable historic data, and this is the biggest issue with applying this approach to spare parts inventory management. As described elsewhere in this book, the data collected on spare parts usage, in most assetintensive environments, is not sufficiently reliable for this type of analysis. In addition, the solution is highly sensitive to the assumptions on the cost of downtime in the event of a stockout. Most companies will understand the hourly rate cost of downtime (ask the accountants), but one issue is just how long the plant will be stopped if the part is not available. What if the plant doesn’t stop: what if it just slows down or has reduced output? For example, at one time I worked at a company with an extensive injection molding capability. Some molds could make 48 components at a time. The failure of a single injector was not sufficient to warrant stopping the entire machine, because the downtime meant that all 48 molds were not producing while one injector was repaired. The better strategy was to wait until a routine maintenance shutdown. Therefore, any assumption about a single injector failure requiring (say) an hour of downtime was not valid.

Figure 3.2. Traditional optimization curve

In fact, does the downtime cost even matter, because for most spares the cost of downtime will far outweigh the cost and inconvenience of holding the spare part. This means that trying to apply this technique to spare parts inventory will almost always result in the justification of almost as many spares as the user wants.

While this approach can be successfully applied to spare parts being held for wholesale supply, it is not recommended for spare parts inventory where the parts are held for the maintenance support of the company’s own machines. Demand Analysis - Reliability-Centered Spares Before examining reliability-centered spares, it is important to understand reliability-centered maintenance (RCM). John Moubray, a world leader in RCM, defined maintenance as3: Ensuring that physical assets continue to do what their users want them to do. From this he went on to define RCM as: A process used to determine what must be done to ensure that any physical asset continues to do what its users want it to do in its present operating context. The RCM process requires an understanding of the physical asset, its function, performance standards, failure modes, causes of failure, the consequence of failure, the tasks that can be undertaken to predict or prevent that failure, and, finally, what should be done if failure is unpredictable. While determining all this requires a significant amount of research and information, by understanding the potential failure modes and consequences of failures, the maintainer can develop a plan for predictive and preventive activity. This information can then form the basis of deciding which spare parts are required to be held in inventory and which can be ordered to a plan or as needed. The process of using this data in this way is the reliability-centered spares process, mentioned at the start of Part 3, and is shown schematically in Figure 3.3. The RCS process requires that for each individual spare part, you answer a series of five questions. These questions first examine the requirements for the spare parts, the consequences of nonavailability, and the predictability of demand. From the answers to these questions, you then determine the stock-holding requirements and the contingency needs in case you are unable to achieve your maintenance plan.

Figure 3.3. The information flow for reliability-centered spares

The five questions are: 1. What are the maintenance requirements of the equipment? 2. What happens if no spare part is available? 3. Can the spares requirement be anticipated? 4. What stock holding of the spare is needed? 5. What if the maintenance requirements cannot be met? The process also requires that you consider these questions sequentially, shown in Figure 3.4. For greater clarity it is helpful to explore the questions one by one. Question 1 requires there to be a complete understanding of both the maintenance needs of the assets and the plan to maintain those assets. This makes sense when you consider that the purpose of holding the spare parts is to support the continued safe and reliable operation of the assets of the business. Logically, if you don’t understand the maintenance needs of the asset (the demand side of the inventory stocking requirement), then you cannot reliably determine the spare parts holding levels. Hence the first step is to ensure that the maintenance requirements are known and documented. Question 2 is where you consider the consequence of nonavailability, that is, the consequence of a stockout. Does it really matter if the part is not available? Classically, the RCS process involves five categories of consequence. These are based on the five categories from the reliability -centered spares process: • Hidden risk. The stockout has no immediate impact, but you may be exposed to an increased, consequential risk. An example is an equipment lockout system that prevents unintended mechanical interference between moving parts.

Figure 3.4. The five questions must be answered sequentially

• Safety risk. The stockout could result in someone being injured or even killed. For example, this could be operating without the correct PPE or having equipment safety systems in a temporary state of disrepair. • Environmental risk. The stockout could result in the breach of an environmental standard or regulation. For example, the nonavailability of a pump results in an environmental overflow or spillage. • Operational risk. The stockout leads to continued loss of capacity, production, or sales. This is the most commonly referenced type of risk, where, in effect, the plant stops while the replacement part is sourced. • Nonoperational risk. This is when the action of repair or procurement at short notice results in excessive and unacceptable additional expense. Question 3 asks you to consider if you can anticipate the need for the spare part and therefore plan the requirement. Of course, breakdown failure usually cannot be anticipated, that is, an unplanned catastrophic failure of a part—for example, a punctured tire. However, you may be able to anticipate some requirements such as wear-out failures, parts subject to conditionmonitoring techniques, and parts replaced during a planned or scheduled overhaul. Understanding your ability to anticipate needs helps you to identify your stocking requirements. Question 4 asks, “What stock holding of the spare is needed?” Classically RCS uses the technique of whole-of-life costing to determine the optimum stock level. This approach takes into account the immediate costs of holding the stock, the cost of downtime that may occur at

different stock-holding levels, and the cost (or benefit) of disposal. Whole-of-life costing is also known as life-cycle costing and is colloquially referred to as cradle-to-grave costing. Whole-oflife costing is a highly skilled discipline that usually requires specialist staff, and this is one of the drawbacks of using the RCS process. Question 5 requires the consideration of the contingency in the event that the company cannot meet the maintenance plan. That is, what if the company is not prepared to commit the necessary resources of people, time, and money to ensure the achievement of the maintenance program. The real question being asked here is, “What if the numbers are wrong, and there is an unexpected stockout of a critical item—how would we respond?” Benefits of the RCS Process The application of the RCS process has some very positive features and benefits. Here are the main ones: • Because the process is based on what is effectively a forecast of needs, you do not need data history to apply it. Hence you can apply the RCS process and determine your spare parts needs before you even purchase the asset for which the spare parts are required. This means that the process can be used as a check against vendor-recommended spares and when your engineering team is negotiating the capital purchase. • You can apply the process at any time during the life of the asset, including during the period nearing the end of life. This means that you can minimize the probability that you will get stuck with excess obsolete stock when the asset is replaced. • The process forces logical thinking about the demand-side requirements for the spare parts holding, an aspect of spare parts management that is often relegated to guesswork. • The process requires the involvement of the engineering, maintenance, and reliability teams. Too often spare parts holdings decisions are based on financial (working capital) and supply chain considerations, an approach that excludes the “customer” of the spare part— maintenance and reliability. • The process can be applied selectively to focus on individual items. By its very nature the RCS process is a review of individual spare parts that gives you the flexibility to apply the process to the parts that matter most to you. There is no need to apply the process to all parts in the inventory; you may choose to apply the process only to slow-moving spares or those with an investment requirement above a specific set point. Problems with the RCS Process The RCS process is deceptively simple—all it requires is for you to answer five questions. Easy, right? Well, maybe not. You see the details behind those questions could be quite difficult to determine. Here is a list of just some of the issues that can arise: • Even companies that claim to have a high standard of maintenance operations can find that the required maintenance plans are nonexistent, not well developed, or not well documented. • It is often the case that companies hold spare parts and don’t actually know all the pieces of

equipment on which the spare part is used. Thus they make decisions using partial information. • Sometimes bills of material (BOMs) are nonexistent, not well populated, or not well documented. • Failure consequences are not well documented, and potential workarounds that mitigate the need for the spare part are not widely understood. Thus decisions may be made without considering viable alternatives. • Condition monitoring may not be reliable or not carried out correctly. • Determining the whole-of-life cost of different stockholding scenarios is a highly specialized discipline that most companies do not seek to maintain in-house. Bringing in outside resources adds an additional cost barrier to the successful application of the RCS process. • Small changes in whole-of-life costing assumptions may make a big difference in the spare parts holding outcome. • Gross simplification of the cost analysis can result in significant overstocking. This especially occurs in industries with high downtime costs that can be used to justify almost any level of spares holdings. • Spare parts criticality is often not clearly defined, or the definition is too simplistic. This results in criticality becoming a matter of opinion. • Risk can be difficult to quantify, especially in terms of probability. This results in the risk analysis also becoming a matter of opinion. • Companies sometimes take the view that determining inventory holdings is a set-and-forget process where changes in production requirements, necessitating a change in maintenance strategy, are not reflected in a redetermination of stock-holding requirements. • The process doesn’t overtly force you to think through the supply side of the stock equation, and without this consideration the numbers determined could be meaningless. After all, what is the purpose of saying that you should hold, say, one of an item if it can only be purchased in pairs? What all of the above really tells us is that, in addition to the technical requirements of whole-of-life costing, successfully applying the RCS process requires a consistency of rigor and discipline plus additional considerations relating to the supply side of inventory management. So Should You Use the RCS Process? In the author’s view, the short answer to that question is, not in its pure form. For 99% of organizations the RCS process is far too data intensive to be applied with the

level of rigor required for success. Or looked at another way, the cost of applying the level of rigor required may make the application of the process uneconomical in most circumstances. The danger with all processes of this type is that shortcuts are taken in the analytical component, perhaps using an untested range of assumptions. This can result in the company telling itself that it has applied a rigorous scientific process when it has not. It has, in effect, made a guess. Plus, as mentioned above, for practical application, the stock-holding decision-making process requires consideration of the supply constraints, something not overtly included in the RCS process. This means that the RCS process can certainly be used as a guide to the thinking required for stock holding, so long as it is applied within a more complete framework. The reliability-centered spares process presents as a complete and thorough approach to determining the requirements of spare parts holdings. Yet as this review has shown, this is not entirely the case. There are a significant number of problems with the application of the process. There are, however, also a number of genuine benefits from the process. For this reason, the recommendation is that the RCS process is only applied with great care and attention to detail and with the understanding that it should only be used within a broader framework that ensures that all aspects of spare parts stocking decision making are considered. Process Review and Analysis The ICR process is a structured, step-by-step inventory optimization technique that guides users through the application of different inventory reduction methods to match the method with the characteristics of specific inventory items. The process encourages your team to look at inventory optimization from different angles rather than jumping to the first solution that springs to mind. This radically improves the chances of coming up with viable and lasting solutions. Another advantage of this process is that it engages your team members from different departments. Ideally this will include maintenance, storeroom or warehouse, procurement or purchasing, finance, planning, supply chain, and logistics. This creates an inventory optimization environment in which individuals learn an appreciation of the perspectives of others and often work together to create better solutions than they would if working within their own silo. The Advantages of the Inventory Cash Release Process The Inventory Cash Release process provides a step-by-step methodology for reviewing and optimizing spare parts inventory.4 This is the framework in which the “Seven Actions for Inventory Reduction” are applied (see below for an explanation of the seven actions).5 The process relies on four key attributes of spare parts inventory optimization: 1. The inventory follows the 80-20 rule. This means that 20% (or less) of the inventory items account for 80% of the inventory value and that major reductions in working capital can be achieved by reviewing a small percentage of the items in stock, saving a lot of time, energy, and money. Software solutions can waste 80% or more of your efforts by focusing on the entire inventory rather than the items that have the greatest impact on your overall inventory value. 2. Inventory optimization is multifactorial—meaning that to achieve true optimization you

need to consider a range of factors, not just a single criterion such as historic usage or recency of use. The ICR process involves consideration of up to seven issues that determine your inventory levels and financial investment (hence, the “Seven Actions for Inventory Reduction”). 3. Predefining your optimization criterion limits your opportunities. Typically inventory reduction or optimization processes involve determining a predefined attribute or condition to review and then applying that condition to all inventory items (for example, maxmin calculations or slow-moving reviews). The Inventory Cash Release process turns that approach on its head by matching the required action with the attributes of specific inventory items, not the other way around. 4. Lasting inventory optimization outcomes result from developing the skill base and decision making of your team. The ugly truth is that most inventory problems result from human actions and decisions, not computer or software glitches. The application of the ICR process has two effects: first, it engages the team members in the solution so that they gain ownership of the outcomes; and second, it builds the team members’ skills and knowledge in this area so that they can continue addressing inventory issues on an ongoing basis. The Inventory Cash Release process is a step-by-step approach that acts as a decisionmaking filter. The approach starts with a large number of inventory items, it then filters the number of items to consider for review, and then it further refines the required decision making through the application of one or more of the seven actions. This process produces a smaller number of focused decisions that will make a real difference to your inventory holdings. Figure 3.5 shows this schematically.

Figure 3.5. The ICR filter

Executing the ICR Process Executing the ICR process is a simple four-step process: • Having compiled a list of SKUs based on the “dollar value held,” you start the process by focusing on the SKU at the top of your list. This is the SKU in which you have the most funds invested. • Now work through deciding which, if any, of the seven actions can be applied to that SKU. At this stage you don’t need to definitively know the answer. Just decide if you think it is a possibility worth pursuing. • If the answer is yes for any one of the actions, then identify your plan for this action. • Repeat the logic for each of the SKUs on your list. This approach will ensure that the team works systematically through each of the seven actions and their applicability to each specific SKU.

The Seven Actions for Inventory Reduction Action 1. Have someone else hold or pay for the inventory. The best way to reduce the investment in inventory is to eliminate the investment altogether. The inventory reduction can be achieved without risk and with full access to the inventory by having someone else hold and/or pay for the inventory. This approach, sometimes known as consignment stocking, transfers both the ownership and the management of replenishment of the inventory to the vendors. Your company only pays for what it uses, when it uses it. By entering into a consignment stock arrangement, the investment in inventory is shifted to the vendors. They are also responsible for managing orders and replenishment, generally with the requirement that they meet an agreed service level. This service level might be an availability level, or it could be that the vendors never have less than x number of units in stock. It is because of the shift in cost that consignment stock is often thought to be expensive. The theory is that the vendors will, in time, seek to recover the cost of holding the stock through price increases. But this doesn’t have to be the case if you do a good consignment deal. A good consignment deal should result in changes in the supply chain dynamics and through that provide an overall cost benefit. Suppliers may also accept a shift in inventory ownership without cost savings in order to be certain about winning your business, but you will need to manage this through your procurement process. A slightly less effective approach is called vendor-managed inventory (VMI). With VMI, you pay for the inventory up front but transfer replenishment and management of the inventory to the vendors. VMI gives the vendors greater visibility of stock usage, which, in turn, means that they should then be able to better manage the supply chain to minimize your investment in inventory. There is considerable effort involved in setting up consignment and vendor-managed arrangements that work, but the rewards are just as great. A well-structured consignment arrangement can deliver a 100% stock reduction and ongoing operational savings. Action 2. Sell excess and obsolete inventory. Operationally, excess and obsolete inventory items generate little interest because they do not create emergencies, and so few companies pay much attention to this inventory unless or until they undertake a specific program of review. In the normal day-to-day management, these inventory items are mostly ignored, and the focus tends to be on items that stock out or, at the least, need reordering. However, excess and obsolete items provide no benefit to your business and so should be eliminated as part of normal inventory management. Because the accounting standards require the write-off of obsolete inventory, it is tempting and easy to leave these items on “autopilot” and not manage them proactively, thus avoiding the pain of the writeoff. This approach just delays the inevitable; the reality is that eventually the company will need to take action. Usually the longer the delay, the greater the problem and the more difficult it is to take that required action. Excess is very different from obsolete in that you may still need the item but are just holding too many in stock. This occurs for a number of reasons:

• You may have simply ordered too much. • Returns may have come in after restocking. • You may have adjusted the safety stock level and thus “created” excess stock. Generally, companies are slow to react to excess stock because they believe that the items will be used eventually. The key question is, how soon is eventually? It can be argued that holding stock costs more than 20% of the stock value per year. Therefore, if excess stock of $100,000 is held for three years, the cost could be more than $60,000! Adopting an approach to manage both excess and obsolete stock in a rigorous and timely manner occasionally results in a need to make difficult decisions to remove or scrap excess or obsolete stock. However, having a rigorous process for managing this inventory is a hallmark of best practice. Action 3. Eliminate spare parts duplication. Almost by definition, spare parts duplication adds no operational value to your company, but duplicated parts will inflate the value of your inventory. So duplication should be a prime candidate for inventory reduction. There are a number of ways that items can be duplicated in an inventory system. Within a single store, the same or similar items may be held as different item numbers. Across a network of stores, the same or similar items may be duplicated. Despite the advantages of computerization, inventories that consist of thousands of SKUs can be unwieldy to manage. It is unlikely that anyone knows everything that is held. It is also possible that more than one person is making recommendations on what ought to be held. With this degree of complexity, it is not just possible but likely that duplication will occur. The message here is simple: seek to identify and eliminate that duplication. The issue with duplication is not just that the item is held twice; it is that duplication increases the safety stock that is held. (As a rule of thumb, safety stock requirements increase by the square root of the number of holding points.) Therefore, eliminating duplication doesn’t eliminate the duplicated cycle stock inventory that is required for operational use; it eliminates the excess safety stock. This excess safety stock occurs even if the duplicated items are held within a single storeroom, so don’t just think about duplication as being across a network. The advantage of eliminating duplication is not just limited to safety stock. Eliminating items helps simplify the range to be stored, counted, and managed. Therefore, it reduces the inventory management costs. Action 4. Change the factors that drive safety stock. In all inventory management, safety stock is used to act as the buffer between variations in supply and demand. The safety stock level is set so that, after reaching the reorder point and with the expected lead time and demand, the stock level reaches the safety stock level at the time of replenishment. But what happens when demand is greater than expected or lead time longer than expected? That’s when safety stock comes in. The safety stock exists solely to cater to the unexpected lead time or additional demand. In a perfect world, it would not be used at all. This demonstrates that safety stock has a definite purpose, and so it must be managed to ensure that it fulfills that purpose, not used as a catchall just-in-case inventory or in lieu of

doing any actual planning. There are ways of reducing the investment in safety stock without impacting the availability of the stock that is actually used or the ability to provide the required buffer. In fact, there are five ways to reduce safety stock: 1. Increase the speed and reliability of replenishment. 2. Smooth the demand pattern—reducing spikes in demand caused by people and process rather than machines. 3. Hold only the right amount of stock—make sure that the safety stock is right for the current circumstance. 4. Identify changed circumstances—similar to the above, make sure that the safety stock is right for the current circumstance. 5. Have fewer stock-holding points—fewer stock-holding points means less safety stock. By applying the thinking and logic of Action 4, you can safely reduce your safety stock without negatively impacting your inventory availability. Action 5. Reduce spare parts reorder quantity. In all cases, the average quantity of stock held across a period of time is a function of both the safety stock level and the reorder quantity. Action 5 focuses on reducing the reorder quantity to reduce the average stock holding. Reducing the reorder quantity has two effects on inventory management. It reduces the quantity of inventory held. But as a result of the reduction in inventory, the frequency of delivery must be increased to achieve the same level of availability. Assuming that the increase in frequency of delivery is not onerous, then changing the quantity ordered is a very effective way to quickly reduce stock holdings with no increase in risk. The reason that there is no increase in risk is that this action works on the replenishment part of the inventory, not the cycle stock and safety stock. The risk of a stockout is largely driven by the ROP, not the ROQ, so, therefore, your risk has not changed. This action is an important part of your tool kit for inventory reduction because it acts at the point in the cycle at which you have greatest influence over the stock holding for the next cycle—that is, when you need to buy more items. By reducing your reorder quantities, you can significantly reduce your stock holding. Action 6. Match spare parts delivery with usage. Each of the actions discussed in this section so far has addressed ways to reduce the physical number of items held. However, one of the variables that drive the cost of holding inventory is how long you hold the inventory. This represents the amount of time that you have to finance the working capital required to buy the inventory (sometimes referred to as the time value of money). Action 6 addresses this issue. Matching spare parts delivery with usage has the same impact as putting fewer items in

inventory. This is because if you can shorten the length of time for which you hold the inventory, you can significantly reduce the average inventory holding and directly impact the holding cost. In many cases it may be hard enough to predict how much of an item you need, let alone get the timing of delivery right. After all, you hold safety stock inventory as a buffer between supply and demand. However, there are some cases where you can make decisions about timing without impacting the risk. These are cases where you have project stock, regular frequency use items, or planned maintenance events. In each of these cases, the usage or requirement date is reasonably well known. By planning the supply of that inventory close to the event, the average inventory holding is reduced substantially. This approach can be applied with just a little forethought about the inventory needs and the requirements of demand. This will mean engaging with maintenance planning or your engineering team to access the planned use of the inventory items. Action 7. Reduce the value of spare parts items held. This is the last of the seven actions and is probably the most obvious, but perhaps because of that it is the most overlooked. Most cost reduction actions are aimed at reducing the cost of an item for the obvious profit and loss impact. However, cost reductions also have an impact on working capital and the investment required for inventory. The other six actions discussed in this section are aimed at reducing the quantity held in stock or the time for which it is held. Action 7 works on reducing the purchase cost and, therefore, the overall value held. There is no reason why this approach would be different from a normal cost reduction exercise—it’s just that the initial starting point is different. The target may not even be the actual unit price but could be the delivery costs. For example, can delivery be consolidated without impacting inventory holdings? Do you pay for fast delivery when slower delivery will do? Here are some of the approaches that can be applied to review the purchase cost of inventory: • Volume concentration—across sites or with suppliers. • Product specification review. • Joint process improvement. • Bundling. • Unbundling. • Expanding the supplier base to increase competition. • Concentrating the supplier base to drive greater surety with vendors. • Just plain old renegotiating!

Action 7 is not advocating a comprehensive strategic sourcing review, but a targeted price review aimed at specific SKUs that are high-value held items. From this perspective, this action becomes a very manageable task to undertake. Be wary, however, of trading off higher inventory holding for cost reductions, that is, buying more of an item to get a cost reduction. This is often a false economy and may not actually provide an economic benefit; it depends on how quickly the items are used—or if they are used at all. There always needs to be a clear economic benefit for any change.

Optimization Doesn’t Solve All Problems No matter which approach to inventory optimization that you adopt, it is important to realize that none of these techniques will solve all your spare parts inventory management problems. For example: • Identifying items that you need and don’t stock. Only the RCS approach will help you to identify the parts that you might need, but this only works if your maintenance is sufficiently sophisticated to have fully defined failure modes and effects. • Planning for the future. The traditional historic approach will not help you identify the future requirements for the items that you do stock, because the approach relies only on the history. RCS and ICR both require you to consider the future. • Understanding how to reduce inventory levels. Only the ICR approach will help you identify how to reduce your inventory levels by adjusting your management techniques and processes. Proof That Single-Focus Solutions Leave You Short There is a common belief in spare parts management that inventory optimization can be achieved by tackling just one aspect of the spare parts inventory. For example, people will say that they are going to focus on reducing slow-moving items, or improving maintenance planning, or reviewing purchase quantities, and so on. Individually these actions can all make some difference in spare parts inventory levels, but individually they do not represent a thorough examination. Focusing on just one aspect of the spare parts inventory is known as a single-point solution. This approach can address a specific problem, but it cannot provide a complete solution. With spare parts management a single-point solution is not enough for true optimization, and the reason is that all inventories are different. Not only are they different in makeup, but they are managed differently, they have different levels of data quality, they are in different geographic locations, and they support different levels of maintenance sophistication. The Inventory Cash Release process and the Seven Actions for Inventory Reduction form a multipoint solution. By applying the seven actions, instead of just one action, you get a far better and more rounded solution. However, the important point here is that the actions that have the most impact will vary from company to company—not everyone is the same—and you won’t necessarily know in advance which action will have the most impact at your company. Applying single-point

solutions is like throwing darts in the dark: sure you might hit something, but it won’t be as effective or efficient as it could be. Figure 3.6 is a graphic that shows results from three different sites6 belonging to one company that applied the seven actions approach. From this figure, you can see that the impact of each action is different at each site. The company had no way of knowing in advance which action would give it the most benefit, but by applying all seven actions, it makes sure that it doesn’t miss any genuine opportunity. The importance of this is amplified when you know that the average reduction across these sites was 42%. As you can see from the graphic, if the company had applied just one action to this inventory optimization task, it would have missed out on a large chunk of its savings. For example, improved planning and coordination delivered just 2% savings at Site 1 but 35% at Site 3. Reviewing excess and obsolete inventory delivered just 17% of savings at Site 2 but a whopping 62% of savings at Site 1. While 62% of the savings from one action is impressive, if that was all the company did at Site 1, it would have missed out on nearly 40% of its total benefit!

Figure 3.6. Comparison of results by action

Applying a single-point solution might seem attractive because it looks simple, but don’t be fooled into thinking that it is also effective. The single-point solution will more often than not leave you well short of achieving your full spare parts inventory optimization potential.

3.4 Managing Rotable and Repairable Spares The management of rotable and repairable assets is a critical function in all asset-intensive industries. Downtime costs are usually massive, and in many cases these costs dwarf the repair or replacement value of the spares. However, this can lead to simplistic and ultimately expensive approaches to determining whether or not to hold or repair parts. Companies involved in assetintensive industries need to make significant repair-refurbish or buy decisions where either the items have failed in service or condition monitoring predicts imminent failure, and this decisionmaking process needs careful thought and documentation. As a further complication, there are three types of items that these decisions apply to: • Repairable. Spare parts that through action can be returned to an “as-new” condition. Generally, these are not individually tracked. • Rotable. Items of plant and equipment that are periodically changed out for repair or overhaul. Probably tracked as assets in the CMMS. • Plant and equipment. The actual equipment on which the repairable and rotable items are used. These will be treated by accountants as fixed assets. In each case a failure in service can result in a repair-refurbish or buy decision, and with so much at stake, decisions based solely on a percentage of replacement value are just not good enough. In order to ensure consistency of decision making and achieve the best production, engineering, and economic outcomes, asset-intensive companies need to establish a practical decision framework. The first step in the process to develop this framework is to identify and establish the criteria for the spare parts refurbishment decisions. The following are the suggested guidelines around which to create a complete framework of seven risk, repairability, and cost issues to consider when determining whether or not to repair or replace any item. Three Documents Are Required Establishing a robust repair or replace decision system requires the development of three documents: 1. Guidelines. These are rules that will guide decision making and are covered in this section. 2. Decision tree. A decision tree or flowchart helps people to understand the order and logic of the rules. Developing this flowchart is key to successful implementation of a robust policy. As each company will have different terminology and priorities, a flowchart is not presented here; however, the guidelines below can be used to create a suitable flowchart. 3. A record of action. In order to test the quality of decisions and the guidelines in place, it is important to document the decisions for later review. This is essential for any program of continuous improvement. As with the decision tree, the format of this record of action will vary widely and so is not dealt with further here.

Guidelines The following guidelines systematically work through 7 key criteria for consideration in repair or replace decisions, although applying these guidelines can result in as many as 16 individual decisions. While this may at first glance appear to be excessive, the purpose of these guidelines is to enable consistent repair or replace decision making that results in improved operational results. The definitions for the guidelines are given in Table 3.1. Table 3.1 Definitions for the Guidelines

Term

Definition

Repairrefurbish

The activity of taking a nonfunctional or functionally deteriorating component, subassembly, or machine and returning it to a state of 100% functionality

Machine

A machine is a complete piece of equipment, usually made up of a number of subassemblies

Subassembly

An identifiable piece of equipment installed on a machine, usually made up of a number of components. For example, a pump is a subassembly in a pump set that includes a motor, coupling, and mounting

Component

The lowest level of the equipment hierarchy. For example, a gear is a component in a gearbox; a bearing is a component in a pump

Lead time

In this case lead time means the total time between making the decision to refurbish or purchase and receiving a 100% functional and fully tested component, or subassembly, or machine in stock

Guideline 1. Repairability Purpose: The purpose of this guideline is to determine if the component can be repaired. 1.1 Identify the failure at a component level. • It is important to understand exactly which component to review for repair or purchase, as this will influence the data required for the decision. For example, deciding whether to replace or refurbish a gear is different from refurbishing or replacing a gearbox. 1.2 Determine if the component can be readily removed from its parent subassembly. • If the item cannot be readily removed, then consider the parent subassembly as the component and start again (the subassembly becomes the component in subsequent considerations). 1.3 Consider the following issues when determining if the component is repairable: • Is there a successful precedent for this repair? • Does the original equipment manufacturer (OEM) recommend repair-refurbishment?

• Is the capability to do the repair easily accessible? • Is there a specification or standard for the repair? 1.4 If you decide to move forward with a repair, then you need to de fine who is responsible for ensuring that a detailed scope of work and acceptance criteria are developed. 1.5 If you don’t know if the component is repairable, then assume that it is not repairable. Guideline 2. Replaceability Purpose: The purpose of this guideline is to determine if the component can be replaced. 2.1 Identify if there is a like-for-like replacement. • If there is no like-for-like replacement, consider an upgraded or alternative component. • The cost of integrating an alternative or upgraded component may far outweigh the repair costs and risks. • Issues to consider include: The purchase cost The cost of reengineering to fit in a new type of component, subassembly, or machine o The impact on spares holdings and inventory costs 2.2 In the event of pursuing an alternative or upgraded component, the use of that component must be evaluated through the MOC process. 2.3 If an alternative or upgraded component is acceptable, then continue the decision process comparing the repair option with the alternative of the upgrade option. Guideline 3. Safety, Health, and Environment Purpose: The purpose of this guideline is to determine if the repair will have any impact on safety, health, and environment (SHE). 3.1 Would using the repaired component have any negative impact on SHE? If yes, purchase a new component. 3.2 Before finalizing the SHE evaluation, please consider the mitigation options for any SHE issues identified. Guideline 4. Operational Risk

Purpose: The purpose of this guideline is to determine if there is any additional risk exposure arising from waiting for delivery of either the repaired component or a new purchase. 4.1 If there is no spare available and the plant is not operating, then make the decision to repair or purchase another item based on which solution has the least impact on downtime. 4.2 If production is not compromised and the component could be repaired or replaced, without any SHE impact, then the key risk issue for the company is loss of production via downtime during the time required to effect a repair or purchase a replacement. At this stage it may be best to undertake the activity that minimizes that risk exposure. 4.3 To understand the risk exposure: • Estimate the maximum potential lead time for both repair and purchase. • Identify the spare parts coverage based on the current storeroom or warehouse holdings. • Determine if the total lead time for purchase is less than the total lead time for repair. • If the lead time for purchase is shorter than the lead time for repair, then consider if waiting for completion of the repair will expose the company to excessive downtime or SHE risk. If yes, then purchase the new item when required. • Conversely, if the lead time for purchase is longer than the lead time for repair, then consider if waiting for delivery of a new item will expose the company to excessive downtime or SHE risk. If yes, then do the repair. • This evaluation requires a case-by-case analysis. 4.4 Before finalizing a repair decision based on this guideline, explore all other supply options, for example, accelerated procurement, and ensure that the repaired item will demonstrate acceptable reliability. 4.5 In the event that a new component is purchased, management will need to decide whether to repair or scrap the existing failed component. Guideline 5. Reliability Purpose: The purpose of this guideline is to determine if the repair can meet the reliability expectations compared with a new item. 5.1 Determine if the refurbished item will perform at an acceptable level of reliability. It will be necessary to define who is responsible for determining acceptable reliability.

5.2 Issues to consider include: • As you don’t want to put unreliable equipment into service, it is necessary to determine if the repair will return the component to 100% functionality and as-new condition. • Is there a quality assurance (QA) or quality control (QC) procedure and quality acceptance test? • Is the repairer certified for the repair? • Will an OEM or non-OEM complete the repair? Generally, OEM repairs provide greater confidence. • For non-OEM repairs ensure that the workshop is company approved and that the repair process is well known and proven. • Are there industrial best practices to follow? • Is there a specification or standard for the repair? 5.3 If you decide to move forward with a repair, the responsible person needs to ensure that there is a detailed scope of work, a QA or QC procedure, and a quality acceptance test. Guideline 6. Equipment Life Purpose: The purpose of this guideline is to determine if the expected life of the equipment will change the refurbishment decision. 6.1 Undertaking a repair may be acceptable, but other aspects of the equipment (such as its current condition) may limit its future life, negating the benefit from the repair. In this case it may be better to replace the unit sooner rather than later. 6.2 Consider how the remaining life of the refurbished component compares with the expected life of either the equipment or a new component, whichever is the least. • It will be necessary to define who is responsible for determining the repaired equipment life. • The OEM recommendation of component life should be taken into consideration. 6.3 If a plant upgrade is likely to make the component or equipment obsolete in the near future, then consider scrapping the component rather than repairing it. Guideline 7. Cost Purpose: The purpose of this guideline is to establish the financial lifecycle differential between

the repair and replace options. 7.1 Estimate the total cost of both the repair and new purchase options. The total cost must include the following: • The direct cost of the repair or purchase. • All logistics costs, such as transport, duties, etc. • The cost of tendering and preparing a scope of work. 7.2 Calculate the expected life ratio (ELR), where: • LR = expected life of the repaired item. • LN = expected life of a new purchase. • ELR = LR/LN. 7.3 Calculate the total cost ratio (TCR), where: • CR = total cost of the repair. • CN = total cost of a new purchase. • TCR = CR/CN. 7.4 Calculate the life/cost ratio: LCR = TCR/ELR. 7.5 Financial guidelines. • For spares with a purchase value below your chosen financial hurdle, purchase a new spare if the LCR > 0.5. (This value may vary from company to company.) • For spares with a purchase value above your chosen financial hurdle, purchase a new spare if the LCR > 0.7. (This value may vary from company to company.). Working through these guidelines will enable an informed and consistent approach to managing repairable and rotable spare parts.

3.5 Storeroom Management The role of storeroom management (you may call it warehouse management) in ensuring

desirable spare parts management outcomes is often overlooked. It is not uncommon for companies to spend millions of dollars on inventory management and ERP software, with the expectation that this will drive improved spare parts management, but to then completely disregard the influence of appropriate storeroom management. Some examples of this type of neglect that I have seen include: • Not labeling storage locations, making it difficult to determine exactly where parts are stored. • Using concertina storage systems that make it time consuming and difficult to locate parts. • Using dilapidated buildings that result in rain and dust ingress and associated deterioration of parts in storage. • Allowing unfettered access of personnel and not policing the sign-out of items, resulting in low levels of accuracy. • Using dynamic locations without providing a means of identifying where items have been placed. • Storing multiple types of items under a single identification code. • Creating catalogs with no description control, resulting in similar items being in different parts of the catalog. • Taking (literally) months to receive items into the storeroom, making them “invisible” in the computer system. • Using 300 KPIs, making any one indicator virtually meaningless. • Conducting stock takes without actually checking the stock (!). All these issues are addressed through ensuring appropriate storeroom management. The Three A’s of Storeroom Management The goal of storeroom management is to deliver on each of the three A’s: Availability. The parts are there when needed. Achieving this is only possible when the ROP is set correctly, restocking orders are placed in a timely manner, goods are receipted in a timely manner, and 100% of transactions are managed and recorded. Accessibility. The parts are easy to locate and remove for use. This requires the use of appropriate storage systems, the right strategy with respect to storage locations, easy-toread labeling, the availability of lifting devices if required, and a system that ensures that

the physical location and recorded location match. Accuracy. The physical quantity and system quantity match. One of the great misunderstandings of inventory management is the idea that stock takes drive accuracy. Nothing could be further from the truth; the reality is that stock takes correct an already inaccurate inventory. Accuracy results from discipline in storeroom management. The remainder of this section will address the subjects that will help deliver on the three A’s: the physical storeroom, the informational storeroom, and the procedural storeroom. The Physical Storeroom Storeroom Location The two choices in terms of location of the storeroom are centralized and decentralized. A centralized storeroom will typically supply multiple locations or departments from one location. Alternatively, a decentralized strategy will result in multiple storerooms, each serving a smaller cluster or even single location. The pros and cons of this choice are shown in Table 3.2 and are reviewed below. With a centralized location: • All deliveries come through one location, simplifying the logistics management. • Fewer locations mean lower costs (especially infrastructure costs). • Managing at one location simplifies control. • The consolidation of safety stock typically means lower inventory levels. • Depending on the proximity to the departments or sites being serviced, the response time for supply of parts may be slower. With a decentralized location the pros and cons are essentially the opposite of those above: • Smaller deliveries will come to multiple locations, and so receipt will be less efficient and the logistics more complex. • Cost will be higher, as each location requires infrastructure and staffing. • Control isn’t necessarily reduced, but having multiple locations complicates management, and this often results in reduced control. • Without careful management duplicated items will also require duplicated safety stock, and this increases inventory levels.

• The major advantage of decentralized locations is the improvement in response time that can be achieved. Sometimes companies with a distributed network of manufacturing facilities adopt a strategy of using local storerooms with site-specific, fast-moving, and low-cost items and a central storeroom with generic, slow-moving, and high-value items. Unfortunately, there is no universally applicable solution for deciding whether to centralize or decentralize storerooms; it will always depend on the specific situation of the company—its spare parts usage, supply dynamics, and geographic spread. Table 3.2. Pros and Cons of Centralized and Decentralized Storerooms

Option

Pros

Cons

Centralized

• Improved warehouse efficiency • Simpler logistics • Usually lower costs • Improved control • Lower inventory

• May be slower to respond—depending on proximity

Decentralized

• May have faster response

• Less efficient • More complex logistics • Higher costs • Less control • More inventory

Storeroom Layout After the location is decided, the next requirement is to determine the physical layout of the storeroom. As with location, there is no universal formula for determining the layout; in fact, except in cases of purpose-built storerooms (sometimes known as greenfield sites), the design is usually based on the constraints of the existing structure and budget. There are, however, six issues to consider. 1. Grouping of Parts There are two basic options—machine-type grouping and inventory-type grouping. In machine-type grouping, all the spares associated with a particular machine or a type of machine (e.g., compressors) are located together. In inventory-type grouping, all the spares of a particular type (e.g., electric motors or bearings) are located together. The pros and cons of these two choices are shown in Table 3.3. A word of warning: When considering grouping, you also need to understand the constraints of choosing a dynamic or fixed location. With dynamic locations the location for individual parts may change each time they are restocked, depending on the available space. This approach can be very space efficient and so is used by large wholesale warehouses. However, without sophisticated tracking systems, dynamic locations do make it hard to find items. Therefore, this approach is not recommended for storerooms being used for spare parts for maintenance and operations support where users usually become familiar with the locations of particular parts. Fixed locations make it easier to find items and are recommended for storerooms being used for spare parts for maintenance and operations support.

Table 3.3. The Pros and Cons of Different Parts Groupings

Option

Pros

Cons

By machine type

• Simpler for maintenance people to find parts (if they have access to the store)

• Duplication of inventory if parts used by more than one machine

By inventory type

• Better control of individual parts

• More movements required to pick parts for one job

2. Racking and Shelving Types and Required Flexibility Inappropriate shelving choices can be very inefficient, resulting in wasted space and difficult access. The key is to ensure that storage spaces are sized for the type, weight, and volume of the items being stored. To do this, try thinking three-dimensionally; it’s not just about the floor plan but also the vertical space. For example, the photo in Figure 3.7 shows close spacing of shelving for the storage of flat items and plates.

Figure 3.7. Close shelving used for storing flat items

For smaller items it may be best to use cabinets, as these can significantly increase the storage density as well as protect the items from being open to dust and dirt. Figure 3.8 shows the use of cabinets. 3. Materials Flow This is where most time and attention is spent when it comes to storeroom layout. The key principle in the layout is to minimize total movements, and this usually means

placing the fast-moving items nearer to the issue point and the slow-moving items farther away. By way of comparison, this is the opposite of how most supermarkets are laid out. In supermarkets the fast-moving items, such as bread and milk, are typically placed toward the back of the supermarket so the customer will have to walk past everything else. In a spare parts storeroom, you want the fast-moving items toward the front because time and movement efficiency are paramount. It should also be noted that grouping parts by machine type is generally not compatible with achieving an efficient layout.

Figure 3.8. Consider the use of cabinets

4. Receiving and Issuing Areas Receiving and issuing areas need to be adequately sized and should not be an afterthought or just squeezed in. These areas are important for the control of inward goods, enabling appropriate quality control, and the control of parts movements as a contributor to greater accuracy. These spaces should also be set up to minimize movements as per point 3 above. As a rule of thumb, consider that the receiving and issuing areas might occupy as much as 20% of the total storeroom floor space. 5. Environmental Protection Depending on the geographic location of the storeroom, there are any number of environmental issues to consider, including rain, salt, sand, snow, humidity, and even animals. Yet it is surprising how often these issues are not addressed. The issue isn’t related only to the spare parts themselves but also to the storage vessels, as shown in Figure 3.9.

Figure 3.9. Rusted storage vessel

6. Specialized Storage In addition to the general environmental considerations, some items require specialized storage in order for them to maintain their integrity and to be fit for purpose. This includes consideration of: • Vibration isolation, as excessive vibration can reduce component life, especially with bearings. • Ozone, heat, humidity, and ultraviolet light management for managing the longevity of rubber goods. • Oil control and color coding to minimize the risk of cross-contamination in lubricants. • Correct storage of V-belts so that they don’t lose shape. • Flat and supported storage of hydraulic hoses and their fittings to maintain their integrity. The Informational Storeroom

The Catalog The catalog is your database of items that are purchased, not necessarily the record of items that are held as inventory. Typically, companies record the details of items that they expect to purchase more than once. The catalog helps to: • Improve purchasing efficiency. • Provide uniformity in description. • Eliminate duplication. • Provide access to technical information. • Manage disposal. And the catalog is essential for e-procurement. The important principle of the catalog is that while all inventory items must be cataloged, not all cataloged items are held as inventory. This is shown diagrammatically in Figure 3.10.

Figure 3.10. Catalog versus inventory

Labeling Clear labeling is important to:

• Improve the efficiency of item selection by making the items easy to locate. • Reduce errors in picking. • Reduce errors in storage of receipts and returns. • Improve the efficiency of stock takes. • Enable visual management of materials. Importantly, labels need to be easy to read no matter where the items are stored. This means that the labels on items on upper shelves should be easily read from ground level. Labeling applies to all aspects of inventory storage: • Sheds and warehouses. • Yard locations. • Aisles. • Bays. • Shelves. It’s important that there is clear identification of aisles, as shown in Figure 3.11. What are the key attributes of good labeling? Good labeling should: • Be clear and easy to read. • Be easy to access and easy to see from the ground. • Be secure (won’t fall off). • Be long lasting (won’t fade). • Include description, stock code, UOM (units of measure), min or ROP, and bar code (if used).

Figure 3.11. Clearly identified aisle

Figure 3.12. An example of good labeling

Figure 3.12 is an example of a good label. On the other hand, the label shown in Figure 3.13 fails for a number of reasons: • Fading.

• Not properly attached. • Dirty and hard to read. • Insufficient information.

Figure 3.13. An example of poor labeling

Key Performance Indicators The purpose of key performance indicators (KPIs) is to provide a set of measures for reporting and overseeing the application of good practice in spare parts inventory management. This is achieved by ensuring transparency in spare parts management decisions and outcomes in order to support both financial reporting and efforts for continual improvement. The appropriate set of KPIs will: • Ensure that the correct inventory items are held in a controlled manner. • Ensure the timeliness and availability of items. • Ensure that stock items have correct master data assigned to them for stock keeping and analytical and reporting purposes. • Prevent the excessive purchase of items. • Enable early identification and disposal of obsolete stock in a planned manner.

Developing KPIs is not just about identifying the metrics to use; it requires consideration of the: • Desired storeroom and spare parts management goals and outcomes. • Metrics that are currently in place, if any. • Organizational levels at which the KPIs should be measured and reported. • Reporting format. • Responsibility for collating the data and assembling a report. • Frequency of reporting. • Distribution list. In many cases, companies will rely solely on the reporting available from their ERP and not produce any separate reports. This approach relies on individuals to check the data rather than have the data reported to them, and in most cases, this approach does not provide the required transparency and framework for achieving continual improvement. To assist with this, it is suggested that companies develop a standard “dashboard” to report the KPIs measured. Table 3.4 shows the suggested set of metrics, and Table 3.5 indicates the suggested frequency of reporting the different levels within an organization. Figure 3.14 shows a suggested standard reporting dashboard. Table 3.4. Suggested Metrics

Scope

Metric

Inventory levels and changes

Total value held ($) Movement in and movement out ($)

Inventory management efficiency

Stock turn (ratio) Stock over max ($ or %) Nonmoving stock ($ or %)

Inventory split

Split by category ($ or %)

Table 3.5. Suggested Reporting Levels and Frequency

Level

KPIs

Frequency

Executive

Total value held Stock turn

Quarterly

Management

Total value held (by site) Stock turn (by site) Stock over max (by site)

Monthly

Site

Toal value held Movement in Movement out Stock turn Stock over max Nonmoving Split by category

Monthly

Figure 3.14. A standard reporting dashboard

The Procedural Storeroom Transactions

Transaction management is critical for good storeroom management, and it is important to recognize that the key transactions are within storeroom management control. These include: • Delivery and receipt. • Movements within the storeroom (put away into the correct location). • Issuing from the storeroom. • Returns to the storeroom. • Scrapping and disposal. Controlling these five transactions and movements will ensure a highly accurate inventory. In addition, attention needs to be paid to the units of measure to ensure that the correct units are used. For example, an item supplied and recorded in boxes can easily be confused and recorded as “eaches” (individual items). Ensuring use of the correct UOM requires care and attention from everyone that is involved in the functions and actions relating to spare parts management, including the users if they have direct access to the storeroom. Ultimately, an inaccurate inventory is a result of a member of the team not doing what is required to accurately record the relevant transaction or information. See also Section 3.6, “How to Achieve 100% Inventory Accuracy—a Preventive Approach.” Stock Takes Stock takes are a time-consuming but necessary part of spare parts inventory management, but they should not be used as a control mechanism for achieving an accurate inventory. While the term stock take generically refers to the periodic reconciliation of the physical stock levels with the system or computer records, the activity can be segmented into stock takes and cycle counts. A stock take is an annual (or semiannual) physical inventory count that: • Gives a complete snapshot. • Requires that all adjustments be made at the same time. • Can be highly disruptive to operations. • Isn’t particularly effective for recognizing systemic problems (due to the infrequent nature of the activity). A cycle count is a “mini” stock take that is conducted on a limited selection of the inventory but is conducted more frequently so that all items are counted during the course of a year. The attributes of a cycle count are that it: • Is not as disruptive as a full stock take. • Provides regular and quick feedback on problems.

• Needs to ensure that all items are counted within a year. • Requires management on a weekly or monthly basis. For the purposes of this book, we will use the term stock take to mean both stock takes and cycle counts, as the fundamental process of both is the same. At best, a stock take is a corrective (or even reactive) approach to inventory inaccuracy. This is shown in Figure 3.15, which indicates that if the inventory is already inaccurate at the time of the stock take, then all the actions undertaken are after the event of the inaccuracy occurring. Thus the stock adjustment is corrective and not preventive.

Figure 3.15. Stock takes are corrective

There are three stages for conducting effective and efficient stock takes. These are shown in Figure 3.16. The key actions for each stage are discussed on the following page.

Figure 3.16. The three stages of a stock take

1. Preparation and Planning It is important to undertake appropriate preparation and planning. This should include: • Establish the priorities for the stock take—are you only counting, or should the stock take focus on any specific areas or issues? • Identify which areas and materials to include—it may seem strange, but there have been stock takes where there were major misunderstandings relating to what and where to count. • Ensure the availability of appropriate personal protective equipment. • Identify problem materials (for example, hard-to-count, hard-to-reach, or hazardous materials) and resolve the problem by planning how to handle the materials. Ensure that participants are familiar with how they are to count problem materials. • In conjunction with local supervisors, determine whether to halt or minimize operational activities at any particular location during the stock-taking period. • Determine how to track any movements of materials during a stock take. • Ensure that the cost data is up to date prior to the finalization of the stock take. • Ensure that the count team has appropriate training before the stock take. • Identify whom to contact for resolving issues that arise during the stock take. 2. Physical Count Obviously, this is the step that gets the greatest attention. Here are a few points that can help improve results: • Appoint a stock take supervisor for each location. The stock take supervisors are responsible for ensuring that procedures are followed and that a full count is completed in their area. • Ensure the identification of all deliveries, redundant materials, damaged materials, and any returns to the store. • Ensure that the inventory management system is updated before actually starting the count. • Take care to correctly identify materials and ensure that the quantities recorded are in the correct unit of measurement. • Mark material counted to ensure it is only counted once. This also helps identify items that counters miss. • Include an independent observer to make random checks of physical counts. The proportion

of items checked will be determined by the independent observer based on the observer’s initial findings but should be a minimum of 10%. • Conduct a final tour of the location(s) to ensure that all materials have been counted, that all stock count sheets were completed, and that the area is ready to be released for normal activity. 3. Finalization Finalization involves entering the count data, checking and resolving inconsistencies, gaining approval for variances or writedowns, updating cost data, and finally closing off the stock take. However, there is one more important task. Following any stock take, the count procedures should be reviewed to determine how they may be modified to improve the next count. The best time to make adjustments to the next stock take’s instructions is immediately after the current count is completed. To do this, you will need to: • Update the data and address inconsistencies. • Identify any systemic inconsistencies that result from procedural issues. Stock takes and cycle counts are a necessary evil, but a little extra care and attention can make them both effective and efficient.

3.6 How to Achieve 100% Inventory Accuracy— a Preventive Approach An accurate inventory count ought to be a high-priority issue for good inventory management. This is because the effects of an inaccurate inventory ripple through an organization, and the implications can be significant: wasted money, additional downtime, exorbitant expediting costs, and inefficient labor, to name a few. Discussions on inventory accuracy often occupy a lot of time, attention, and blame shifting, but here is the main thing to remember: inaccurate inventory is solely the result of a member of your team not doing what is required to accurately record the relevant transaction. That is what creates inaccurate inventory records. If it is self-evident that companies want an accurate inventory and if, ideally, they would like to achieve a 100% accuracy rate, why is it so hard to achieve? The reason is that the approach taken by almost all companies is reactive or at best corrective. This means that the action to achieve an accurate inventory is only taken when the inventory is already inaccurate, that is, after the events that created the inaccuracy. This was discussed in the previous section on stock takes and was shown schematically in Figure 3.15. With the reactive (or corrective) approach, the inventory in the storeroom is already inaccurate, due to any number of potential issues or mistakes (more on these shortly), when a stock take or cycle count is conducted that identifies the problem (that is, the discrepancy). This is then investigated and a stock adjustment made to correct it. What companies really need is a preventive or proactive approach to maintaining inventory accuracy. This means having the systems, training, and discipline to ensure that the stock on

hand and the records match and that accuracy is maintained over time. Obviously it’s a far better idea to do the work to maintain accuracy rather than let problems develop and then correct them. Before discussing the recommended approach for achieving 100% inventory accuracy, it is important to understand the two standard definitions of inventory accuracy: accounting accuracy and storeroom accuracy. Accounting Accuracy Accounting accuracy is the definition of accuracy used most typically by the accounting profession and can be defined as:

Where the total dollar value as determined by a stock take equals the total dollar value calculated by the inventory management system. Accounting accuracy is not really concerned with variations at an individual item level, only at an aggregate level—that is, the total value of the inventory. This approach and definition is of little value in actually managing the inventory. Inventory management needs to be concerned with variations at an item level because this is where operational problems are created and resolved. Here’s an example of why using an accounting approach to inventory accuracy does not help you manage your inventory: A company was using an accounting approach to inventory accuracy. The company held $20 million of inventory, and when it conducted a stock take, it found that it had both a large number of items that were overstocked (to a value of about $5 million) and a large number of items that were understocked, compared with what its system said it had—this to a value of $4.9 million. Using an accounting accuracy approach, this organization was quite pleased with itself because its inventory value was seen to be only out by about $100,000 in $20 million: $5 million minus $4.9 million. That’s an accuracy of 99.5%. However, if you are an inventory manager or if you are part of the maintenance crew, you are going to be short of a whole range of items that were understocked and are holding excess stock of other items. From an inventory management perspective, the accounting definition is not very useful. Storeroom Accuracy Inventory managers should be thinking about storeroom or warehouse accuracy. This can be defined as: The type of accuracy where the actual count of individual items in stock equals the quantity that is recorded for each item in the inventory management system. With storeroom accuracy it is the actual quantity on hand that matters most, and the goal is to ensure that the values, in terms of the quantity, are correct (accepting that the pricing and the

dollar value will then take care of themselves). So if you have an inventory of, say, 100 items and for 90 of those the physical count matches the computer count, then you have 90% accuracy. Thinking of accuracy in this way, it doesn’t really matter (at this point) whether the count is up or down; it just matters whether it matches or not, and this is how you start addressing and identifying where your inventory management problems are. Why Inventory Accuracy Matters Inaccurate inventory has a ripple effect throughout the organization and has a major impact on your operational reporting and activities. Here are six ways in which an inaccurate inventory wastes resources and costs your company money. 1. Stockouts extend downtime. The first issue is that stockouts extend production downtime. If you don’t have an item in stock that you thought you had in stock, and if your plant is down and you’ve got to expedite that order and get the item in stock, then you are going to extend the period of downtime. This is the number one thing that everybody thinks about when discussing concerns over spare parts inventory accuracy. 2. Stockouts reduce maintenance efficiency. Inventory inaccuracy can also reduce the efficiency of your maintenance activity because your maintenance people spend time waiting instead of doing. They spend time going back and forth to the storeroom trying to sort out the stockout problem and locate parts that are not there. This also happens if you experience a stockout during a preventive maintenance task. In both cases your maintenance team is being used far less efficiently, an issue that is sometimes referred to as a reduction in “wrench time.” 3. Your storeroom team spends time, energy, and money expediting. During any high-profile stockout situation, your storeroom people will spend time, energy, and money expediting the delivery of the part that is out of stock. This means that they are now working far less efficiently than they otherwise would be and that they are distracted from completing other activities and tasks. In addition, you are likely to spend a lot of money expediting those orders. 4. Your procurement team orders items that you don’t really need to order just yet. With an inaccurate inventory your procurement team can be ordering items that you really don’t need to order just yet. This happens if you are holding more in your physical inventory than your computer indicates, but because your computer can only operate on the data it has, it may flag the need to place an order or automatically place an order when it thinks that you have reached the reorder point. In turn, your procurement team will then facilitate that reordering, using up time and attention. If you actually have the items on the shelf but your inaccuracy doesn’t allow you to see that, the team is now doing an activity that it doesn’t need to do just yet. 5. You inaccurately report your inventory levels. With an inaccurate inventory you will end up inaccurately reporting your inventory levels and your dollar value through your finance

function, as part of the financial reporting. If you apply the approach of accounting accuracy (as per the earlier definition), you might think that it will all just balance out, and it may from an accounting perspective, but that doesn’t help you operationally. 6. You inaccurately report your maintenance costs. Of course, if you don’t have the stock that you thought you had, it may be that those items have already been removed and used in your maintenance function. This may seem OK, but what it really means is that you have been inaccurately reporting your maintenance costs. This is because the full cost of maintenance activity, including all the materials and parts that have actually been used, hasn’t been included in your past reporting. This can then provide misleading data on which future decisions about maintenance budgets and capital expenditure are based. The impact of an inaccurate inventory is not just the immediate concern over access to parts but is wide ranging and even long lasting. Where Inaccuracy Is Created An important aspect of striving for and even achieving 100% inventory accuracy is to know exactly where in the inventory management process you can take action to achieve that goal. Understanding this process will help in understanding why and where inaccuracy occurs. Referring to Figure 3.17, you can see that the process begins when a need for a part arises. Perhaps the part is needed because you have new equipment installed, or maybe it’s just that you recognized a need to stock the item. The next step is to set parameters for ordering that item; the parameters would include how many you need and this is when you initially determine the reorder point and reorder quantity. Then somebody procures or orders the item, using the usual procurement process. The actions taken so far are unlikely to have any practical impact on your inventory accuracy. In time, the item is delivered to your facility and is put away in your storeroom. When the need arises to use the item, it is issued, and there will be process around that. Sometimes the people on the maintenance team will take more than they need immediately, or they might take what they think they need and it turns out that they need less; either way there is a subsequent return to store where items come back to the storeroom. These are the steps where inaccuracy might occur.

Figure 3.17. The inventory management process

Inaccuracy is not created when you set the holding and ordering parameters or when you place an order; it’s when you do your in-house transactions such as delivery activity into the storeroom, issuing, and returning items, that your accuracy problems arise. The good news is that these are also the areas where you have direct control. This means that inventory accuracy is an issue that is actually within your direct control: by controlling the transactions and the information that’s recorded in each of these steps, you can control your inventory and push yourself toward that 100% accuracy. How Inaccuracy Is Created Understanding where the inaccuracy is created leads to exploring how the inaccuracy is created. There are four actions that impact your accuracy: 1. Transactions Not Recorded The first and most obvious of those actions is that the transactions aren’t recorded. If a transaction is not recorded, someone has either brought something into or taken something out of the storeroom without recording what it was or how many there were. If you don’t record the transaction, your physical count and your system count will be different. There are a number of reasons why people will remove or replace an item without recording the transaction. Sometimes they are just in a hurry, and that happens a lot in the maintenance environment when people are under pressure to get the plant running again and they

just want to get the item out of the storeroom and get it installed. This is usually done with good intent. They will say, “I will come back and do the paperwork later,” and then of course they don’t—and then you end up with inaccurate inventory. Sometimes, however, people remove items for less noble reasons. This usually happens with desirable items and is really just another form of theft. During my time as a maintenance engineer, we used to joke that we needed to budget for people taking tools for “domestic” use. Of course, this is no laughing matter, and eradication of this cause of inaccuracy is very much a cultural issue. 2. Item Put in Wrong Location Sometimes inaccuracy occurs because items get put away in the wrong location. This may be when your store people are putting a new item away, that is, a newly delivered item. Or it may be when the members of your maintenance team are in the store and they pick up an item and check out what it is, to make sure it’s the right thing for what they need, and then put it back in the wrong place. Again, I know from my own days as a maintenance engineer that this happens a lot in the storeroom and is especially prevalent when you have many similar items, such as bearings, stored adjacent to each other. If the item isn’t put back in the right place, then you will end up with inaccurate inventory. 3. Count Errors Sometimes inaccuracy is caused by count errors. People take, say, nine items, but they think they’ve taken eight, essentially miscounting how many they’ve picked up. When that wrong value is entered into the system, your inventory is inaccurate. Similarly, sometimes there is miscount at the stock take where someone incorrectly counts the number of items that are on the shelf. Again, an inaccurate entry results in an inaccurate inventory. 4. Unit of Measure Confusion Another cause of inaccuracy is unit of measure confusion. This is similar to the miscount noted above but is more readily preventable. In this situation there is confusion around what the unit of measure is. Here’s how that works. An item may be recorded in your inventory management system as “eaches” but may be delivered in boxes of (say) six. When someone removes a box of the item from the storeroom, if the person thinks the UOM is the box, he or she will record an issuance of one. But what the person has really done is remove six items. When this happens, you end up with an inaccurate inventory. Maintaining Accuracy Is Simple but Not Easy Inventory accuracy is something that is within a company’s control, and if the company takes the right approach, maintaining accuracy is relatively simple. But it is not easy because maintaining a high level of inventory accuracy requires a disciplined approach involving a range of people. We know that there are no technical barriers to maintaining an accurate inventory, so there’s no need for anything technical to be in place other than managing transactions. There are no system barriers; that is, you don’t need to have a particular software system in place in order to maintain an accurate inventory. There are no educational barriers; you really don’t need to

have a great education, nor do you need to have a PhD, to have an accurate inventory. Maintaining an accurate inventory does require resourcing of the storeroom; it requires you to make sure that your storeroom has the resources needed to do the work. With an underresourced storeroom, it becomes problematic to manage transactions, deal with deliveries, and so on, and the thing that will get missed is the thing that’s least urgent, which typically is getting the paperwork done. So if your storeroom is underresourced, you are more likely to end up with an inaccurate inventory. But you also need to train the people on your team. You need to train them in your own systems and procedures and policies and make sure that they know what to do in order to have an accurate inventory. They also need to understand that the need for discipline requires that they do the right thing, and the same thing, time and time again. That is usually the biggest hurdle you will face: instilling the discipline to make sure that everyone is doing what’s required every time it is required. So if the goal is to achieve a 100% accurate inventory, you must be proactive. You must get out in front of the problem and make sure you are putting in place the systems, process, and training required for managing your inventory and the drivers of potential inaccuracies. Eight Steps for a 100% Accurate Inventory Fortunately, inventory accuracy is within the company’s control and can be achieved by applying the eight-step process shown in Figure 3.18. However, it is important to remember that to achieve 100% accuracy, you must complete all eight steps in the process; you can’t just pick and choose the steps that suit you or seem easiest. If you do that, you won’t achieve 100% accuracy, and then you’ll still be exposed with the risk of inaccuracy. The eight steps are discussed below.

Figure 3.18. Eight steps for a 100% accurate inventory

Step 1. Set a Goal The first step to achieve 100% accuracy is to set a goal. That may seem a bit self-evident, but not a lot of companies have actually set an accuracy goal and so communicated to their team that the accuracy target is 100%. Companies will report accuracy at, say, 95% or 98% (or whatever they achieve), but setting a goal is the action that gives something to measure against, a target to achieve. One common approach to goal setting is what’s known as SMART goals. The wording here means: S = specific M= measurable

A = achievable R = realistic T = time Here’s how you would use this approach for setting goals for achieving 100% accuracy: S: Be specific by setting your target as achieving 100%—or if you’re not ready to get there yet, something less; just be sure that whatever the goal is, it is a stretch from where you are today. M: The goal is measurable because you can identify your accuracy when you do your stock take or cycle count. Please be sure to use the definition of storeroom accuracy and not accounting accuracy. A: We know that high levels of accuracy are achievable because a lot of companies achieve it. R: We know that 100% accuracy is realistic because, as discussed above, there are no great hurdles for achieving that goal and the process is known. T: A good goal is time targeted, so you need to set the time by which you expect to achieve that goal. This may be as soon as the next stock take or after you have had time to go through all the steps in this process. Determine the time target that suits your company and where you are today, and then you can measure your progress toward that target. The vast majority of companies do not set goals in the area of accuracy; they may report their accuracy, but they don’t necessarily set a goal of what they want to achieve. In one specific case a company routinely reported an accuracy of 60% but for years took no action to improve this as it had no goal. In effect the company was just reporting another piece of data. Step 2. Document Your Process The second step is to document the processes and procedures that you are going to put in place to achieve 100% accuracy. The issue here is not just creating the documents. Lots of companies have documents, and they will then say that they have their procedures and checklists, but it doesn’t make a difference. Often the issue is what the documents contain. Documenting your process is about creating guidance for your teams. It is the purpose and application of the documents that you have to pay attention to. One common problem is that often these documents deal with what needs to be done, but they don’t describe how it is to be done, and that’s always the hardest part because that requires a commitment from the organization about the process to be put in place. Often companies will try and short-cut this step by saying that the actions require “common sense.” However, experience

shows that common sense isn’t common. The suggestion here is that you use different types of documents to communicate the processes. This could include procedures, flowcharts (which are a very good tool for people to identify where they are in a process and what their particular role is), and, of course, checklists. When you put these together, you have to tell your team how to make the decisions or how to execute the actions that are the most important. Step 3. Train Your Team Training your team is an action that needs to be done formally. Too many organizations take, what I call, the “Follow Fred for a few days” approach for this type of training. Essentially the approach is this: when someone joins the organization and becomes part of the storeroom team, the new team member doesn’t receive any formal training in how to go about tasks and duties but rather is told to, literally, “Follow Fred around for a few days, and he’ll show you what to do.” In my experience this approach does not work for the following reasons: 1. You are investing your future in this person’s ability to train others. You may be fortunate to have someone in the storeroom who is very good at that, but it is a skill that not many people have. Often someone who may be a storeroom supervisor says, “I’ve shown him what to do and he hasn’t picked it up” without really understanding that the training technique hasn’t been appropriate for that individual. You need to train the people on your team in what you expect them to do, train them in your policies and procedures, which also involves giving them feedback and checking their progress, seeing how they’ve done, and having all that genuine training activity formalized so they’re better at it and they get things done correctly. 2. Bad habits get passed on. We all develop bad habits of things and shortcuts in the way we do things. It could be that the person doing the training even passes on some of these bad habits and shortcuts in training. One example of this was when I realized that the person conducting a stock take never counted the stock, that he just wrote down on the stock take paperwork. This meant that the computer and the count always matched, which gave a report of 100% accuracy but was no way to manage inventory! 3. You don’t really get feedback until there is a problem. During formal training you may give a written quiz or exam in order to get feedback on the understanding of the trainee. This may even be an oral test, but no matter what the method, you can get feedback to tell whether there is a problem with the training or how well the material has been absorbed. When you don’t have that sort of process in place, you don’t actually know until a problem arises that the training didn’t work, and so you need to formally train your team in all your policies and procedures about achieving 100% accuracy Step 4. Keep a Clean and Organized Environment Of course, you need to ensure that you’ve got a clean environment so that things are ordered and orderly, because otherwise it leads to confusion, and that leads to inaccuracy. A clean warehouse or storeroom is an absolute must, because a messy warehouse sends the message that nobody cares and that “near enough is good enough.” There is a famous

sociological study that found that environments and neighborhoods where there are a lot of broken windows send a message to everybody that nobody cares. This leads to further decay. Environments and neighborhoods that are cleaner and better manicured are more respected and continue to be maintained. It is the same as your warehouse. If you have a messy warehouse where things are sitting in the aisles, trash is left lying around, and things are mixed up and not where they are supposed to be, then you are going to send a message to the people that come into that warehouse and the people that work there, that the company really doesn’t care about standards and that near enough is good enough. Another aspect of keeping a clean environment is that this makes it easier for people to get things right in the first place. There is no point in making this a guessing competition or an intelligence quiz. Make it easy for people to get things right with clear labeling of the aisles in your warehouse, clear labeling of the locations, clear labeling of the storage bins, so that it is easy for people who are putting things away or who are identifying what they’re counting. Make it easy for them to identify what the items are. For example, make sure that you don’t just use bar codes that are readable by machine, that you put the stock codes and descriptions on your labels so that they are checkable by a human. In the absence of a fully automated storeroom, it is still humans that are doing this work, so make sure it is easy for them to get it right by being clean and organized. Step 5. Assign Locations You need to assign locations for everything that’s in your storeroom, and most companies do this, although I have seen some that don’t. Sometimes they treat not having assigned locations as a virtue because it gives them flexibility, but more often it’s actually a hindrance to achieving good accuracy because it creates confusion. In assigning locations, you need to be specific to the very spot where you expect the item to be put. To demonstrate this need, here are two examples of different warehouses. In the first example, a company stores all its electric motors on pallets in what the company has defined as the electric motor area of its warehouse. This works fine for the company in terms of “that’s where we keep them,” but it doesn’t work in terms of getting an accurate inventory, because to find any one specific motor, a person needs to check across the whole electric motor area. In the second example, a different warehouse has a very different approach, where all shelving is clearly labeled and the items are shelved in a specific position that matches where they’re supposed to be. Which situation do you think makes it easier to find the right motor? My experience is that the organized warehouse makes it far easier, so you need to put some time and effort into making it easy for people to give you the accuracy that you’re looking for. Step 6. Control You need to control what’s coming in and out of your inventory, and your storeroom, to make sure that you can get that accuracy you want. This requires a focus on controlling and managing the transactions and recording the transactional information. For many companies, control means only allowing warehouse personnel to receive your inward goods or even to go into your storeroom. Conversely, there are some situations where the store is quite open and staff can come and go as required. The maintenance teams, reliability teams, production people, and so on, can come into the storeroom and operate in a type of

honesty system. However, I haven’t yet seen an honesty system that delivers a high level of accuracy. This is because (as noted earlier) people, even with good intent, will take items, thinking, “I’ll come back and fix the paperwork later, but right now I’m in a hurry.” The paperwork is always the last thing that people do, and frequently it gets forgotten. Or people take three items, find they only need two, and don’t hurry back to replace the one not used. This leads to inaccurate inventories. For a high level of accuracy, don’t allow non–warehouse personnel or non–storeroom personnel to enter your warehouse or storeroom. Close it off. This, of course, becomes a resourcing issue, because then you need to have staff available to service everybody that’s coming to the counter. This might appear to be expensive, but as a method of control, it can have massive dividends in terms of accuracy and even in terms of parts usage. A power station that had an open storeroom and moved to a closed storeroom saw a decrease in the value of items removed in a year of $1 million. This was really driven by the increased accountability around who was coming in and taking what, and it also had a big impact on accuracy because obviously people weren’t taking things that they weren’t recording. So closing your storeroom can have a huge impact because it gives you greater control. However, you do need to be disciplined in the way that this approach is executed. Here is a case of a theoretically closed warehouse: At this location, visitors to the warehouse, maintenance staff, engineering staff, and so on, came to a counter serviced by storeroom staff and didn’t get any access to anything behind that counter. The “customers” told the staff what they wanted, and the staff would go and pick the item for them. Unfortunately, the warehouse was underresourced, and so to make it easier to get deliveries or to give access to people, the staff would leave the back door open! This allowed people to bypass the counter and pick what they needed. This warehouse had an inventory accuracy of just 30%! Step 7. Count Teams When it comes to doing a stock take or a cycle count, you need to have count teams of people who understand what’s required and who will work together to ensure that they deliver an accurate count. Point 3 (above) was about training, and this point is related but addresses a specific training need. When it comes to doing stock takes and ensuring an accurate count of the inventory, it is important to make sure that the people doing the counting are familiar with the procedures, can recognize the items, and understand the need for accuracy. This requires the development of count teams. When you’re going to do a stock take or have a cycle count program, you need to establish teams who will undertake that work with a team leader. It also helps if the teams specialize in specific sections or, with distributed storage, geography, because that will encourage ownership of results. As an example of the effectiveness of this, I was part of a program where we had to conduct a stock take over 26 different locations. Previously this had taken this organization some weeks to complete, and the workers had lots of problems with the accuracy of the count. It took them as much as a couple of months to finalize their stock take and get their numbers finalized. Our challenge was to take a different approach that would be more accurate and be completed much sooner. To do this we developed count teams. Each team was allocated a leader, and we trained the members of each team so that they understood the process that they were going through, they understood the tools that we were asking them to use, and they understood the importance of accuracy. We gave them a way to identify items where they had uncertainty, and we made technical people, who could help with the identification of items, part of each team.

This meant that if the team members couldn’t identify a component or if they were uncertain of the unit of measure, they could label those items, and we could go back and make sure that any questions they had were answered appropriately. This resulted in a much more accurate count. As a result of taking this approach, the stock take at these 26 locations was completed in three days, not weeks. Then all the data entry for the follow-up work was completed within a week. This transformed the program from a process that took a couple of months to a process that took about 10 days. The approach had a massive impact not only on the effectiveness and efficiency of the stock take but also on the accuracy, because people understood that it mattered and we gave them tools to make it work properly. Step 8. Audit You need to audit and follow up the results of your stock takes and cycle counts. This doesn’t mean just double-checking items where the physical stock count didn’t meet the stock quantity on the system; this means looking for the root cause of the systemic accuracy issues that arise. Identify where you can learn how the inaccuracies occur and use the feedback from the process to identify any process issues. The task is to ask and then answer the question about why particular items were incorrect when others were not and then investigate that. This doesn’t require the whole team to be involved; you can appoint a small team to work on the problem of what it is that led to that inaccuracy. It may be OUM confusion, or parts confusion, or a particular category problem. The goal of the audit is to investigate this and then use that learning to go back and further improve your accuracy. This is how you work your way toward a 100% accurate inventory: by learning from what’s happened in the most recent count, changing your approach, maybe changing some of your policies or procedures, and then letting those changes take effect. Next time around you go back through this cycle. Accuracy = Efficiency It is interesting to observe how some organizations don’t have time to do the proactive things, but they do have time to expedite orders. And they do have time to wait for something to be delivered, and to overstock their inventory, and to order items that they don’t need, and to let their staff work inefficiently. Surely, it is better to be proactive about your spare parts inventory accuracy, to try to make sure you get it right the first time, 100% accuracy. Some organizations do claim to have an accuracy of +99%, and maybe that is close enough. Maybe that is their target. However, if you have an inventory of 10,000 items (and many engineering inventories are much, much larger than that), a 99% accuracy means that at any point in time there are 100 items where the stock on hand and the system value don’t match. If any one of those items is required and the plant stops as a result, then nobody will be congratulating you on the 99% accuracy! Extend this thought a bit further. Many inventories operate with an accuracy of 85% or less. At 85% accuracy, the 10,000-item inventory has 1,500 items that are not accurate! Achieving 100% accuracy is simple, but it is the number of items that are being managed that creates complication. If there were just one item, in one storeroom, on one shelf, it would be easy because there would be only one item to look after. Scale that up, so that it is not one item on one shelf but rather thousands of items in the storeroom, and it seems much harder. However, each item is independent of each other item, and each transaction is independent of every other transaction, so there is no logical reason why 100% accuracy is not achievable.

In any storeroom you just have to follow the steps outlined above and not cherry-pick the actions that you think suit you. Don’t tell yourself that you don’t have time for training, that you don’t have time to train the team. Don’t say that you can’t get the storeroom organized in the way that’s suggested because of the physical nature of the store. If you do this, you are not going to achieve the goal of 100% accuracy. You must implement all eight steps to get that 100% accuracy. Remember, an inaccurate inventory is the result of a member of your team not doing what is required to accurately record the relevant transaction or information. Remember that this is a human activity; inventory management is about people engaging with your systems and your parts, and it is the people that have to do the right thing. The members of your team need to know what the right thing is and have the discipline to do that right thing all the time.

3.7 The Practical Application of Bar Codes Bar codes have been in use for many decades and are essential to the running of most supply chains, especially in industries such as retail. However, it seems that only the most sophisticated of organizations have adopted the use of bar coding for their spare parts management. This could be related to the types of items that become spare parts—largely industrial and equipment components, which aren’t always packaged with bar codes from the supplier. But this shouldn’t and in fact doesn’t mean that companies can’t adopt bar coding techniques for the management of their spare parts inventories, especially if they are already using bar code software for their other inventory or if they use one of the major enterprise software solutions. The aim of this section is not to present you with all the possible options and solutions relating to bar coding. Frankly you can get that from any of the many equipment and software suppliers that are in the market. The aim is to give you a practical insight into bar coding and its application in the spare parts environment. So we will go through the pros and cons of bar coding and address some of the issues and problems. My expectation is that you will learn enough to make up your own mind about the application of bar coding in your workplace and to hold an informed discussion with your own management and with solution providers. A Bar Code and a Bar Code System Are Different A bar code is that familiar black-and-white-striped label that is attached to almost everything that we buy. Figure 3.19 shows a typical bar code. Often people who are not familiar with bar coding will make statements such as “We need to use bar codes,” when what they really mean is “We need to adopt a bar coding system of which the bar code is a part.”

Figure 3.19. A typical bar code

A bar code is a machine-readable representation of information. Importantly, the bar code does not contain the information about the item to which it is attached; it is a reference to a database that does contain the information. The bar code enables connection to the database and acts as the link between the database and the product. There are many different layouts for bar codes, but all bar codes use a series of bars and spaces. The number of bars and the size of the spaces are determined by the bar code type, and in most cases bar codes are controlled by official bodies applying standards such as the European Article Number (EAN), Universal Product Code (UPC), International Standard Book Number (ISBN), or International Standard Serial Number (ISSN). A bar code system is a network of hardware and software used to enable and support the collection and retrieval of data. Figure 3.20 shows a typical bar code system. Importantly, a bar code system is not an inventory management solution; it is an aid to help improve the accuracy and efficiency of the inventory management system. The Pros of Bar Coding The pros include: 1. Accuracy. The number one benefit of bar coding is the minimization of data entry errors, as the bar code system will not get the stock number wrong. It is commonly quoted in the bar code system industry that a well-trained data entry operator will make one mistake with every 300 key strokes,7 but the worst bar code accuracy is about 1 in 400,000. 2. Efficiency. Bar coding speeds up data entry processing because waving the scanner is much faster than having a person entering an alphanumeric stock number that could be 10 or 12 characters long. 3. Labor saving? It does not automatically follow that the increased accuracy and efficiency will result in a labor saving, especially in the industrial environments of spare parts inventory management. This is because while the bar code system will improve the efficiency of the data processing, storeroom staff do a lot more in their day-to-day activities. 4. Inventory accuracy? While bar codes will minimize data entry errors, there is much more to achieving an accurate inventory than just data entry. See the preceding section, “How to Achieve 100% Inventory Accuracy—a Preventive Approach.”

Figure 3.20. A typical bar code system [By Jmduncan, own work (GFDL, http://www.gnu.org/copyleft/fdl.html, or CC-BY-SA-3.0, http://creativecommons.org/licenses/by-sa/3.0/, via Wikimedia Commons.]

The cons of bar coding include: 1. Bar coding is not a universal solution. As mentioned already, one of the common misconceptions of bar coding is that it is a warehouse management solution. It is not. It is a data entry solution. Bar coding won’t help you make better decisions on what to stock and how many to stock—the main drivers of both overstocking and understocking. 2. People still need to count. If the bar code tag is attached to every item in a bin or location and there are only a few items, then the people doing the counting for data entry purposes will just “wand” each item. However, if there are many items or they are too small for a tag, the workers are more likely to count them and then manually enter a number. This reintroduces the potential source of accuracy errors that the bar coding was supposed to remove. 3. You need clean labels. It doesn’t take much for labels to become unreadable. In many spare parts storeroom environments, the labels can easily be damaged or become so dirty that they are unreadable. 4. There needs to be a commitment to training and more training. One of the hidden costs of bar coding systems is the level of training required. When this is not fully understood, companies skimp on the training needed, and so their teams then make mistakes or bypass the system. This reintroduces the potential source of accuracy errors that the bar coding was supposed to remove. When to Check a Bar Code Bar codes can be checked at each transaction and counting point in the spare parts management process: • Receiving • Put-away • Issuing • Returns to store • Sent for repair • Return from repair

• Stock take • Cycle count Where to Use a Bar Code While bar codes were developed as a product identification system, they can actually be used in many other situations. For example, you could use a bar code for: • Warehouse locations, so that there is an accurate record of where an item is stored when put away. • Personnel, as a means of identifying who removed an item from the storeroom. This works even if there is a swipe card for access to the storeroom, as it is not unusual for several people to enter a storeroom when only one person swipes to gain entry. • Cost centers, as a way of improving the accuracy of costing of parts usage. • Assets—a bar code on equipment can be coupled with remote bar code readers to collect more accurate data on maintenance activity and parts usage. • Repairable and rotable spares, as a means of tracking individual items to check on service life and repair effectiveness. While the use of bar codes for recording spare parts movements may be the starting point of a bar coding system, the opportunities to take advantage of this approach are limited only by your budget and software capability. How to Generate Your Own Bar Codes While most items that are purchased will have a bar code already, there will be some items that don’t have a bar code (especially fabricated items), and some bar codes might not have the right information for your needs. For example, you may buy bearings in a box of 12 where the box is bar-coded for the convenience of the supplier; however, you issue the bearings as “eaches,” although the individual bearings are not bar-coded. In this case you may need to generate your own bar codes. Generating your own bar codes is relatively easy. You need to purchase bar code generator software, and then the bar codes can be printed using a standard laser printer or a specialized bar code printer. It is also usually recommended that you use a bar code verifier to ensure that your newly created bar codes work correctly. For more information, you should discuss this with your preferred vendor of this equipment. Interaction with Your ERP Software Most ERP systems and inventory management software already have bar code reading support built in, so the software side of setting up a bar code system should not be too difficult. You will

also find that there are many independent software developers that create add-on software for major ERP systems. Again, for more information, you should discuss this with your preferred vendor.

3.8 Materials Data Management and Cleansing No matter how well the spare parts identification system is set up, without an appropriate data governance structure and process, the information that you have will lose integrity. Sometimes this happens when implementing a new ERP system, due to companies’ not providing sufficient time and budget to properly map the data fields. Sometimes it happens during a company merger where there is an attempt to merge two spare parts databases. More often, however, it happens because companies don’t instill the appropriate discipline to ensure adherence to a standard approach. The result of this is an inability to identify the parts already in the system, and this leads to extended downtime, unnecessary purchases, and inventory duplication. Whatever the reason, your organization is very likely to invest in its materials data and data management systems at some point, and while the payback is big, it can be a significant, resource-draining project, and it is very easy to get wrong. This section explains the particular challenges around managing materials master data, details some of the standard concepts being used by vendors, and identifies the key decisions that will enable you to deliver a successful project to clean your data and make sure it stays clean.8 Start with the Right Project Structure When planning to clean your materials data, there is a lot to think about. Right at the beginning you should appoint an experienced project manager to run the planning and execution of your project and vest this person with the authority needed to coordinate activities across your organization. The person also needs a robust business case so that there is a strong focus on delivering rapid payback, guidance for decision making, and protection for the project when other business priorities and personnel change. Both cleaning data and implementing a strong and effective data governance process take time. All too often companies give considerable focus to implementing their IT systems and only think about the data that goes into them at a late stage. But getting the right data into the system is fundamental and defines how well the expensive new ERP system will perform. So make sure that your data cleansing or migration plan includes the time and resources needed, or you will end up with a rushed project, unreasonable pressure on data cleaning vendors, inevitable data quality issues, and a poor return from your ERP investment. Involve the Right People With the level of time and resources required, this is a project to do just once. There are many people who will use the output, and it is important to find out who all these “consumers” of your materials data are so you can deliver a comprehensive set of clean data. For spare parts this includes production engineers, stores staff, procurement staff, compliance, accounting, export control, and design engineers. Whereas one group may be interested in detailed item

characteristics, others may only want to know the spend classification or tax codification. Unless all parties are engaged in the process, however, opportunities for efficiencies will be missed. Issues to Address The cost of your project will be controlled by how much data needs to be cleaned, how broad the cleaning is going to be, and how deep the cleaning will go. Thus the key issues to address are volume, breadth, and depth. 1. Volume Any reduction in volume will save money and can be achieved in a number of ways. With materials data it is usually worthwhile to exclude some data from the project, for example SKUs where there is no current stock and there has been no transaction for a certain period—say, two years. On the other hand, it probably makes sense to clean the stock of a plant that is closing down, because then all the active plants can find and move the spares they can use, saving the new cost of all those items. The “per-line” fee is typically the most significant element of a vendor’s pricing, so controlling the volume of data to be cleaned is important to managing the cost of the project. 2. Breadth Many materials data cleaning projects are focused on sorting out descriptive data, but there may be a number of other key data that should be included. Certainly the part manufacturers’ names and part numbers are essential, but units of purchase and issue, customs, and spend classifications should also be considered. Broadening the project further to include getting the bill of materials relationships right is often very worthwhile, as equipment data is often wrongly held in the spares description, and the BOM is a vital link for both searching and setting inventory levels by plant engineers. 3. Depth Most data cleaning vendors apply a price per SKU according to the level or depth of the cleaning that will be done. The terms used may vary, but the essential levels are: • Classify. This is appropriate when the main focus is on spend management and the item is supplied by a single source. Typically, a noun and a modifier are delivered, e.g., bearing, roller, together with appropriate spend classifications. This level of cleaning is inadequate for most engineering applications or for competitive sourcing. • Clean. One of the most common choices, this level of cleaning will reorganize existing unstructured data into the right attribute fields according to a predefined technical dictionary. This type of cleaning is appropriate where data is already quite complete and the main aim is to have a normalized set across multiple plants and systems. The outcome is usually a split of the resulting data according to whether it is fit for purpose, with duplicates identified, and a set of items that need further investment. • Enhance research. When cleaning up existing data has been insufficient, additional work is

often carried out based on research by using the manufacturer’s or supplier’s name and part number. It can also be done where there is doubt about the quality of the legacy data, and so independent validation of the information is required. • Walk-down. This is normally only needed where the original data is so poor that it cannot be adequately cleaned or where research cannot be completed due to a lack of part numbers. Walk-down is usually most efficiently achieved by staff already positioned at a facility and is conducted over a period of time, although teams of specialists can be contracted when the volume is significant and time is critical. Getting Help There are a large number of service companies set up to undertake manual data cleaning work, with the main center being in India. It is important to understand that these content factories, as they are known, are significantly different from each other. Different operators offer different skill sets, have different specialist knowledge, can handle different levels of volume, and will achieve different levels of quality. While there are some excellent companies, it is not always easy to distinguish between these and others that may turn out to be not much more than a desk, a phone, a website, and telesales activity. Rather than setting up your own production facility for a one-off noncore project, the best approach may be to employ a full-solution provider that can combine a software application with project management local to you and that has done the groundwork to select, train, and build a tight relationship with one or more content partners. As well as providing reassurance on quality, the company will relieve you of considerable project management time and ensure a much more predictable and reliable outcome. Choosing the Right Tool A materials data cleaning tool has to combine the following features: • Catalog structure. The data structure has to support the huge number of part numbers and interrelationships between part manufacturers, original equipment manufacturers, vendors, and distributors. It needs to be able to handle the various relationships within a specific material item, such as drawing numbers, supersession, obsolescence, and old versions of part numbers. Finally, it must be able to capture the relationship of the part to the machine it is fitted to and the asset locations of those machines. • Technical dictionary. Sit four people down in a room and ask them to describe a simple item in four words, and you will get four different answers. However, when you give them a set of choices to follow, you will usually get four identical answers. This set of choices is what a technical dictionary represents. It is not something that you can easily create for yourself, but a good solution provider will be able to provide a technical dictionary that has been built up over time and can act as a basis for your project. And a good solution provider will have the tools and experience to guide you in creating your own dictionary for specialist areas. The key is to understand in detail how the dictionary is being used within the cleaning and governance applications. If you have an international dimension to your project, then it is also important to gain confidence in the multilanguage features.

• Efficiency. Data cleaning involves a lot of manual work, so the productivity of the system is important, including the level of automated data cleaning. Don’t believe any vendor that offers full automation, unless your data is already clean! Significant structuring and data organization can be automated but must invariably be backed up by manual checking and confirmation or enhancement. Matching the data to preexisting databases is also worth considering, but care must be taken in regard to copyright, and so the matching process might best be left to a direct relationship with your spares suppliers. • Process management. Both data cleaning and governance can only be successful if your chosen solution incorporates strong process controls. This can take several forms, with work assignment and ease of project reporting being important features to look out for. The better applications offer the ability to group data fields and control edit and authorization rights of fields according to an individual’s specific skill set and responsibility. • Quality process and audit. Within a data cleaning project, it is crucial to maintain a good history of work undertaken to ensure accountability. Quality control processes must be embedded into the application, rather than thrown in as an afterthought. The available software applications have different capabilities, and it is important to understand how each one ensures a high level of quality and how you can track this as the project progresses. Data Governance After you’ve employed the best services partner and used the right data cleaning application to deliver a set of well-organized, clean materials data, how are you going to maintain all that information and make sure that your data doesn’t get corrupted, causing you to start all over again? This is where putting in place the right governance process and software application is crucial—and it must be a combination. Data governance across a large organization with many languages and ERP systems can be achieved, but only with a very capable software application backed up by the business processes and organization to apply it. Every good consultant will tell you that the starting point is to understand your current processes and define what you need to control. This is an important step, but care must be taken not to define an entirely customized process that requires lots of expensive development and implementation. You might save a great deal of time and money by finding a solution that already has the flexibility to map in your required processes through simple configuration. Your chosen solution has to handle the requirements of creating a single item, internationally, across multiple languages, dealing with the complex workflow and approval processes required by the end users of materials, where inaccuracy is much costlier than a misspelled address. The solution needs to be capable of controlling the entire creation and modification process—from the initial request for a new master item originating from the factory floor to the addition of the item to whichever enterprise system needs it. This includes ensuring it is not a duplicate, recording the descriptive information consistently, adding all the other data associated with materials such as accounting codes and logistics information, and tracking this process all the way. Further, if you operate with multiple ERP or CMMS systems, your governance or MDM application has to handle all the different fields in each application and make sure descriptions are optimized to use the space available for each system.

Finding an application with all these capabilities embedded, off the shelf, will allow you to focus on the crucial organizational changes and staff management issues of implementing a centrally controlled data hub and then exploiting the many significant benefits that suddenly become possible. Data cleaning and governance projects are hard to get right, and many companies have wasted a lot of money failing to do so, but clean materials master data is the foundation on which considerable business intelligence rests. Getting it right can open up a myriad of opportunities and will save you much, much more than it costs.

3.9 Integrated Maintenance and Spare Parts Planning The key functions that influence maintenance and spare parts outcomes typically operate independently, with little incentive to coordinate activities in a way that improves overall business results. This is classically known as “functional silos,” because each function reports through to different senior or executive managers, has its own key performance indicators to drive its own effectiveness and efficiency, and effectively operates as though the other functions are parts of different organizations. This is shown diagrammatically in Figure 3.21.

Figure 3.21. Typical silo organization

The problem with this is that these functions do not operate independently. There are significant linkages between each function, which represent the flow of both information and the physical movement of parts. Figure 3.22 shows a simplified version of the linkages between the internal company functions that influence spare parts inventory. This figure divides the functions into two management activities, based on their involvement in either supply of spare parts or demand for spare parts. This supply-demand segmentation helps clarify the role of each function in an overall model of operations planning. What is clear is that, at a minimum, the goals are each interdependent because they rely on each other to be able to achieve their own goals and contribute to the overall goals of the organization.

Figure 3.22. A simple model of the spare parts management linkages

Figure 3.23 shows a more complex view of these relationships by indicating both the information flows and the physical movement of parts. This more complex view better illustrates the interdependency of these functions, with each other and with external suppliers. Looking at the parts supply from the storeroom, to be functional this physical supply is reliant upon the storeroom receiving information of parts demand from the maintenance or reliability staff. This information may be provided by a maintenance or reliability person turning up at the storeroom and requesting a part, by that person taking the part and informing the storeroom after the event, or by a more sophisticated mechanism of integrated maintenance and spare parts planning. The problem is that, despite the routine information and materials flows between these functions, there is often a missing link that prevents an effective connection between maintenance and spare parts management. This is highlighted in Figure 3.24. Why This Is a Problem The missing link results in the poor integration of maintenance and spare parts planning, and this, in turn, has the potential for causing significant business losses, including: • Reduced labor efficiencies through: Reduced maintenance wrench time caused by parts shortages The distraction of storeroom personnel with “storeroom emergencies” The distraction of procurement personnel through emergency expediting

The rework of maintenance plans due to delayed tasks • Increased plant downtime caused by waiting for spare parts availability • Reduced reliability caused by delayed or less effective maintenance tasks • Reduced reliability caused by poor return-to-stores control • Increased costs caused by expediting of spare parts purchases • Increased working capital caused by excess stock holdings • Poor stock control, adding to excess stocks through overstocking on required parts • Increased obsolescence of parts caused by poor end-of-life management • Wastage caused by poor management of “perishable” spare parts resulting in disposal before use • Physical deterioration of nonperishable parts due to poor storage techniques resulting in disposal before use

Figure 3.23. Detailed information and physical movements for maintenance and spare parts management

Figure 3.24. The missing link preventing effective communications

The quantitative impact of these issues will vary from company to company, but there is little doubt that this missing link could be causing some companies millions of dollars in extra expense that they could avoid through improved management practices. Research on Integrated Maintenance and Spare Parts Planning The potential for losses is supported by the research that led to the identification of spare parts management best practices (referred to in Part 1) that examined the activities of hundreds of storerooms.9 The data from this research indicates that 50% of the participants had no integration of their spare parts inventory and asset management strategies, thus supporting the assertion that there is a missing link that prevents an effective connection between maintenance and spare parts management. The research also found that 30% of respondents reported that their spare parts inventory planning initially considered asset management strategies but that they did not subsequently review or update the information or requirements. This research therefore indicates that as much as 80% of participating organizations have no effective ongoing link between maintenance planning or asset management and spare parts management. Of the remaining 20% of organizations, only one-third said that they fully integrated these functions, with two-thirds admitting to ad hoc updates. The research results show a very clear correlation between having an integrated asset management and spare parts management system and having both a reduction in stockouts and an improvement in overall inventory results (including stockouts, stock turn, and inventory levels). These are shown in Figures 3.25 and 3.26, respectively. Each of these charts uses the low score of 0 for the question on integrated spare parts and asset management as the index starting point. Therefore, a score of 0 gives an index score of 1. The charts then show the change from this index point as the score for integrated spare parts and asset management improves. Figure 3.25 clearly indicates that those companies that scored high for integrated spare parts and asset management had fewer stockouts than those that did not score well. Similarly,

Figure 3.26 shows that those companies that scored high for integrated spare parts and asset management also reported significantly better overall outcomes. Addressing Integrated Maintenance and Spare Parts Planning Addressing integrated maintenance and spare parts planning requires the implementation of activities that close the gap caused by the missing link in information flows. This is what the topscoring companies in the research do. In the simple model of spare parts management linkages (Figure 3.21), the functional activities were segmented into being primarily involved in either demand planning or supply planning. The key to developing an integrated maintenance and spare parts planning (IMSP) process is to connect these demand and supply planning activities for maintenance and spare parts. This can be achieved by applying and modifying the processes and tools used for sales and operations planning (S&OP). S&OP is a process used by companies to link production planning (supply) with sales planning (demand) in order to ensure that they produce the correct amount of the right inventory. While some of the issues with spare parts planning for operations and maintenance support are different, the concept is sufficiently similar that we can adopt some aspects of S&OP here.

Figure 3.25. Correlation of intrgrated spare parts management and stockouts

Figure 3.26. Correlation of integrated spare parts management and overall outcomes

However, to be fully effective the process must also consider the input of the finance people (they control the money!) and the integration of the related maintenance strategies and spare parts stocking policies. This complicates our diagrammatic model, as shown in Figure 3.27, but this can be translated into a straightforward process. The IMSP Process Applying the S&OP model requires the formalization of the process steps, meeting agenda for four meetings, plan requirements, metrics, and reporting that are needed to plan maintenance and spare parts management. The planning process should be split into short-term (1–3 months), mediumterm (4–12 months), and long-term (1–2 years) time horizons, as some items will require long-term planning to ensure availability. Figure 3.28 illustrates the IMSP process for a major planned maintenance event or shutdown. Referring to Figure 3.28, the process requires the involvement of all the related departments. This model indicates the involvement of maintenance and reliability, procurement, and spare parts management and logistics. You may have other names for these functions, and you may choose to involve other departments, but at a minimum these are the functions to include. It is also necessary to refer to any existing short- and long-term plans for both maintenance and production. Once the attendants have been selected and the basic data are available, the process steps are:

Meeting 1. IMSP Draft Meeting Purpose: To provide a forward-looking summary of maintenance plans and match this to spare parts requirements and availability Output: The initial draft maintenance and spare parts plan and identification of the currently known spare parts issues that need to be addressed

Figure 3.27. The complete information map for integrated maintenance and spare parts planning

Figure 3.28. Example of the IMSP process for a major PM or shutdown

Meeting 2. IMSP Consensus Meeting Purpose: To reach consensus on the maintenance and spare parts management plan and identify risk management actions for any issues that are identified Output: Clear agreement on the IMSP plan, parts forecast, procurement schedule, and risk mitigation actions Meeting 3. IMSP Review Progress Purpose: To review progress with risk mitigation actions, determine and agree on alternatives and solutions (if required), and revise the plan as necessary Output: An updated plan and risk mitigation actions Meeting 4. IMSP Review Finalization Purpose: To resolve any remaining issues and review and agree on the final plan Output: An integrated maintenance and spare parts management plan For successful execution of this process, at the end of each meeting the following five questions should be asked and answered: 1 How are we performing now? 2 Is the plan still achievable? 3 Will the plan deliver what we need? 4 What is on the critical path? 5 What else do we need to deliver on this plan? The Weekly Meeting What if you want to use the IMSP process on a continual basis rather than for a single major planned event such as a shutdown? This can be achieved simply by holding a weekly meeting that reviews a rolling forecast of the known maintenance activities and associated spare parts requirements over the next week, month, and quarter. Each meeting involves identifying the requirements, risks, and mitigating actions for each forecast period. This can easily become part of the agenda for a weekly maintenance planning meeting. Process Principles The IMSP process is underpinned by the following set of principles: • Risk mitigation through communication. It all rests on effective communication.

• A single set of numbers. This requires agreement on the task to be performed and the resources (spares) required. • A joint game plan with synchronized activity. • A common understanding of the process and discipline required. • A sound and robust process. • Tools that are efficient (quick and easy) and effective (providing the right answer). • A focus on the things that you can control: PM tasks, stock levels, overstock management, and obsolescence management. The Benefits of Adopting an IMSP Process Superficially the benefits of adopting this process are the reversal of the problems listed previously. In practical terms these can be summarized as: • Increased confidence in the plan • Early identification of problems and opportunities • Increased wrench time for maintenance personnel because the required parts will be available as expected • Reduced inventory holdings • Increased parts availability Issues That Prevent the Effective Implementation of the IMSP Process While the process is simple, there are some prerequisites for an effective implementation, and many companies are not in a position to address these. Here is a summary of the issues that prevent the effective implementation of the IMSP process: Maintenance • Poor articulation of current plans • Lack of genuine maintenance strategy and plans • Incomplete or no BOMs • Poor understanding of planned demand—parts planning and usage related to known and planned activities

• Poor understanding of unplanned demand—parts planning and usage related to unpredictable activities, e.g., breakdowns Storeroom and Parts Management • Poor inventory accuracy • Inability to address seasonality • Incomplete or no spare parts management policies • Storerooms focused on being administrators (handling transactions) rather than managers (reviewing and controlling) • Storeroom personnel not well trained in spare parts management • Storeroom personnel seen as the “bottom rung” with nothing to contribute Tools, IT, and Communications • No common data sources • The inability of the ERP system to manage this process • Poor communication of ad hoc changes

3.10 Spare Parts Procurement Issues Procurement is an essential part of the spare parts inventory management process. Without procurement there would be no inventory to manage. Yet when it comes to the management of spare parts used for maintenance and operations support, the procurement team is often treated as an outsider, a service provider, rather than a partner in ensuring that the objective of maintaining operational capacity is achieved. In my experience, this approach is a drag on both efficiency and effectiveness, often resulting in the waste of both time and money. Consider if any of these situations sound familiar: • A vendor makes an offer of a discount if the company buys a bulk quantity of an item. The procurement person sees that the item is used regularly and considers this a good deal to save on the unit cost of the item. At the same time the maintenance people are planning to discontinue use of the item, as they know it is about to be superseded. The bulk quantity of the item arrives in the storeroom, resulting in an overstock of that item, and the next day (or week) the maintenance team creates a new item to replace the item just purchased. In the end the bulk purchase is wasted, and the items are never used. • There is a plant outage, and the required part is not in the storeroom because it was never

created as an inventory item. The maintenance supervisor puts the procurement team under pressure to source the item ASAP. The team drops everything, IDs the part, finds a vendor, and pays exorbitant costs to expedite delivery. Meanwhile, a maintenance team member recalls that there is a spare in a “squirrel store” in the corner of the workshop. The plant is repaired and production commences. But no one tells the procurement supervisor, whose team spent the whole day finding and sourcing the part. When he calls the maintenance supervisor to say that the part is on the way, she tells him not to worry because the maintenance team found one, but “thanks anyway.” How do you think that the procurement person will react next time there is an “emergency”? • An inventory item is created with a unit of measure listed as “boxes.” A purchase requisition is raised to buy more of that item, but the originator mistakenly thinks that the UOM is “eaches” and so inadvertently requests many more than the company really needs. Not knowing how or where the item is to be used, the procurement person places the order. When the item is delivered and there is 10, 20, or 100 times the expected quantity, the blame game begins. The excess items then languish, unneeded, in the storeroom, or the procurement team spends more time and energy arranging the return of the unused items. What these examples have in common is that in each case the people thought that they were doing the right thing. The only missing element was the inclusion of procurement as a partner in the spare parts process and with that improved knowledge and communication. MRO and maintenance spare parts is a procurement category that is different from other categories due to the often relatively low values purchased but with, sometimes, relatively high frequency. Compare this with many raw materials where there is a large value purchased with relatively high frequency. In addition, a company might need dozens or maybe hundreds of different raw materials, while at the same time needing thousands or tens of thousands of different types of spare parts. These differences are shown in Figures 3.29 and 3.30.

Figure 3.29. Spare parts procurement segmentation 1

Figure 3.30. Spare parts procurement segmentation 2

Maintenance Needs to Take Responsibility The procurement of spare parts with a high frequency and low value (see Figure 3.29) means that procurement procedures for spare parts need to be highly efficient, and this often leads to automation. Automation is a great option if the spare parts requirements or specifications don’t change. However, it is the changes that do occur that bring procurement, maintenance, and the storeroom into conflict. The information on requirements and technical specifications rests solely in the hands of the maintenance function, and so improved spare parts inventory management requires that maintenance take responsibility for sharing this information. This is not meant to suggest that the maintenance people get a blank check and can order anything and everything they want; there still need to be some checks and balances. This gatekeeper role is often filled by procurement personnel, so why not share the required data in a structured manner? The reason is that the maintenance people often don’t actually know what they need or how many; too often they are guessing. Without the necessary information, the procurement team is then also guessing, and this leads to the two main ways in which procurement personnel make changes that negatively impact spare parts inventory and maybe even operational results: 1. Parts substitution

2. Volume buys Both of these are expanded on below, followed by a discussion on addressing these issues through a spare parts procurement policy, perhaps as part of the overall management policy. Parts Substitution Whether or not to use genuine or nongenuine parts is one of the great conflicts of spare parts management. Genuine (or OEM) parts are almost always more expensive than the substitutes but are also perceived to be more reliable. However, the reliability issue is not definitive because the OEM parts are often purchased by the OEM from a third party and then relabeled with the OEM’s brand. Procurement personnel are usually attracted to the non-OEM brands due to the lower cost, as achieving lower unit costs is usually a key performance metric in procurement. Another problem with parts substitution is a lack of specifications. If engineering or maintenance were able to provide sufficient specifications, then all parts could be purchased on the basis of the lowest cost that meets the specification. Too often, the specification is merely related to dimensions or function with no consideration of performance. In most industries, this higher level of specification (which is performance based) is usually only applied in the lowvolume, high-cost area of capital equipment, the obvious exceptions being the airline and defense industries. There can be no definitive statement on whether or not a company should use OEM or nonOEM parts, but there can be a statement about who decides and how that happens. This should be part of a spare parts procurement policy. Volume Buys The desire to achieve lowest unit cost can also drive procurement personnel to buy items in bulk, even if the ROQ is set lower than the bulk buy quantity. Purchasing in bulk can result in lower operational costs through lower unit costs for the items purchased but also increases the size of the inventory investment and the obsolescence risk. It is one of the great myths of spare parts inventory management that economic order quantities save money. This is only true in circumstances where the items purchased are used within an acceptably short time frame. Spare Parts Procurement Policy The two issues discussed above should be sufficient to convince us that procurement, maintenance, and the storeroom must work together in order to ensure the appropriate purchasing of spare parts. While procurement will have its own policies and procedures relating to purchasing, to the use of approved vendors, and to the decision of when to go to tender, or sole source, the spare parts procurement policy needs to deal directly with the substitution and volume buy issues. In working together, it is a good idea for procurement, maintenance, and the storeroom to agree on a spare parts procurement policy. This doesn’t need to be a separate, stand-alone policy; it could be part of the overall spare parts management policy (see Part 1 for details on policy development). The following are recommendations on how to deal with these two major issues.

Adopting these recommendations into a spare parts procurement policy will provide clear guidelines for these two major spare parts procurement issues. Recommendation 1—Substitution Policy One way to deal with parts substitution is to classify all spare parts as shown in Table 3.6. Table 3.6 Substitution Policy

Classification Criteria

Policy

Critical or safety critical

These parts will already be classified as critical within the spare parts inventory management system or will be otherwise identified as safety critical

No change or substitution is allowed without maintenance or engineering authorization

Compliance

These parts are components in equipment that is subject to legal compliance issues, where substitution may put that compliance in jeopardy

No change or substitution is allowed without maintenance or engineering authorization

High or medium operational risk

These parts will not be critical, but substitution with an inferior part may result in further operational risk such as early-life failure

No change or substitution is allowed without maintenance or engineering authorization

Low operational risk

These parts present little or no operational risk if substituted and can be purchased on a lowest-cost basis

Procurement may source the parts based on lowest cost

Being explicit about the classification, criteria, and policy will shift the conversation to determining which category is appropriate for any particular part and ensuring appropriate approvals for any changes. Recommendation 2—Volume Buys Addressing the issue of volume buying requires quite a different approach. As the procurement team is rarely also accountable for the level of inventory investment, all volume buys above and beyond the preagreed ROQ values should be approved by the designated inventory “owner” and the maintenance user. Embrace the Differences The role of the procurement function in spare parts inventory management is, of course, to purchase the required parts but also to act as a gatekeeper to ensure that the correct procurement procedures are followed, approved vendors used, and purchasing approval limits adhered to. In addition, the procurement people are often the face of the company for vendors, and their supplier relationships can be vital to getting allocation if availability is scarce or orders require expediting in times of emergency. The cause of much of the conflict in this area is the misalignment of responsibilities. Procurement can see itself as the gatekeeper of cost, while maintenance sees itself as the gatekeeper of reliability, and often these two goals are not compatible. This is a reality of modern organizations, so rather than fight this, companies should embrace the differences and set up cross-functional teams and policies that get the best out of both camps.

Five Common Procurement Problems 1. Economic order quantities and volume buys. Economic quantities are only economic if the parts get used. 2. Substitution of parts. This can result from a misalignment between procurement’s drive for keeping cost down and the operational need for quality. 3. Minimum order quantities. A mismatch between the planned ROQ and the MOQ can result in overstocking (or at least the appearance of overstocking). 4. Units of measure. Consistency between inventory UOMs and purchasing UOMs has to be ensured. 5. Delayed purchasing. Not advising maintenance of procurement delays results in frustration and confusion.

10 Key Lessons: Operations 1. All inventory stocking decisions can be resolved as a forecasting problem. 2. Single-focus optimization techniques will leave you shortchanged. 3. The ICR process can be applied on a daily basis, by almost anyone, without the need for expensive software. 4. The repair or replace decision is complex and should not be resolved with a simple “percentage of purchase cost” hurdle. 5. Supply chains impact spare parts holdings, but the attitude and approach of management has a far greater impact. 6. The goal of storeroom management is to deliver on the three A’s: availability, accessibility, and accuracy. 7. Without an appropriate data governance structure, the inventory information will lose integrity over time. 8. Inaccurate inventory results from a team member not correctly recording a transaction or other information. 9. Bar coding is not an inventory management system. 10. Integrated maintenance and spare parts planning can significantly improve your spare parts inventory outcomes.

PART 4 Obsolescence and Disposal SPARESOLOGY® STRUCTURE 1. The Spare Parts Management System Understanding Spare Parts | Finance | Policies & Processes | Parts Identification | Best Practices 2. Create & Stock • Deciding What to Stock • Spare Parts Standardization • Capital Equipment • First Time Buy • Critical Spare Parts • Setting the Re-Order Point • Setting the Re-Order Quantity 3. Operations • Forecasting • Inventory Optimization • Managing Repairable Spares • Storeroom Management • Data Management and Cleansing • Inventory Accuracy • Conducting Stock Takes • Bar Coding • Integrating Maintenance and Spare Parts Management • Bills of Material • Spare Parts Procurement 4. Obsolescence and Disposal • Managing Obsolescence • End of Life Management • Last Time Buy • Spare Parts Disposal

4.1 Obsolescence and Disposal Is Part of the Life Cycle One of the peculiarities of spare parts inventory management is that the supply chain is established to operate one way: to put items into inventory and then into the hands of the user. Very few industrial companies have put much thought into the processes required for removing items from the inventory and disposing of them. Yet this task is as fundamental to inventory management as the initial creation and stocking of the parts. Perhaps this situation stems from the thought that any disposal is an admission of some kind of failure or that it represents an admission of wasted funds. Nothing could be further from the truth. The establishment and application of processes and reviews that address excess and obsolete stock is a sign of a sophisticated organization, not failure. Nobody wants to write off inventory that has been purchased and then not used, but it is inevitable; so why not prepare for this, not just in an accounting sense but also through appropriate end-of-life management. Of course, there is always the issue of how much inventory ends up as excess and obsolete, and, perhaps ironically, the solution may lie in the initial purchase of spare parts. Too often, the parts that are purchased at the create and stock phase are still on the shelf years later, unused and unneeded. This needs to be addressed, and that requires the focused consideration of end-of-life management, last-time buy, and the management of obsolescence. To do otherwise is to risk wasting funds on purchases that just won’t be required. On one memorable occasion during a review, it was identified that a purchase order had been placed for $30,000 worth of spares for a machine that was soon to be decommissioned and was effectively obsolete. While this removal was well known to the engineering community at this company, nobody bothered to advise the storeroom or procurement personnel, and so just doing their jobs as required, they placed orders for the spares that were removed from the storeroom but were actually only being boxed up to go out with the decommissioned machine! This kind of expensive mistake can be avoided by following the suggestions in Part 4, where we focus on obsolescence and disposal.

4.2 Managing Obsolescence It is inevitable that any spare part will, at some point, become obsolete. This fact is not influenced by how you manage your inventory (how well or how poorly) or how well you train your team. The fact is that technology changes, designs change, equipment changes, processes change. These are things that you really cannot expect to influence to any great extent. What you can influence, however, is how you plan for, and respond to, the inevitable outcome of obsolescence, whenever and however that occurs. Many labels are used to describe obsolescence and how the obsolescence comes to be. For example, sometimes the term commercially obsolete is used to mean that the item is no longer sold. Or a part could be described as technically obsolete, meaning that the part has been superseded by newer technology. Whether or not this makes the item obsolete in any operational sense depends on whether you can still acquire the item when you need it.

However, for all practical intents and purposes, there are just two mechanisms that lead to obsolescence: vendor led and owner led. Vendor-led obsolescence occurs when the vendor or original equipment manufacturer (OEM) no longer sells the item as a new part. The vendor may or may not have an alternative item that can take the place of the old item, but the new item will most likely have a different description and part number. There may even be an alternative that closely matches the item but will require some reengineering to fit. Owner-led obsolescence occurs when your company decides to replace the equipment on which the item is used. This means that you will no longer need to keep the item in your inventory, and so you may be left with unneeded stock that you will describe as obsolete. Of course, when spare parts are created within a management system, few people will be thinking about the future obsolescence, and, indeed, the same is true during the useful life of the part. The result is that either companies are caught short and don’t have the parts they need or they end up disposing for zero value parts that they have bought and never really needed. This is why it is important for companies to build awareness of the potential obsolescence and establish practices for managing that obsolescence. The Difference Between Spare Parts and Service Parts For the purpose of this discussion, I have adopted the following definitions: Spare parts are parts kept by the owner or user of the equipment for the purpose of maintenance and operational support. Service parts (sometimes called service spares) are kept by a service provider for the purpose of providing customer service (such as an appliance OEM or auto service center). Wholesale parts are kept by the OEM or a third party for the purpose of sale to the owner or user of the equipment and the service provider. The relative position of these definitions along the supply chain is shown in Figure 4.1. The Visibility of Impending Obsolescence In terms of the approach to managing obsolescence, it does matter in which of the above categories you identify and how the obsolescence comes about (that is, vendor led or owner led) because it influences your visibility of the impending change. Table 4.1 shows the likely visibility of impending obsolescence depending on who the holder of the part is and how the obsolescence comes about. Understanding the visibility of change is important because it influences the actions that you can take in terms of preparation for and managing parts obsolescence. Let’s use spare parts as an example (refer to Table 4.1).

Figure 4.1. Relative position of different parts in the supply chain Table 4.1. Likely Visibility of Obsolescence on Holders of Parts

Part Type

Vendor-Led Obsolescence

Owner-Led Obsolescence

Spare parts

May have zero visibility of impending obsolescence

Has full visibility of impending obsolescence

Service parts

May have zero visibility of impending obsolescence

May have zero visibility of impending obsolescence

Wholesale parts, OEM

Has full visibility of impending obsolescence

May have zero visibility of impending obsolescence

Wholesale parts, third party

May have zero visibility of impending obsolescence

May have zero visibility of impending obsolescence

In the event that the part obsolescence is vendor led, then it is possible that the owner of the spare parts and the equipment has zero visibility of this event before it occurs. The vendor may or may not choose to share that there is a new version of the product being released or that the parts that the owner has been buying for so many years will no longer be available. Whether or how the vendor shares this information will depend on a combination of the perceived value of your business as a customer and the relationship with the vendor’s representative. In this circumstance there are several strategies that could be used to prepare for and manage this event: 1. Establish relationships with more than one vendor so that there are options if one vendor

stops supplying the part. 2. Establish high-quality relationships with the vendor representative so that he or she is more likely to keep you informed of upcoming obsolescence. 3. Ensure a contractual obligation on the part of the vendor with associated penalties should the vendor be unable to comply. These actions are all risk management related, and your ability, and desire, to implement any of them will depend on the importance of the spare part to your operations, the importance of your business to the vendor, and the uniqueness of the part. Referring to Table 4.1, in the event that the part obsolescence is owner led, then, in theory, the owner has complete visibility of the impending change that will result in the spare part being obsolete, or at least excess to the owner’s needs. This is “in theory” because the reality is that in practice it doesn’t always work this way. Engineering and maintenance teams have been known to replace equipment, and the first that the storeroom or buyer hears of the change is when the work is done. When it comes to owner-led obsolescence, the greatest hurdles for obsolescence management for the owner of the parts are internal communication, the size of the last-time buy (LTB), and the risks of managing stock levels down. These are all in the control of the owner. This is equally true for the wholesale parts OEM where the obsolescence is vendor led.

4.3 Managing End of Life and Last-Time Buy The First Action in All Cases No matter how the obsolescence (or looming obsolescence) comes about, the next issue is what to do about it. The answer depends on when the obsolescence is recognized. For example, if the equipment that uses the part is no longer in use, then the required action is one of disposal, no matter whether the obsolescence is owner led or vendor led. Managing disposal is discussed in the following section. If the equipment is, however, still in use, then no matter how the obsolescence comes about, the most appropriate first action in managing the end-of-life (EOL) process is to determine if there is a suitable alternative that can be used. With consumable items and personal protective equipment (PPE), this is almost always the case. Vendors change the style of glasses, gloves, vests, boots, and so on, on a regular basis. They don’t intend to stop selling the items; rather, it’s more an issue of presenting “new and improved” items to the market. In this case the EOL management for both the vendor and the owner focuses on “running out” the old stock and ensuring a smooth transition to the new item. With engineering components, this is not so simple, except in the case where the owner or user has decided to change the item in use. Many companies will go through a management of change (MOC) process where they investigate the suitability of changing from product X to product Y. Product X may still be sold by the vendor, but product Y may be cheaper, more effective, or more efficient and hence

thought to be a better solution. In this case there may or may not be any LTB for product X; however, they will need to develop an EOL plan. The case study on the following page demonstrates the importance of having an EOL plan. Another type of problematic decision making arises when the part is obsolete from vendorled decisions and the equipment that uses the part is still in use. In this circumstance you need to give careful consideration to the EOL process and, if you have the opportunity, your LTB of the part. The bad news is that there is no universally applicable, straightforward formula or approach to apply in this situation. There is a range of issues to consider and some different approaches that could be applied, but at its core, the issue of EOL and LTB is essentially a forecasting problem. So like all inventory stocking decisions, the better and more refined the forecast, the better the EOL and LTB decision making. Of course, producing a reasonable forecast isn’t simple or necessarily easy.

EOL Plan Case Study This manufacturer uses saw blades to cut the product to size. The steel blades were effective but needed sharpening on a regular basis. This required blade changes, and during the changeovers no production was possible. To recover the lost productivity, the manufacturer investigated a switch to ceramic blades. The vendor produced a ceramic blade that was an exact replica of the steel blades, except, of course, for the material. This meant that the ceramic blades would fit exactly into the machine without any equipment modifications. A series of trials demonstrated that the ceramic blades lasted longer, resulting in a reduction in downtime and greater output of the plant. This greater output far outweighed the cost of the ceramic blades, and the change to ceramic blades was readily approved. Following approval, the capacity plan was adjusted to take account of the new levels of production, and a supply of ceramic blades was delivered. Unfortunately, during the MOC process, no one had considered the existing stock of steel blades or developed an EOL plan for these blades. In fact, a fresh supply of steel blades had been delivered during the MOC investigation into the ceramic blades. At the time of the changeover to ceramic blades, the company found itself holding $110,000 worth of stock of steel blades. At first glance, it might seem that the solution to this dilemma is obvious: why not just use up the stock of steel blades and then change over? Of course, it wasn’t that simple. As mentioned, the capacity plan had been adjusted to suit the new level of output. Along with this, site budgets and personal KPIs had been adjusted. Using the steel blades would now produce, on paper, a substandard result for the plant, and the site manager was not going to let this happen. This was because the steel blades held in inventory did not impact his budget but the steel blades used in production did. The blades were later written off. Developing an EOL plan during the MOC process would have saved the company from spending most of that $110,000 and having to do the subsequent write-off.

Define Your Goal Before determining what constitutes a reasonable EOL forecast, you need to decide on your goal. In an ideal world, the use of (or demand for) the last item would be the final demand for that item. Thus there would be no leftover stock and no future demand. This would be the perfect tradeoff between inventory cost and item availability. Unfortunately, the world is rarely that perfect. More realistically you are going to need to make a decision between inventory cost and parts availability. If you are the owner of the equipment, then it may be that max im-izing the availability of the equipment during its remaining life is more important than the cost of holding a few extra spare parts. In this case it can be very easy to justify large stock holdings that may not be necessary. This is a very real trap and is to be avoided. This is also the reason that the EOL plan

and the LTB require careful consideration. If you are the OEM, it may be that you are obliged by law to maintain a supply of spares for a period of years. In this case, customer service obligations may outweigh the desire to use up all the inventory. Similarly, as a wholesaler it may be that the profit generated from sales and the goodwill generated by having the parts outweigh the desire to use up all the inventory. Of course, this all depends on how much the item costs and the circumstance of the company. Hence, there is no universal solution. Considerations for EOL and LTB When it comes to developing an EOL and LTB plan, there are a wide range of issues to consider. The following list and commentary is provided to prompt your own thinking in this area. As the relative importance of each issue will vary for each and every situation, this list is presented in no particular order. The task of determining which issues are most important for your situation is left up to you. Please note that it is assumed that before reaching this point you have already explored the potential for alternative parts to be used. 1. The install base. No matter if the install base is one machine on your site or thousands of units sold to customers worldwide, a major consideration should be, how many machines are we aiming to support? A reasonable estimate of this number (not a guess!) can then be used in conjunction with the following considerations. 2. The historic part usage or failure rate. The big issue with this consideration is the quality of the data. It is important to ensure that the data that you use reflects actual usage and not the transfer of items from warehouse to warehouse or distribution center to distribution center (in the case of an OEM or wholesaler) or the transfer to a squirrel store or workshop (in the case of an owner). 3. The expected future usage. It is not always the case that the usage history is an accurate indicator of the future, so it is important to think about the potential future usage. Questions that you might ask include: Is the item used in a regular, planned maintenance activity? What is the expected pattern of failure or usage—random, planned, wear-out (and therefore maybe increasing)? Will the machine usage increase or decrease and so have an impact on the spare part demand? 4. The remaining life of the machine(s). How long are you looking to support the machine? One year, two years, forever? Are there any plans in place or being considered to replace the existing machine and so remove the need for the spare part? 5. The potential for degradation in storage. What is the shelf life of the item? If you expect to support the machine for 10 years but the shelf life of the soon-to-be-obsolete part is 5 years, then you know that you have a problem. It won’t make sense to buy a 10-year supply of something that only lasts 5 years.

6. The potential for repair of the part. Is the item repairable? It may be that when the part was readily available, the purchase of a new item was preferable to the repair of the failed item. However, with the part soon to not be available, the relative weight of this equation may have changed. It could be that rather than buy enough stock to last a lifetime, it may be better to now buy only enough items to be able to manage the repair cycle and start repairing the failed items. 7. The cost of replacing a subassembly. It may be that while the part is unique to the subassembly on which it fits, the subassembly itself might be updatable and the soon-to-beobsolete part will not need to be reordered. This approach might be most applicable to electronics. For example, a circuit board for a drive control unit may no longer be available, but the whole unit could be easily updated. This may involve additional engineering expense, but the payoff may be in reduced risk of future problems. Determining LTB Quantities After taking some, or all, of the above into consideration, you will then need to determine your LTB quantity. The question remains: just how many should you order? Previously in this section I stated that the LTB problem is really a forecasting problem. Now, armed with the information from above, you may be in a position to make a better forecast of usage and determine your LTB. However, before you do that, please consider this next step. Determining the LTB quantity is similar in concept to determining the reorder point (ROP) for an item that is in regular use. Of course, you are not trying to determine the ROP because there will be no reorder; however, you are trying to determine how many items you might use during a defined period and how much safety stock you might need in case your assumptions on usage are not accurate. This is very similar to using the logical approach for determining the ROP. The logical approach for determining an ROP requires that the calculation be split into two parts: the cycle stock and the safety stock. During the normal life of an inventory item, once the quantity on hand for an item reaches the ROP, an order for replacement stock is generated. The cycle stock is the stock that you reasonably expect to be used during the time it takes for that new order of stock to be delivered. The safety stock is the stock that you hold just in case there is excess demand or delays in delivery. This is, in effect, the emergency stock in case something goes wrong. Translating this to the LTB: The cycle stock is the stock that you expect to use during the agreed time for equipment support. The safety stock is the extra stock you hold in case there is excess demand during this support period. Splitting out the calculation in this way provides a level of transparency that makes it easy to interrogate or audit the decision. Determining the EOL Plan The final step of your process is to develop your EOL plan. This doesn’t need to be a sophisticated document; it just needs to set out the information collated, the decisions made, and the actions agreed to. A basic EOL plan could include any or all of the following, although you will note that some items are listed as mandatory:

• The details of the item, including the description and part number (mandatory). • The details of the item that will supersede this part (if appropriate). • The expected usage requirements along with the data and assumptions that support this value (mandatory). • The time frame for equipment support and/or part usage and inventory run down (mandatory). • The expected remaining quantity at the end of the equipment life. • The disposal plan for remainder quantities. • The specific agreed actions, responsibilities, and time frames (mandatory). • Authorization (mandatory). Setting out the EOL plan in this simple document not only aids communication but also provides a mechanism for continual improvement. In fact, you should build in a review to assess your plan at a pertinent future time, for example, in six months or one year. Keep the list items above in mind as you consider the following calculation of an LTB: Example of an LTB Calculation Part

Filter unit, part number 123456

Install base

2 machines

Historic usage

3 per year per machine. Twice annual planned replacement and an average of one annual emergency replacement

Expected future usage

No change from historic usage

Remaining machines

life

of

Uncertain but expect the need to provide support for 5 years

Potential degradation in storage

If stored correctly, the filter units will last more than 5 years

Potential for repair

Filter units are not repairable

Cost of replacing subassembly

Replacing entire filter assembly considered to be cost prohibitive compared with stocking filters (include costs if available)

Logic and Calculation • Support for 5 years requires 2 machines × 3 per year × 5 years = 30 units

• Safety stock, in case of extra year of usage: 6 units • Total LTB: 30 + 6 = 36 units Splitting the calculation into “support” and “safety” means that these two values can be independently assessed. Are the support assumptions reasonable? Will usage decline, and so perhaps planned replacement will be less often? Are there changes that might affect the emergency replacement needs? Is the assumption of safety for one extra year reasonable, or might it be more? Another way to determine your LTB requirements is to apply a usage profile or EOL profile. Usage profiles provide a shortcut for estimating future requirements by assigning a profile based on part type or commodity designation. They are most applicable to OEM and wholesale environments where there are a large number of units being supported in the market. The main issue with these profiles is selecting and applying the right profile. It might seem easy to apply a profile, but if the profile doesn’t match the actual component, then the shortcut adds no value in terms of improving the EOL forecast. In fact, inappropriate use of a profile may cause you to buy much more than you really need, or much less. It may be no better than a guess. Obsolescence and the First-Time Buy So far in this section, the focus on obsolescence has been about the end of life, but what about obsolescence problems that are created with the firsttime buy (FTB), that is, when the item is first created and stocked? It may seem unusual to suggest that obsolescence is created with the first-time buy, but this happens far more often than you might think. Of course, the part is not obsolete at that point, but when companies don’t pay sufficient attention to their FTB, they can purchase more than they might use during the usable life of the part or the machine. By purchasing too much with the FTB, they set up an obsolescence time bomb, just waiting to go off some year in the future. This situation is unlikely to occur with fast-moving parts or consumables. It is possible but unlikely. This situation is most likely to happen with slow-moving and just-in-case parts. Those are items where the usage might be uncertain and the stockout risk is perceived to be significant. The issues of uncertain usage and perceived risk don’t mean that you should just accept that the company will spend more than it needs to with the FTB and will ultimately write off those items. They do mean that you should pay more attention to these decisions, and the process described in this section can be used to help with that evaluation.

4.4 Spare Parts Disposal It is inevitable that you will at some point need to dispose of some items, and so a key spare parts inventory management activity is to establish a system for managing that disposal. The development of a disposal policy is covered in the section on spare parts inventory management policies. The following is included here in order to provide some guidance on the options and decision making required in managing spare parts disposal. The management of obsolescence and disposal actually starts with the initial purchase of

the item in question, right at the beginning of the creation phase. Too often companies find that some portion of that initial purchase is still in inventory at the end of the item’s life, so ensuring the best estimate or forecast of requirements at the initial purchase will go a long way to reducing obsolescence and disposal in the long term. Between that initial purchase and the end of life, managing obsolescence requires regular reviews. These help to identify items that may need action to be managed down before they become obsolete, and if that is the case, this would also be the best time to consider the disposal options. Of course, becoming obsolete is not the only way that items become candidates for disposal. Think also about items that have significant excess stock, items that are left over from project work, items that are left over from a shutdown, or those that were repairable but no longer qualify as reliable under the repairable items policy. Disposal management is not straightforward. Consider this list of disposal issues that may need to be addressed: • Identifying or confirming that the items are no longer required and should be disposed of. • Gaining approval to sell or scrap the items. • Physically removing to a separate area—ensuring isolation so that the items are not treated as active inventory. • Managing logistics issues such as transportation. • Determining the value: is it based on the asset register or current market price? What is the profit impact of any disposal or sale? • Checking for branding: are any items marked as your company’s property with a logo or name tag? • Coordinating and managing the entire process. • Deciding what approach should be taken if a sale is possible: Tender Quotations Auction Private sale • Identifying the state of the items: new or used? • Surveying locations: is the same item at multiple sites, and is it obsolete or in excess at each site? • Setting a time frame over which the material is sold.

• Determining the treatment of revenue. • Ensuring that all valid options are considered before just writing down the value, e.g.: Give preferential use (in order to use up stock) Transfer to another site (at what value?) Sell back to vendor Sell at reduced value Scrap and write down Disposal Options Disposal doesn’t have to just be about writing off the value and taking the items to a disposal facility (which, by the way, will cost money). There are a number of alternatives to writing off your excess and obsolete inventory,1 and these can be divided into: 1. Cost avoidance 2. Cash generating 3. Socially responsible Generally, the cost-avoidance options provide a greater net return with less work than the other options. This is because the value generated is equal to the full purchase price of the item that would otherwise be purchased. Note, however, that in some specialized circumstances this is not the case, and so in those circumstances cash generation may be preferable. Cost-Avoidance Options 1. Use preferentially (in lieu of another similar item): • Preferential use is one of the easiest and most cost-effective ways to deal with excess and obsolete inventory. • The effect of this is to delay or even remove the need for purchasing the other item, and so this saves the company from unnecessarily spending its money. • Sometimes this approach may result in production or reliability inefficiencies, and in these cases a cost-benefit review should be performed. • A negative production or reliability outcome should be authorized by a designated authority.

2. Transfer to other sites: • If the item is used at more than one location within your company, it may be worth transferring the excess or obsolete stock at one site to sites that can use the item. • Similar to the “use preferentially” option, the effect of this is to delay or even remove the need for purchasing the item at the other site. • There need to be firm rules established regarding payment of freight, as well as rules that prevent sending stock to a site that results in the receiving location being overstocked. Cash-Generating Disposal Options 1. Sell back to vendor: • Vendors are generally only interested in new or recently purchased materials that are still in the original packaging. • Usually the return will result in a credit rather than a cash payment (from an accounting perspective this may be treated as a cost avoidance, as it minimizes a future expense). • Vendors will sometimes also charge a restocking fee. • Sales tax may be applicable—check your local rules and regulations. 2. Sell to market: • Consign to sell through an existing vendor. This is a variation of selling back to the vendors, as they are not buying the item from you but rather facilitating the sale to their market. • Sell through a third-party investment recovery service. In this case a third party manages the sale on your behalf. The service provider will usually take a percentage of the sale value, and so maximizing the value is also in the service provider’s interest. Note that some companies will also seek a listing fee. • Sell directly. This method appears to be attractive because of the many ways that items can be sold and advertised through the Internet, and your company keeps more of the value realized. However, this can be a time-consuming and resource-hungry process, and for this reason most companies do not pursue this option. Other guidelines to consider: • It may be acceptable for items of a low value to be sold via an informal process, while items of a higher value will require a formal process for gaining and reviewing offers. • Similarly, it may be necessary to confirm that the transaction both represents best value and is at arm’s length from the people involved in the sale process and decision making.

• Sales should be “as is, where is” in order to avoid unexpected freight or delivery costs. • At no time should companies provide a warranty on the operation of parts. Ensure this is stated as a condition of sale. 3. Sell for scrap: • Scrap merchants will sometimes take items, but they are generally interested in items that require little additional work by them before they can realize the value. For example, they will readily take steel or other metals but not equipment made from steel that may need stripping before being melted down. • The value offered by scrap merchants is often so low that companies find the time spent dealing with the transaction not worth the value generated. 4. Write off: • A write-off occurs when the company adjusts the value of the item, as reported in the company accounts, to zero. • It may seem counterintuitive to include write-offs in a section on cash-generating options, but in some circumstances a write-off can be cash generating. This occurs when the writeoff results in a reduction in reportable profit (because of the reduction in value in the accounts) and therefore a reduction in the company’s tax payable. (The reduction in profit is also the reason that many companies take a long time to deal with excess and obsolete stock.) • In most jurisdictions, all written-off parts have to be permanently removed from the site, must be rendered unusable, and are not to be transferred to any third party. Socially Responsible Options 1. Donation: • Not all items that cannot be sold or used need to go to a landfill. For some items it may be a valid option to donate unwanted items to charities in the local community. • Sometimes trade schools are in need of items for students to work on to practice their skills. • Charities may be willing to take low-value items to a scrap merchant (where the value may be too low for the donating company to spend time arranging). Some charities actively strip precious metals from computer items and so take these items for no charge. 2. Environmentally friendly: • No matter how you choose to dispose of these items, please ensure that the method is environmentally responsible.

10 Key Lessons: Obsolescence 1. It is inevitable that any spare part will, at some point in time, become obsolete. 2. For all practical intents and purposes there are just two mechanisms that lead to obsolescence: vendor-led and owner-led. 3. When developing an End-of-Life plan you must first decide your End-of-Life goal: minimum inventory cost or spare part availability? 4. Splitting the Last-Time-Buy calculation into ‘support’ and ‘safety’ means that these two values can be independently assessed. 5. Internal communication is one of the greatest hurdles in obsolescence management. 6. Purchasing too much with the First-Time-Buy sets up an obsolescence ‘time bomb.’ 7. A key spare part inventory management activity is to establish a system for managing spare parts disposal. 8. Preferential use at the current or related sites is one of the easiest and most cost effective wats to deal with excess and obsolete inventory. 9. Vendors are generally only interested in returning new or recently purchased items that are still in the original packaging. 10. Sale of old parts rarely generates any significant return.

References Preface 1.

Leonard E. Read, “I, Pencil: My Family http://www.econlib.org/library/Essays/rdPncl1.html.

Tree

as

Told

to

Leonard

E.

Read,

”

2. Phillip Slater, Smart Inventory Solutions, 2nd ed., Industrial Press, New York, 2010.

Part 1 1. This research was conducted by Phillip Slater over more than five years and involved more than 200 storerooms worldwide. The tool used for the research was the materials and spare parts management matrix, discussed in the section “Identifying Best Practice Spare Parts Management.” 2. Source: Initiate Action consulting files, client confidential. 3. Phillip Slater and Joel Levitt, The Elephant in Your Storeroom, published at SparePartsKnowHow.com, 2013, http://sparepartsknowhow.com. 4. http://www.oxforddictionaries.com/definition/english/collaboration. 5. http://www.oxforddictionaries.com/definition/english/cooperation. 6. Ron Ashkenas, “There Is a Difference Between Cooperation and Collaboration,” Harvard Business Review, April 20, 2015. 7. http://taxfoundation.org/blog/monday-map-property-taxes-business-inventory. 8. The WACC values are calculated at http://www.gurufocus.com/. 9. Search conducted by typing “system definition” into Google search box. 10. https://en.wikipedia.org/wiki/Bullwhip_effect. 11. https://en.wikipedia.org/wiki/Policy. 12. http://www.oxforddictionaries.com/definition/english/procedure. 13. http://www.iso.org/iso/catalogue_detail?csnumber=44651. 14. http://www.eccma.org/whyeotd.php. 15. http://www.nato.int/structur/AC/135/ncs_guide/english/e_index.htm. 16. This is the best, credible, value that I have seen. 17. David Greenberg and Henry Schindall, A Small Store and Independence: A Practical Guide to Successful Retailing, Greenberg Publishing, 1945. 18. As explained in note 1, this research was conducted by Phillip Slater over more than five years and involved more than 200 storerooms worldwide. The tool used for the research was the materials and spare parts management matrix. 19. https://en.wikipedia.org/wiki/Cherry_picking.

Part 2 1. http://www.phillipslater.com/phillip-slater-testimonials/.

2. http://www.merriam-webster.com/dictionary/standardize. 3. Phillip Slater, Smart Inventory Solutions, 2nd ed., Industrial Press, New York, 2010.

Part 3 1. This content was developed from material originally produced by Steve Ilic. 2. Source: Neil Bloom, author of “RCM—Implementation Made Simple,” and the Association of Asset Management Professionals, http://www.maintenance.org/topic/key-success-factors-for-rcm. 3. John Moubray, Reliability Centered Maintenance, 2nd ed., Industrial Press, New York, 1997. 4. The ICR process is explained in detail in Phillip Slater, Smart Inventory Solutions, 2nd ed., Industrial Press, New York, 2010. 5. Slater, Smart Inventory Solutions, 2nd ed. 6. Source: Initiate Action consulting files, client confidential. 7. “Bar Coding for Beginners,” http://www.bar-code-fonts.com/barcode-101.html. 8. This content was developed from material originally produced by sparesFinder, http://www.sparesfinder.com. 9. This research was conducted by Phillip Slater over more than five years and involved more than 200 storerooms worldwide. The tool used for the research was the materials and spare parts management matrix discussed in “Identifying Best Practice Spare Parts Management” in Part 1.

Part 4 1. Chris Collins, “10 Ways You Can Monetize Excess Inventory,” Asset Management and Maintenance Journal, August 2015, pp. 114–115.

Commonly Used Acronyms and Abbreviations

ASAP

Auslang Dictionary of Item Names Application for new stock item, also American National Standards Institute As soon as possible

BOM

Bill of material

CM CMMS

Condition monitoring Computerized maintenance management system

DIFOT DR

Delivery in full on time Demand rate

EAN EOL EOQ ERP E-SPIR

European Article Number End of life Economic order quantity Enterprise resource planning Electronic Spare Parts Interchangeability Record

FIFO FMCG FTB FTE

First in, first out Fast-moving consumer goods First-time buy Full-time equivalent

ICR ID IMSP IRA ISO IT

Inventory cash release Inside diameter Integrated maintenance and spare parts planning Inventory record accuracy International Standards Organization Information technology

KPI

Key performance indicator

LIFO LSA LT LTB

Last in, first out Logistics support analysis Lead time Last-time buy

ADIN ANSI

MAX MDM MIN MMS MOC MOQ MRO MRP MTBF

Maximum Materials Data Management Minimum Maintenance management system Management of change Minimum order quantity Maintenance, repairs, and operations Materials resource planning Mean time between failure

NSC NSN

NATO Stock Classification NATO Stock Number

OAR OD OEM

Order as required Outside diameter Original equipment manufacturer

P/N PCB PM

Part number Printed circuit board Planned maintenance

RACI RCM RCS ROP ROQ RTS

Responsible, accountable, consulted, informed Reliability-centered maintenance Reliability-centered spares Reorder point Reorder quantity Return to store

S&OP S/N SAP SIN SKU SPIL SPIR STD

Sales and operations planning Serial number Systems applications and products Short item number Stock keeping unit Spare parts interchangeability list Spare parts interchangeability record Standard

TCO

Total cost of ownership

UOM UPC

Unit of measure Universal product code

WACC

Weighted average cost of capital

Index A ABC analysis, 15 Accrual, 37, 38 Accuracy, 199, 200, 204-209, 214, 216, 247 Apple, Inc., 34-36 Assets, 39-42, 219, 231 Asset register, 23 Audit, 213, 225

B Balance effect, 12 Balance sheet, 39-43 Bar codes, 189, 215-220 Best practice, 70, 72, 77, 80-87, 149, 164 BHP Billiton, 34, 36 Bill of materials, see BOM BOM, 22, 46, 157, 222, 238 Budget, 34 Buffering, 43, 167 Bulk procurement, 48, 64, 95, 239 Bullwhip effect, 48

C Cannibalization, 18 Capital cost, 35, 102, 107 Capital equipment, 45, 241 Cash flow, 39-41 Catalog, 23, 187, 224 Categories, 63 CMMS, 171, 226 Collaboration, 30, 31 Communication, 17 Compliance, 67, 244 Computer Maintenance Management Systems, see CMMS Condition Monitoring, 145, 146, 158 Consignment, 65, 95 Consumer Service Factor, see CSF Continual improvement, 55, 67 Cooperation, 30, 31 Cost allocation, 23 Cost management, 22, 172 Create and stock, xi, xii, xiii, 89-137, 249 Criticality, 16, 18, 149 Critical spares, 64, 109, 122, 127, 137 CSF, 127 Cycle count, 53, 75, 194, 195, 198, 199, 212, 219 Cycle stock, 129, 131, 133, 134

D Data analysis, 150 Data and cost management, 20

Data cleaning, 224-226 Data governance, 225, 226 Debt, 33 Deficit, 40-42 Delivery in full on time, see DIFOT Demand, 125-130, 136, 151, 154, 157, 165, 167, 234, 261 Departmentalization, 29 Depreciation, 37, 38 Designed Systems, 5 DIFOT, 14 Direct labor, 36 Disposal, xii, xiv, 45, 56, 62, 63, 66, 194, 249-271 Downtime, 11, 20, 32, 171, 175 Dumb parts numbers, 69

E Economic order quantity, see EOQ ELR, 178 End of life, see EOL Enterprise resource planning, see ERP EOL, 257-259, 262 EOQ, 14, 25, 129 ERP, 68, 71, 81, 191, 220, 221, 225, 226, 239, 262, 271 Excess inventory Excess parts redistribution, 48 Expected Life Ratio, see ELR Exponential Smoothing, 144 ExxonMobil, 34, 36

F Factory, 8 Failure, 103, 104, 110, 147, 152, 153, 155, 156, 176, 251, 260 Finance, 29, 30, 32, 117, 148, 178, 234 First-time Buy, see FTB Fiscal management, 43 Fixed capital, 38 Fixed-interval maintenance, 21 Forecasting, 19, 102, 143-147, 237 Forester effect, 48 Free parts, 107, 108, 137 FTB, 264, 271

G Gaussian function, 18, 126 General Motors, 34, 36 Grouping, 183 Guesswork, 17

H Holding levels, 66

I ICR, 106, 159, 162, 169, 247 Identification, 68 IFS, 44 IMSP, 23,1233-238, 247 Indirect labor, 36 Insurance spares, 65, 105, 106

Integrated maintenance and spare parts planning, see IMSP Intelligent parts numbers, 69 International Standards Organization, see ISO Inventory, 9, 141, 142, 148, 150, 158, 168, 187, 188, 193, 198, 202, 206, 247 Inventory management, viii, ix, 24, 71 Inventory Cash Release, see ICR Inventory optimization, 50, 148, 149, 159, 160, 194 Inventory prevention, 50, 52, 87 Inventory reduction, 27, 162-168 Inward goods movements, 35 ISO, 67

J JIT, 14 Just in time, see JIT

K Key performance indicator, see KPI KPI, 180, 190, 191

L Labeling, 188-190, 218 Last-time buy, see LTB LCR, 178, 179 Lead time, 18, 94, 110, 122, 129, 130, 173, 176 Liabilities, 39-42 Life/cost ration, see LCR Life cycle, 44, 251 Logistics, 16, 18, 101, 106, 159, 178, 181, 182, 227, 234, 235, 265 LTB, 256-258, 261-264, 271

M MAD, 127 Maintenance, 11, 20, 24, 27, 142, 154, 155, 183, 202, 235, 242, 244 Maintenance management, 20, 21, 29, 169, 229 Maintenance, repairs, and operations, see MRO Management of change, see MOC Materials management, 20, 23 Materials resource planning, see MRP Mean average deviation, see MAD Mean time between failure, see MTBF Metrics, 56, 60, 77, 192 Minimum order quantity, see MOQ Moubray, 103, 152 MOC, 175, 257, 258 MOQ, 132, 133, 246 Moving average, 144 MRO, 6–9, 19, 57-63, 240 MRP, 14 MTBF, 104 Multiechelon systems, 47, 49, 95

N Net worth, 39-42 Normal curve 126-127 Numbering system, 68

O Obsolescence, xi, xii, xiv, 35, 45, 149, 164, 237, 243, 249-271 OEM, 99, 174, 177, 242, 243, 252, 254, 256, 259, 264 Operating expense, 33 Operating statement, 39-41 Operations, xiv, xi, 20, 26, 139-247 Operational results, 20 Optimization, 50, 51, 150, 152, 159, 169, 170 Original equipment manufacturer, see OEM Outward goods movements, 35 Over-ordering, 32 Overstocking, 18, 218, 237

P P&L, 39-42 PeopleSoft, 44 Personal protective equipment, see PPE Planning and scheduling, 20, 22, 141, 196 Planning horizon, 93, 94, 96 Poisson, 18, 128 Policies, 53-61, 66, 74, 78, 79, 244, 265 PPE, 83, 257 Preventive maintenance, 21 Procedures, 66, 74, 79 Procurement, 25, 26, 29, 32, 66, 142, 176, 201, 203, 227, 229, 234, 235, 239, 240, 242-246, 261 Profit and loss, see P&L Purchasing, 23, 29, 30, 35, 95, 128, 179, 187, 234, 243, 265

Q QA, 177 Quality assurance, see QA QC, 177 Quality control, see QC

R RACI chart, 61 RCM, xi, 103, 152, 153 RCS, 20, 145, 151-154, 156-159, 169 Redundant stock, 18, 20 Reliability, 85, 149, 176, 228, 230, 245, 267 Reliability-centered maintenance, see RCM Reliability-centered spares, see RCS Reorder point, see ROP Reorder quantity, see ROQ Repairableitems, 59, 141, 171, 173, 174, 178, 260 Repairs management, 23, 219 Requisitions, 29, 229 Response times, 48 Retail model, 10 Return, 13, 188, 219 Revenue, 39, 63, 266 Risk, 67, 116, 119-121, 154, 155, 175, 237, 244, 256 ROP, 23, 26, 58, 59, 81, 83, 84, 92, 101, 106, 115, 124-129, 133, 134, 151, 167, 180, 189 ROQ, 58, 81, 83, 84, 92, 106, 124-126, 128-134, 137, 151, 166, 167, 243, 245, 246 Rotable spares, 16,18, 171, 219 Run to failure, 21

S

S&OP, 229, 231, 233 SAP, 44 Safety, health, and environment, see SHE Safety stock, 26, 64, 126, 129-131, 133, 134, 137, 165, 166, 181, 182, 261 Samsung, 34, 37 Sales and operations planning, see S&OP Scientific method, 79 Service parts, 253, 255 Shareholders, 33 SHE, 175, 176 Single-echelon system, 47 SKU, 29, 35, 36, 45, 46, 162, 165, 168, 222, 241 Slow-moving inventory SMART goals, 207 Spare parts inventory, 11, 15, 17, 22, 24, 25, 51 Spare parts management system, xiii, 3-87, 230-232, 238 Sparesology®, 1 Spoilage, 37 Squirrel stores, 23, 84, 85, 240 Stock items, 10 Stock keeping unit, see SKU Stockouts, 16, 154 Stock takes, 58, 66, 188, 194-199, 207, 212, 219 Stock turn, 73, 192, 231 Stocking procedure, 74, 91 Storeroom, xiv, 12, 150, 180, 182, 187, 193, 195, 207, 210, 211, 228, 229 Supply and demand, 25 Supply chain management, 7, 13, 87, 149, 159 Supply chain techniques, 13, 101, 247, 253, 254 Surplus, 39-42

T TCR, 178 Time-based replacement, 19 Total cost ration, see TCR

U Unit of measure, see UOM UOM, 189, 194, 205, 240, 246 Utilities, 35 Utility, 38

V Value, 12, 63, 167 Vendor-managed inventory, see VMI Visibility, 48 VMI, 163 Volkswagen, 34, 37

W WACC, 34 Warehousing, 7, 210, 212 Weighted average cost of capital, see WACC Whole-of-life-costs, 156, 158 Wholesale, 11 WIP, 57-60, 63 Work in progress, see WIP Work order records, 23 Working capital, 38

Write-off, 52, 269