Does your company buy spare parts as part of new capital equipment purchases?
Are these then treated as ‘free spare parts’ when used by your team?.
There are some very real consequences from how we treat those so-called ‘free’ parts.
It’s just that sometimes they’re not so obvious to us.
Phillip Slater explains.
The High Cost of Free Parts
Video Transcript
Hi, my name is Phillip Slater and for the next couple of minutes I’d just like to give you something to think about.
Today I’d like to talk about the high cost of free parts.
What you say, free parts? How can free parts cost, surely the definition of free is that there is no cost? But there is a cost and it’s often a hidden cost. So first how do we get free parts? Sounds like a good deal.
Well what happens is that when a company buys new capital equipment, the providers of that equipment will typically bundle in some quantity of spare parts.
The cost of those parts is included in the budget for buying the equipment. So, it gets separated from the cost of spare parts.
And when those parts are then put into the storeroom, for future use, they are typically listed as free issue or certainly there’s no cost of issue associated with them because the cost has been allocated as part of the other capital budget.
Sounds like a great deal, free spare parts for use by maintenance.
The only the problem is that when you start using those parts the actual cost of doing the maintenance isn’t accurately recorded.
So that means that you are spending effectively more than your records show that you are. All because you had those so-called free parts.
Meanwhile, in the storeroom they’ve got all these parts that are seen to be free and those parts get used and when they’re used, they need to be replaced.
So therefore, we are now spending money replacing those parts, and that’s the right process to go through, except that those parts now have a value in the storeroom and so the value of your inventory increases now by the value of the new purchases.
Except you haven’t changed anything. You’re still stocking same parts you did before. It’s just that you’ve now had to pay for them out of that budget and so they’re score-carded differently. They are accounted for in a different way.
Now this can lead to the finance people saying, well look the value of our spare parts has increased significantly and this means we need to take action to reduce the value of the parts we have.
So much for free parts.
I guess the real message here is that while free spare parts sounds like a great deal, the consequences of the decisions about how we treat those parts actually has meaning and there are ramifications. It’s just that sometimes they’re not so obvious to us.
That’s something the think about.
My name is Phillip Slater.
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Posted by: Phillip Slater