The problem is that people see spare parts inventory only as engineering components and so think that their inventory decisions are engineering decisions
Imagine walking into a storeroom or warehouse and finding the shelves stacked high with cash.
Ten thousand dollars on one shelf, two thousand on another. A storage bin filled with 10 dollar notes over there. Everything neatly labelled and catalogued.
Like a bank vault in a movie, except that everything is on display.
Now imagine that the value of the cash on the shelves diminishes rapidly. Not in the usual slow way that cash loses relative value over time but fast, like the way that new cars lose value as soon as you drive them out of the dealership. Once the cash is on the shelf it is as good as gone and can’t be used to buy anything.
Imagine that you need to have at least some cash on those shelves because you know that when the time comes to pay, not having enough cash costs you a big penalty. Worse still, you don’t know, definitively, how much you will need in total. Despite all the best will in the world, you can’t tell if you have too much or too little.
How Would You Manage That Cash on the Shelf?
Faced with this problem, what would you do?
Would you not bother checking if past assumptions on how much cash to hold worked out OK?
Probably not.
Would you, say, only twice per year monitor how much cash there is on the shelf and in-between checks not really worry too much?
Definitely not.
Would you let just anybody in your company decide how much cash to put on the shelf?
Absolutely not.
Spare Parts Inventory Behaves Just Like Cash on the Shelf
Of course, you know that I am not literally talking about cash, I am talking about spare parts inventory.
The reality is that in asset-intensive organizations, spare parts that are kept for equipment repairs and maintenance, behave just like cash on the shelf. Once you buy them they lose value. Rapidly. The purchase of a spare part uses up a valuable resource, cash, in a way that means it cannot be reassigned or re-spent. For all intents and purposes, once it’s used, it is gone.
Purchase too few of the required part and you can pay a big penalty in terms of downtime and lost production.
But purchase too many and the extra parts provide you with exactly zero functional utility.
They add no value at all to your organization. In fact, it’s just the opposite, they use up a valuable resource that cannot be renewed.
What should you do to manage that cash?
Continuously monitor how much was spent, on what, and what the total was?
Naturally.
Check whether your systems are delivering good outcomes and adjusting your settings based on the results?
Good idea.
Be very careful about who you allow to make decisions on how much to hold?
Smart move.
Provide specific guidelines on how to make those decisions?
Smarter move.
Making Progress With Spare Parts Inventory Management Depends on How You Frame the Problem
For most companies, the problem with spare parts inventory management is not that inventory management is hard, it’s not. The problem is that they look at the spare parts inventory only as engineering components and so think that their inventory decisions are engineering decisions. They’re not. Or they think that the management of this type of spare parts inventory is the same as generic inventory management. It’s not.
Spare parts inventory management is a financial decision-making process bound up in engineering and supply chain constraints.
Once this is understood companies can then start making decisions to influence these constraints so that they create better financial outcomes.
By framing the problem as ‘inventory management’, companies constrain themselves to a very small set of possible solutions. These solutions are almost always sub-optimal and sometimes can be harmful.
For example, a sub-optimal solution comes from the assumption that history is a good indicator of future performance. With spare parts it almost never is.
A harmful solution results when companies start using indicators such as MTBF (of MTTF) as a proxy for spare parts demand. People who understand that metric know that it cannot be used for any form of tactical or operational decision making. It is far too high level for those types of decisions.
Framing the problem as ‘inventory management’ also means that only ‘inventory managers’ are involved in decision making. This is a major mistake because the problem is multi-faceted and therefore requires input from several different sources.
However, by framing the spare parts management problem as ‘managing the constraints to achieve good financial outcomes’ companies then open up a range of possible actions that they can take to reduce their inventory without increasing risk. These are what we call the ‘7 Actions for Inventory Reduction’.
This ‘managing the constraints’ approach also means that companies, almost naturally, will seek a broader range of input. They will need guidance from the range of people who understand the constraints.
The Answer is to Challenge Constraints, Not Accept Them
Going back to the cash analogy above. If the problem is understanding whether you are spending too much or too little, then the answer doesn’t lay in ad-hoc guesswork or unreliable metrics. The answer is not to accept the constraints of supply and demand but to challenge them. That is how you get your cash off the shelf and back into the company’s bank account.
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Posted by: Phillip Slater