Subject area: Spare Parts Management Procurement
Procurement plays a crucial role in spare parts inventory management, ensuring the availability of parts while minimizing costs and waste.
By effectively sourcing, negotiating, and managing the supply of spare parts, procurement services contribute to streamlining inventory, enhancing decision-making, and reducing costs.
However, achieving these outcomes requires an alignment of goals between procurement and spare parts inventory management.
When the goals are not aligned, the procurement function can, without realizing it, actively work against effective spare parts management and reducing costs.
How can this be, I hear you say.
Surely, a key goal for procurement will be cost reduction.
Yes, it will be, however, it is how that goal is achieved that really matters.
The most obvious way that procurement and effective spare parts management can be misaligned is when procurement seeks ‘lowest unit cost’ outcomes.
To achieve that goal procurement buys cheap parts or buys excessive quantities to achieve a volume price break.
But cheap parts may have a shorter life (requiring more frequent replacement) or may impact plant reliability through increased failure rates.
Excess quantities that get price breaks may result in buying items that will never be used.
These outcomes clearly do not align with the goals of spare parts inventory management, but they are often ignored as the procurement practice aligns with the goals of the procurement function.
However, there is another, less obvious, dare I say, hidden, way that spare parts management procurement misaligns with the goals of spare parts inventory management.
That is, procurement frequency.
Less frequent procurement has a double-whammy impact on spare parts inventory.
First, it means more stock is required for what I call ‘cycle stock’ plus, due to the extended time between procurement events.
Then, it means more safety stock is required to manage the risk of excess demand or delayed delivery during that extended time between procurement events.
(Note that in our training we show people how to split their ROP or Min calculation into separate components as it increases transparency of decision-making.)
These two issues add to greater than necessary spare parts inventory.
Typically, these procurement frequency issues arise when the procurement function chooses to limit the number of orders they place (say, determining that items will only be ordered a maximum of twice per year) or when resourcing means that there are lengthy delays in processing new orders.
(Heaven help any company that experiences both.)
In both above cases, the driver is cost savings for the procurement function.
Less frequent ordering for inventory means fewer orders to process. Reduced procurement resourcing means less capacity for order processing, and so lengthy delays.
Neither of these actions align with the goals of effective spare parts management.
Plus, the effect is not felt by procurement. The effect is to increase the level of inventory that is held and that is, typically, not a metric for procurement. That is someone else’s problem.
Here are a couple of examples.
- Recently, in our training, it came out that the VP of Procurement for the company had decided to limit the number of P.Os raised per inventory item because it helped him manage the cost of his department. The logic was that each P.O had a cost of processing and so limiting the number limited the costs. No doubt this is true, except that this was done with no reference to the overall cost to the company, only the procurement cost. So, the real impact was to increase the inventory level and all the associated costs with holding and managing inventory.
Plus, the inventory management team had determined appropriate ROP and ROQ parameters, but the procurement decision meant purchasing more that the recommended ROQ and so they were often shown to be overstocked in many items. They were then put under pressure to reduce the inventory levels, despite the cause being out of their control. This was a cause of much friction and frustration in the organization.
- In another case, as a cost cutting measure the procurement leadership had reduced their staffing so much that any new P.O took about 3 months to process. This delay effectively added to the lead time for replenishment and so directly added to how much inventory the company needed to meet the maintenance and operations demands.
In both cases the procurement decisions were short-sighted.
Here’s the real problem: these issues are process related and require a cross-functional understanding of spare parts inventory management for their resolution.
You can’t identify and resolve these issues by looking solely at procurement or solely at inventory management. You cannot identify and resolve these issues through software analysis.
You can only identify and resolve these issues by understanding the full process of spare parts management and by taking an approach that looks beyond the immediate silo structures.
That will only be achieved with appropriate, and holistic, spare parts management training and the insight that this can deliver.
Study at a pace and place that suits you
The Advanced Spare Parts Management Course covers all the issues faced during the spare parts inventory management lifecycle.
Completing this course equips you with the know-how and skills to effectively manage all aspects of spare parts inventory.
The course specifically focusses on MRO and spare parts that are held in support of equipment operations and maintenance.
Posted by Phillip Slater