For most asset-intensive companies, spare parts are like the air that we breathe. Not thought about at all when in ample supply but the number one focus for survival when not available.

Spare Parts Inventory – The Forgotten Investment

A little over ten years ago I coined the phrase, ‘the forgotten investment’ as a description of most asset-intensive companies’ approach to spare parts management.

At the time I wrote, “For many people [spare parts] inventory is not a serious business topic. [Spare parts] inventory is something that accountants count and stores people store. The cash impact is not always fully appreciated. [Spare parts] inventory is the forgotten investment.”

In the time since then more and more asset-intensive companies have gained an appreciation of the need for an improved focus on spare parts management and they have gained massive benefits from this. Unfortunately, however, this is not yet universally the case.

The Wasted Costs Are Avoidable

Many asset-intensive companies still view spare parts management as a low level operational task. This results in spare parts inventory responsibilities being allocated to middle managers (and even supervisors) who themselves don’t see this task as core to their job. As a result, these companies:

• Waste millions of dollars on inventory that they don’t really need – in one case I know of personally it was hundreds of millions.
• Fail to get proper leverage from their IT investments – they spend up big on their ERP and then use excel as a work around.
• Throw ‘good money after bad’ through spending on ad-hoc ‘thought bubble’ problem solving – including software that is supposed to optimize their inventory but doesn’t (and in fact can’t).
• Let down their customers (both internal and external) when they are unable to fulfil their product and service promise.

All of this is avoidable when senior managers and CFOs stop treating spare parts as a third-order issue that has little business impact and start seeing spare parts as a core function that helps deliver on business strategy and supports profit achievement.

Here is the first of 7 things that every senior manager and CFO should know about spare parts management.

1. Most of What You Have Learned About Inventory Management Does Not Apply to Spare Parts

We all know that moment when we meet people at a conference, event, or even socially at a bar-b-que, and we are asked what we do for a living. When I explain that I help companies optimize their spare parts investments, almost universally the reply is something like, ‘Oh, so you do JIT’. (Fortunately I have learned to resist the urge to get on my soapbox with a lecture as to why this is wrong.)

This JIT response tells us that most people in industry have some idea about inventory management but that their understanding is informed by standard supply chain and inventory management theory, not spare parts inventory management.

Spare parts inventory that is held to support operations and maintenance exhibits a range of characteristics that are different to the other types of inventory (such as raw materials, WIP, and finished goods). These latter three items are often referred to as direct inventory while spare parts are referred to as indirect inventory.

So what are these differences? Here is a list that I have identified.
With spare parts inventory:

• You stock items that you don’t want to use (this is a big one!)
• Items of small value can be critically important
• Stock out costs are disproportionately high
• Users are part of the process but (generally) are not accountable for their actions
• The small market (your equipment) eliminates any potential ‘balance effect’
• There can be huge forecast variations due to technical requirements
• There are massive variations in the value and volume of items managed
• Stock sales realize little or no return

Once senior managers understand that the theory taught about supply chain does not apply to their spare parts inventory they then realize that their spare parts inventory management needs a different focus if they are to stop wasting time and money.
 

Free Online Mini-Course

To help you understand the issues we have created a free online mini-course. This course, An Introduction to Spare Parts Inventory Management, provides an introduction to the concepts and critical thinking required to identify, analyse and solve spare parts inventory management problems.
 

Follow this Link for Access to the Course