Despite the Costs, Companies Routinely Accept Sub Standard Results
There are some statements we can make about spare parts inventory management with absolute certainty.
One is that: the need for companies to apply at least ‘good practice’ inventory management is self-evident.
Self-evident because of the cost of purchasing the inventory.
Spending money to buy things that you just don’t need (or in quantities that you don’t need) just doesn’t make any sense. However, the reality is that many items that become obsolete are left over from the initial purchase. This is a complete waste of company funds.
Self-evident because the cost of not having the right inventory when you need it can be disproportionately high.
Not having what you need in manufacturing or process industries results in extended downtime. Not having what you need with service spares results in clients not meeting their goals. Not having what you need under an SLA could result in financial penalties.
Self-evident because of the cost of financing and holding inventory.
- Yes, globally interest rates are low but the financing costs for companies is still significant. Financing is measured using the term Weighted Average Cost of Capital (WACC). In the chemical industry the average WACC is 10.8%. In steel, 9.5%. O&G 8.5%. Transportation 6.5%. And this doesn’t include the cost of managing the inventory!
Another thing that we can say with absolute certainty is that: companies spend lots of money on resources to try and achieve better outcomes.
They spend this money on people (their team members), software (both their ERP and specialist software), and consultants (and not all consultants are equal!).
Yet, despite the certainty of the costs and the application of resources, companies routinely achieve, and accept, substandard results.
Why Companies Routinely Accept Sub Standard Spare Parts Inventory Results
In the author’s experience, there are three top-level reasons why companies routinely achieve substandard results.
First, they don’t know any better and think that they are doing OK.
- There is a whole range of reasons why this might be:
- It has always been this way and they don’t check their performance. The ‘if it ain’t broke, don’t fix it’ attitude does not lead to improved results.
- They make comparisons to other companies that are also poor performers. In their defence it is true that good benchmark data is hard to come by.
- Their measures of performance are one-dimensional. They may not have stock outs, but they are also overstocked. Or they aim to reduce stocks while assuming little or no operational or sales impact.
- They measure their metrics incorrectly. The classic example of this is stock turn. Many companies measure stock turn by including all inventory that just passes through their storeroom. This exaggerates the outcome as these items were never intended to be inventory.
- They get inappropriate advice. Not all inventory has the same characteristics. Finished goods, service spares, and in-house spare parts all have different characteristics and any advice needs to be tailored appropriately.
- They don’t realize that their data is not reflective of reality. Understanding what data tells us involves much more insight than just understanding statistics.
Second, they don’t know what else to do.
It is often said that the definition of madness is doing the same thing and expecting different results.
With spare parts inventory this might also include reinforcing the status quo by doing more of what wasn’t working and expecting that to change the outcome.
Third, it is not perceived to be important – until it is.
Sure, it is always important to the people directly affected.
But what I mean here is that management doesn’t make consistent and ongoing good practice a priority, or commit the resources to develop staff skills to improve results. Then, when some event occurs, or the stock level reaches stratospheric levels, suddenly the spare parts inventory is the most important thing. The result is a knee-jerk reaction where people can ‘tick the box’ that something has been done but where the result is short-term, at best.
3 Signs that You Are Probably Accepting Sub Standard Spare Parts Inventory Results
If you are wondering if you are accepting sub standard spare parts inventory results, measure your company against these three signs.
1. Senior management shows little interest in doing what’s required to make changes.
- This shows itself in different ways at different companies, for example:
- The most obvious is when management doesn’t commit the required resources, support, and time.
- Less obvious is when they don’t have the will to implement change for fear of upsetting key personnel. Usually these personnel are the cause of the problems.
- Sometimes they assign someone the task of generating the required systems but expect it done while they do their existing job and without any obvious, vocal, public support or back up.
- Companies with multiple, autonomous, locations need corporate management to lead the way. Often the local management have their own priorities, driven by their KPIs, and if corporate doesn’t address this, then local priorities prevail.
What to do: If any of these are the signs that you see, then you need to build the case for change and show just how much inaction and lack of resourcing is really costing.
2. You don’t have in place objectively developed stocking policies.
Stocking policies are the key to communicating the requirements of the organization with respect to inventory decisions. They provide the framework for decision-making. They are auditable. They remove ad-hoc, emotional decisions. They need to be specific. They don’t need to be externally developed but they do need to be objectively developed.
If you do not have specific and objective stocking policies, that are actually followed, then it is almost impossible for you to achieve good practice outcomes.
What to do: If this is the sign that you see in your company then the good news is that developing policies is not difficult, but it does take some guidance to get right. Just don’t start with a blank page, use some templates and edit them to suit your company.
3. Training is non-existent or limited to a few people.
Many companies seem to think that training someone to use their chosen ERP software is the same as training in inventory management. This is not correct. Your ERP software is for tracking transactions. Spare parts management is about much more than transactions. So, while your team does need to understand your ERP software, they do need specific training to understand the nuances and issues of spare parts management.
The other training related sign of accepting substandard results is when companies train just one person and expect them to be able to distribute their know-how across the organization.
This might work at a single site with a single storeroom and few personnel, allowing for focussed attention. However, it won’t work in any meaningful or timely way, if there are multiple sites and therefore shared attention.
What to do: If this is the sign that you see in your company, then you should recognize the benefits of good practice outcomes, find the budget and train your team!
Which One Are You?
Spare parts inventory management is just like every other aspect of business: there are a few top performers, a group in the middle, and many underperformers.
Which one are you?
And if you are not a top performer, which of the three signs that you are probably accepting sub standard spare parts inventory results can you see reflected in your company?
Find out how we can help you avoid sub standard spare parts inventory results by visiting our Welcome page.