June 13, 2011
by Mark Eystad
We have talked about utilizing your Computerized Maintenance Management System (CMMS) to apply the Principles of Lean to track spare parts inventory (See “Parts-focused,” M&P January, 2010). Of course, today’s business climate means always ‘taking it to the next level.’
Hopefully, you followed the advice from January 2010, and it’s been a year since you applied Lean to your spare parts inventory. So, when was the last time you reviewed your spare parts inventory levels? A critical analysis of your spare parts inventory should be done, at a minimum, once a year, which is why we are revisiting the topic.
Most CMMS software allows you to slice and dice your inventory in virtually any manner you’d like to see it. There are several ways to analyze the data. It helps to know total spare parts inventory value on a weekly (or at a minimum a monthly) basis. When charted over time, this value ought to be trending down. Unfortunately, the opposite is often the case, as reorder points or inventory levels are adjusted up when individual stock-keeping units (SKU’s) are found to be out of stock.
The next analysis is days-on-hand of inventory. There are two ways to conduct this analysis. First, you can sort by SKU, at normal usage, how many days of inventory are sitting on your shelves? Secondly, you can multiply the days since you have received the part into your inventory by the value of the part to see how many ‘dollar days on hand’ you have in your warehouse. Please note this is not any attempt to place a value on any individual part. This is simply a measurement tool. It bears no relation to any Generally Accepted Accounting Practice (GAAP) rules. Now, use the software to sort from most days on hand (or most ‘dollar days on hand’) to least days on hand.
Generally, these analyses will follow the Pareto Principle where 80 percent of the cost is contained in 20 percent of the SKU’s. This is where the usefulness of the CMMS software ends and good old experience comes into play. Now it is time for you as a maintenance manager to do one of your least favorite activities – sit at your desk and review data.
There may be some outlier’s like that one really expensive gearbox you’ve had on your shelf since a particular piece of equipment was installed. Only very sophisticated CMMS software will be able to identify whether those parts belong to critical equipment of not. This is why humans still have to review the data and make the final call. If that really expensive gearbox is a one-off and not having on your shelf means the plant may shut down, then you have to be able to explain that to the financial department that is looking at you to reduce your inventory. Taking action
The analysis is the first step, but in order for this process to have an effect on your company’s bottom line, you’ll need to convert the analysis into action. As you review each line item, you need to ask yourself if there are alternatives to keeping this part on your shelf. There are many ways to get the burden of the carrying cost off your company’s books. Let’s look at a few:Parts sharing
— If your plant is just one division in a larger company, many times you can work with your peers at other plants to “share” your spare parts inventory. In other words, instead of each of your plants having to carry the same really expensive gearbox, maybe only one of you keeps that part on your shelf, knowing that if another plant needs it in an emergency, it may require plunking it into the back of a pickup and driving to your sister plant when they need it. You, in turn, can carry some other parts that they may need.
Today, where there are geographic pockets of many plants with similar equipment, even competitors are parts sharing. This means being able to trust your counterpart at your competitor. Sometimes, the OEM will manage that third-party relationship for you, so it is their responsibility to contact your competitor to get that part out of their inventory when you require it in an emergency. These are tricky relationships and it requires a great deal of preparation before agreeing to share parts with a competitor. However, if each of you understands the benefits, you can each gain the rewards.Consignment or Vendor Managed Inventory (VMI)
— Most companies already utilize this kind of relationship with low-value, high-volume parts like nuts, bolts and pipes, valves and fittings (PVF’s). This is where the vendor usually installs a bin system for their parts and they physically manage that inventory. They have service technicians who visit your site regularly to replenish the parts and you get charged for the parts you consumed since their last visit.
This has been occurring for years, but now more companies are jumping on that bandwagon. Now you can purchase drive belts, conveyor belts and hoses the same way. It seems that even some OEM’s are jumping on the bandwagon and offering the same service for at least a portion of their spare parts. This is something that can often be negotiated into the purchase of new equipment.Spare parts insurance
— This is still an oddity but is growing in availability. This is a sort of hybrid between the previous two methods. This generally occurs when purchasing new equipment. The equipment manufacturer may offer ‘spare parts insurance.’ Let’s say you are the only company within a reasonable area who requires that $60,000 gear box. The OEM may offer to keep one on their shelf and available to you within 24 hrs. for some nominal fee, say $2,400 annually. If and when you need the part, the OEM will have it to your facility within the allotted timeframe and you will pay the full price for the part. This keeps you from having to spend $60,000 today and instead you pay $200/mo to the OEM.Contract warehousing
— Yes, there are companies that will completely manage your spare parts warehouses. They are experts on warehouse management systems who can apply their knowledge and their size to lower the costs of running your spare parts warehouse for you.
So, as you can see, there are a number of methods to reduce inventory beyond the tweaking of traditional economic order quantities (EOQ’s). It’s time to get creative with your methods to manage your spare parts inventory. Instead of waiting for your finance department to send you an edict to reduce inventory by ‘X’ amount, get proactive and show them where you have reduced your inventory without affecting parts availability.Mark Eystad is the owner of Mark 1045, Inc. (www.mark1045.com), Marietta, Ga. Mark has been improving the financial performance of companies for over 12 years. For more information e-mail: firstname.lastname@example.org.