As users of any kind of physical asset, why would you want to stock parts? After all, they are expensive and take up room. Some parts need to be coddled; others go bad, get broken, or are subject to theft.
There are two financial reasons for stocking parts:
• You can buy the parts cheaper if you buy in quantity or have some flexibility about the delivery window.
• You pay less if you can use ground shipping rather than air or courier. You can also save money when you can ship a number of items at one time.
One maintenance reason for stocking parts:
• Having all the parts when you start a maintenance job results in increased worker efficiency.
By far, the biggest reason for stocking parts is operational:
• Having spares for critical equipment reduces expensive downtime, sometimes dramatically.
The Spare Parts Themselves Have Changed
In the past, the spares for a machine were available quite a bit longer. If you bought a basic Bridgeport Milling machine in 1965, the spares were probably available from the OEM or dealer for twenty years or more. Today if you buy a new mill, you would be lucky to be able to obtain parts ten years later. Models are changing rapidly and OEMs seem to be supporting spare parts for shorter time periods.
As customers, we are seemingly making the problem worse. We are a fickle lot. We always want the latest and best machine. Our attention spans are short and we are hard to impress. To keep our attention, the OEMs have to continually develop new models with newer, faster, and greater capabilities. The result is that the lifecycle for a product is dramatically shorter than it used to be. Each new model has new and different parts to be stocked. The OEM reaction has been to limit the time where you can even get the spare parts.
Case Study
A German automobile manufacturer built an assembly plant in the United States. The plant took several years to go from drawings through approval, construction, and commissioning. Tweaking the assembly line to get the high quality needed took additional time. The plant was built using the state-of-the-art manufacturing technology at the time of the design.
The line has been running just a few years and maintenance requirements are starting to emerge. Purchasing has tried to order some standard parts but has had trouble getting delivery. The situation was escalated back to Germany where the full story started to come out.
The “state-of-the-art” equipment (only running for a couple of years) was no longer being supported. People in the know, using the equipment, had started to empty the supply chain, knowing that parts would become hard to obtain.
Conclusion
These four areas have dramatically changed the spare parts business. In some ways, the crisis that is developing comes from using 1975 tools and mental attitudes to address 2020 problems.
Of Course, If We Could Do Without Inventories...
If there was any way to run the plant with acceptable downtime but without spares, we would certainly do it. In fact, this goal is already being achieved at your local automobile repair shop. The local shops (not the new car dealers who also supply the spare parts) do not carry many spares. That is because of highly sophisticated, competitive, and responsive vendors. Your shop troubleshoots the problem and calls the local NAPA (National Automotive Parts Association) with the parts needed to repair the car. Within an hour or two the parts are delivered.
Anyone who can deliver 99% of the parts to an oil refinery, mine, or assembly line within an hour or two is likely to have a smash hit business. Or if we can predict the demand / requirements, then we can also have low stock levels with long lead times. Unfortunately, in most instances, predicting the demand / requirements is as tough as predicting anything else!
WHY DO PARTS STOCK OUT ANYWAY?
If we do decide to stock an SKU, what are the conditions that could cause a stock-out situation?
• Incorrect calculations for safety stock, ROP, and EOQ (Economic Order Quantity)
• Bad data contributing to the calculations above
• Usage rate of the part increases; could be more problems with equipment, additional equipment, spoilage of the stock, etc.
• Adverse changes to lead time (time for a new average to be calculated)
• QOH (quantity on hand) has fallen below the ROP (Reorder Point) and part was not ordered; could be a simple mistake to a new company policy
• Items being removed without being recorded (does not matter if it is used or stolen at this point)
• Any combination of the above
Parts That Have a Usage History Are Easier to Manage
Supply is simple for certain parts. Predicting which spare parts will be needed in what quantities works well for many of your SKUs. These parts operate statistically like a retail inventory. If the usage of the part is driven by wear out and you have enough usage, the SIC (Statistical Inventory Control) system for managing inventory can be used to determined quantities using simple math. If all parts just wore out periodically and that was the entire problem, then your spare parts could be well managed by typical inventory management techniques.
CHAPTER 2
MODELS OF INVENTORY
Different types of inventory holdings require different types of management strategies. Each strategy gives us a management model. Part of the problem is that inventory is held for different reasons. Each inventory “makes” money for the company in a different way and should follow rules unique to that way. For example, people often have trouble seeing the distinction between traditional retail inventory and maintenance inventory.
There are four types of inventory, which includes distinguishing between finished goods and retail inventory. They are raw material, work in process, finished goods, and retail and resale. Each type is subject to different types of analysis. Sears and Roebuck (now simply Sears) was one of the first organizations to seriously study inventories. They were pioneers in making the management of a retail inventory a scientific endeavor.
Now after years of case studies and dissertations, we can observe that all four inventories are pretty well understood and well-studied in business schools. Table 2-1 on the following page summarizes these four types.
Each of these inventories has specific rules, KPIs (key performance indicators), other metrics, and challenges. The one thing in common is that apparently all these measures are directly related to sales. Profit flows from adding value.
Raw Material and Work in Process
Inventories for raw materials and work-in-process were not well studied until the 1970s. It took Toyota’s success and its revolutionary approach to manufacturing and inventory (TPS or Toyota Production System) to generate interest in raw materials and work-in-process inventories.
Table 2-1: Types of Inventory
| Type of Inventory | What Is It? | How to Manage or Analyze |
| Raw Material | To be used to produce something (e.g., wood stocked for a furniture maker). | Delivered as needed, when needed, quantities needed. Tie vendor to production line MPR system. |
| Work in Process (WIP) | Similar to raw material, but some value has been added. | JIT (just in time) and daily or hourly delivery to next process, deliver to machine, no stock, and no buffer. Pull systems order parts. |
| Finished Goods | Completed products in warehouse. | Similar to retail inventory, but other issues such as build up for seasonal sales (e.g., candy canes), buffering supply disruptions (e.g., build up
|