The impact of the balance sheet versus expensing approach is not to be taken lightly. While the balance sheet approach may require additional accounting input, it does enable a company to more accurately reflect the actual maintenance expenses, which is important for asset management. On the other hand, companies that use the expensing approach have been known to put off completing maintenance tasks because the spares budget has been spent for the month. This might seem like prudent fiscal management until you realize that the budget may have been spent on items that have not been used and that may not be used for months or even years. This is clearly not good practice.
1.11 The Key Elements of a Spare Parts Management System
Now that we have reviewed some of the issues and concerns relating to spare parts inventory management, we need to understand just what makes up a spare parts inventory management system. As a starting point, let’s look at what a spare parts inventory management system is not.
It is not software.
No matter whether you use a companywide enterprise resource planning program, such as SAP, PeopleSoft, or IFS, or whether you use a standalone inventory management program, these programs are not your spare parts inventory management system. These are tools that you use within your system, primarily for data collection and labor efficiency. Similarly, bar coding is not a spare parts inventory management system. Bar coding is also a tool used within your spare parts inventory management system. So just what is a system? An online search using Google9 provides the following definitions:
1. A set of things working together as parts of a mechanism or an interconnecting network, a complex whole.
2. A set of principles or procedures according to which something is done; an organized scheme or method.
Thinking about these definitions, we can see that an ERP and bar coding are both systems, but on their own they are not spare parts inventory management systems.
Definition of a Spare Parts Inventory Management System
Here is a practical definition of a spare parts inventory management system:
A set of principles, policies, procedures, guidelines, and tools that enable a company to identify procure, control, account for, and dispose of spare parts.
In effect, the spare parts inventory management system encompasses the entire life cycle of asset ownership from determining what to stock to disposing of a part at the end of its life. This is shown in Figure 1.9.
Figure 1.9. The spare parts management life cycle
Importantly, establishing a spare parts inventory management system does not commence with the spare parts themselves; it commences with getting organized. That is, it is first necessary to determine how the parts that are ultimately selected will be identified, the holding quantities determined, and the parts then stored. Without this your spare parts inventory is likely to be nothing more than a pile of junk in the corner—just like Figure 1.10.
Even with an idea as simple as getting organized, there is a scale of sophistication or maturity that needs to be considered. For example, a simple system of storage bins with a label that includes a part description and maximum holding quantity, where levels are checked weekly and top-up replacements reordered, might be perfectly adequate for a small manufacturer with a handful of machines, a few different types of parts, a small inventory investment, and minimal downtime consequence. However, that approach would not be suitable for a large, complex manufacturer or processing plant, with millions of dollars tied up in thousands of stock keeping units, with perhaps hundreds of cost centers and downtime costs measured in tens of thousands of dollars per hour. The system therefore needs to be fit for purpose, based on the circumstance and situation in which it is being applied. Some examples of this are provided in Table 1.2.
Figure 1.10. A pile of junk results from not having a spare parts system
Table 1.2. Examples of increasing sophistication in the attributes of spare parts inventory management systems
| Attribute | Basic | Sophisticated |
| Use of IT | None, visual management only | Fully integrated, bar coding, equipment BOMs, alternative SKUs, images of parts, electronic vendor catalogs |
| Reordering | Manual stock reviews and periodic reordering | Automated reordering of selected parts based on vendor matrix and preapproved agreements |
| Parts identification | User memory | Formal, simple, standardized approach to part descriptions and numbering |
| Storage | Whatever is available | Fit-for-purpose storage based on part maintenance requirements such as vibration isolation and humidity control |
| Determining holding levels | Best guess by maintenance team members | Fully documented and rigorous approach that differentiates among inventory types |
Establishing and determining parameters such as identification, storage, and control, before establishing the rest of the spare parts inventory management system, sets the constraints within which the system must operate. Failing to understand this leads to many companies having misalignments between aspects of their spare parts inventory management system that drive inefficiencies and suboptimal outcomes.
The following sections of this book explore the key elements of spare parts inventory management through the spare parts life cycle and under the umbrella of a spare parts inventory management system.
1.12 A Quick Word on Multiechelon Systems
For spare parts inventory that is held by a company for the operations and maintenance support at its own sites, the vast majority of storerooms operate independently. That is, most typically, one storeroom services one site, or when there are multiple storerooms at a single site, each storeroom operates independently of the others. This arrangement, where one location acts as the buffer between the vendor and the user, is known as a singleechelon system (see Figure 1.11). This arrangement occurs even with very large companies that have many locations.
Some companies, however, operate with a multilayered approach that is sometimes referred to as a hub-and-spoke