1.3 Why Spare Parts Are Different (from Other Inventory Types)
As a young maintenance engineer, I learned the hard way that spare parts don’t follow the usual rules of inventory management. When first in a position that included spare parts management among my responsibilities, I started by applying the rules of inventory management that were taught during my time completing a maintenance engineering degree. This just did not work, and the team and I had to determine the right way to manage our spare parts inventory in order to support our maintenance and operational goals.
In the previous section we demonstrated that the spare parts supply chain is different from other supply chains, if only at the very end. This difference is, however, very important, because it is at the end of the supply chain that companies plan and use the parts for their intended maintenance and operations support purpose.
Not only is the supply chain different, but many aspects of spare parts inventory management are different from the usual supply chain and inventory management orthodoxy. The classic supply chain theory (and training) is based on what can be called a “retail model,” that is, the model most often associated with retail management and fast-moving consumer goods. As a way of explaining this point, in each of the following examples a comparison is made between the approach required for spare parts management and the likely approach that would be applicable to a major retailer, such as Walmart.
If not properly understood, these differences can have a significant impact on inventory decision making and the quantum of funds that are tied up in a company’s spare parts inventory.
1. Stock items that you don’t want to use. The most obvious difference between retail and wholesale inventory management and spare parts inventory management is that with spare parts you will deliberately stock items that you don’t want to use. These are the insurance spares that companies hold, literally, just in case. Insurance spares are typically high-value, long-lead-time items, without which operations would cease. Holding these spares is akin to taking out an insurance policy; you don’t want to be in a position that you need to make a claim, but you don’t want to operate without the coverage.
Compare this with the way retailers or wholesalers would act. In these environments they don’t want items sitting on the shelves, unsold, for long periods; they want turnover. Retailers want items to come in and sell as quickly as possible. Items that don’t sell quickly are delisted and not restocked.
Not understanding this is one of the major mistakes made by novice spare parts inventory managers. When accountants (and it is typically accountants) suggest that the way to reduce spare parts inventory is to remove all items that haven’t moved for two to three years, they are applying the retail-wholesale logic that they were taught at university, without understanding the dynamics of spare parts inventory and why it is held.
2. Items of small value can be critically important. In retail and wholesale inventory management, items of small value are rarely that important, as they are unlikely to return any significant profit unless they are very high turnover. Sometimes they are used as a “loss leader” as a way to get people into the store.
Compare this with spare parts inventory, where a low-value item may be critical to keep your plant operating, and so ensuring the supply of that part might be the most important thing that the spare parts management team can do.
3. Stockout costs are disproportionately high. In retail and wholesale inventory management, the cost of not having an item available when requested (a stockout) could be limited to just the marginal profit that the company makes on that item. In some circumstances, it doesn’t even have that impact, as the buyer may back-order the item and be satisfied with receiving it later.
Compare that with the cost of downtime if you do not have a critical spare part available when required. Depending upon the type of plant operated, the cost of downtime could range from thousands to hundreds of thousands of dollars—per hour! This disproportionate value of downtime, versus the cost of the spare, is what leads many companies to spend way too much on their spare parts inventories, justifying the expense with the potential value of downtime.
4. Users are part of the process but are not (generally) accountable for their actions. In a retail and wholesale environment, the user (in this case the buyer) of an item has little or no input into determining the need for an item and certainly no input or accountability for the process that gets the item on the shelf.
Compare that with spare parts where the user (maintenance) is central to determining whether an item is required, how many of an item will be required, and when it might be required. It is the user’s input that feeds into the entire procurement and inventory management process, and yet maintenance is rarely held accountable for the decisions it makes or the quality of the information it provides.
5. Small market eliminates the “balance effect.” When a retailer stocks an item, it typically has a large “catchment area” of people who may come and buy that item. For retail chains the retailer even has the option of moving items that don’t sell in one area to an area where the items do sell. This large market has the effect of enabling the retailer to balance stock locations with the location of demand.
Compare that to an inventory of spare parts that is usually intended to support one machine or set of machines at one site. Few companies have a means for sharing parts, and so the demand for spare parts is limited to their own small in-house “market.” This means that if parts are bought and not used in the expected volume, there are few, if any, options for alternative use.
6. Huge forecast variations due to technical requirements. In almost all stages of the standard supply chain, the forecast variation will most likely be within 20–30%, at most. Forecast variations greater than this, and that occur repeatedly, will result in investigation and further refinement of the forecasting process.
Compare this to spare parts where the forecast variation could easily be 100%. This occurs when an item is bought and not used (an item that was expected to be used). Visit any storeroom, and it is common to see where multiple units of an item are purchased but only one is used. This could be a forecast variation of 80–90%, depending on how many were purchased.
7. Massive variations in the value and volume of items managed. Retailers and wholesalers can usually afford to have different people managing the decision making for different categories. There may be a person who is the buyer of shoes, one that does fruit, and so on.
This type of category management is common in industrial organizations but is much less granular. Usually the area of spare parts is one category, and that is often put together with other related categories. This means that there is one process for decision making and management of all different types of spare parts: small, large, cheap, expensive, imported, local. This makes it very difficult to develop the kind of specialist management insight that occurs in the retail and wholesale environment. This issue is discussed further in Section 3.10, “Spare Parts Procurement Issues.”
8. Stock sales usually realize little return. Of course, mistakes are made, no matter what system you are part of. In retail this could be a swift change in fashion, and in wholesale it may be the overstocking of components that are then quickly replaced by a newer model by the manufacturer. The great advantage of these industries is the ability to have a sale. This might result in the loss of all margin or even a loss on the purchase price, but it can move the stock and recover some value.
Compare that with spare parts management where obsolete and excess items often have no resale value. In many circumstances it is years before excess or obsolete items get recognized as such, and by then the vendor won’t take a return and no one else wants the old model. Sometimes people will say that they can