book has been designed and written to provide you with the insight, understanding, process, and tools to improve your materials and spares inventory management performance, free up significant cash, and achieve lasting results.
Chapter 2
The Mechanics of Inventory Management
The purpose of this section is not to provide an in-depth understanding of all the mechanics of materials and inventory management (there are hundreds of other books that can do that) but rather to revisit or recap the mechanics in a way that puts the rest of this book in context.
Certainly this section addresses some basic elements of materials and inventory management but, as in many situations, the real value comes from looking beyond the basic element and understanding the implications of that formula or process that the element represents. Anyone can look up a formula on the Internet; however, it is an understanding of the nuances that provides value. For example, one of the major reasons that organizations have so much difficulty with materials and inventory management is that they confuse simplistic with simple. Although the concepts and formula are simple — in that they are readily understood — they should not be thought of or applied in a manner that is simplistic, that is, free of any complicating factors.
Too often people take the basic concepts and formula and do not think through the complicating factors when implementing the concept or formula. This does not mean that we need to make things overly complex; it just means that we need to understand the implications of our choices. This section aims to provide some insight to assist in that understanding.
One of the most common confusions of terms is that between materials and inventory. Many engineers, in particular, concern themselves with materials management but show little interest, and sometimes don’t want to be involved in, inventory management. However, when subject to some scrutiny this does not make any sense.
Materials are the physical parts and components and materials management is concerned with the logistics associated with the procurement and supply of those materials in a timely manner. Inventory is the gathering of those materials in order to provide a ready supply when they are needed. Inventory can also be defined as those parts purchased for future use without knowing exactly where and/or when the part may be used.
Inventory management, therefore, is a subset of materials management as it is primarily concerned with managing the procurement and supply of those materials held as inventory. Anyone who is involved in materials management must therefore have an interest in inventory management if their materials are being held for future use. Inventory management is much more than just managing the storeroom.
Relevant Terms and Expressions
Before working through the rest of this book and to ensure a common understanding of some relevant terms and expressions, review Table 2-1, which shows the most immediately relevant terms and expressions, and Appendix A, which contains a comprehensive glossary of materials and inventory management terms and expressions.
| Term | Definition |
| Cash flow | The net gain or loss of cash in a business through its business cycle. |
| Inventory | Materials and spare parts that are held for future use without knowing exactly where and/or when the item will be used. |
| Lead Time | Measured from when the ROP is reached to the actual physical restock. |
| Materials | All items that are purchased for use in, or for supporting, manufacturing and engineering activities. |
| Max | In some systems, this is used to determine the reorder quantity when the minimum is reached. |
| Min | In some systems, this is both the safety stock level and the reorder point. |
| Reorder Point | The trigger point for reordering stock (ROP). |
| Reorder Quantity | The quantity to be reordered when the ROP is reached (ROQ). |
| Safety Stock | An allowance for both demand and supply variations during the lead time to restock. |
| Stock Keeping Unit | Refers to any individual inventory item; also known as an SKU. |
| Stock turn | The number of times in a year that, in theory, the inventory is completely repurchased. Higher is better. |
| Storeroom | The area for storing the inventory; sometimes referred to as the warehouse or the store. |
| Stores | Sometimes used as a synonym for inventory. |
| Working Capital | The cash invested in inventory. |
Table 2-1: Relevant Terms and Expressions
What is the Purpose of Having Inventory?
Before moving on to develop an understanding of how to manage and optimize inventory, it must first be recognized that inventory exists for a purpose. In fact there are three main reasons that companies invest in inventory:
1.To enable supply in a timely manner.
Companies invest in inventory to ensure that the item is available when needed. The investment is based on an assessment that without the inventory there will be a loss of profit due to missed sales. This is true even for spare parts where equipment downtime may ultimately result in a lost product sale — obviously not all customers are willing to wait for delivery.
2.To provide purchasing/manufacturing efficiencies.
Order quantities and batch sizes sometimes force companies to buy more than they need or want in the short term. In this case, they invest in the inventory in order to avoid the extra cost associated with small quantities or batches. (See also Chapter 6: Issues, Myths, and a Few Home Truths.)
3.As a temporary measure to accumulate stock prior to major events/projects.
The major event or project could be a marketing program or an engineering upgrade. In either case, an investment is made in inventory because there is only a small window of opportunity in which to use/move the parts and it is considered that the supply chain cannot provide the quantity of parts required in that window of opportunity.
In all three cases, the real driver for investing in inventory is to minimize the risk of other potential costs or losses. Therefore, it is essential to continue to think of inventory as an investment made with the purpose of minimizing risk.
Why Spares and Indirect Inventory Are Different
While the process and actions discussed in this book can be widely applied to many types of inventory, they are particularly effective on spare parts and indirect inventory. Indirect inventory can be defined as the stock of all the “bought in” materials that companies might use. This includes parts and components (in assembly operations), finished goods (for wholesalers), service parts, OEM spares, operating supplies, engineering spares, industrial supplies, and MRO (maintenance, repairs, and operations) parts. Conversely, ‘direct inventory’
