buffer-type impact of the balance sheet does just that because the inventoried parts do have a value and that value is reflected in the balance sheet. To do otherwise would result in massive swings in expenses as a company might spend up big on spare parts in one year (say, for new plant and equipment) but then spend very little as it uses up those parts over time.
Some companies don’t use this buffering approach; instead they expense all spare parts when they are purchased. We can let the accountants and auditors argue whether this practice is in accordance with accounting principles, but it is important to note that both the buffering and expensing approaches do have their pros and cons. These are shown in Table 1.1.
Table 1.1. The pros and cons of the balance sheet and expensing approaches
| Approach | Pros | Cons |
| Balance sheet | Improves asset management by aligning the timing of expense with operational activity and enabling budgets to be constructed to align with maintenance expectations | Reduces accountability for cash spent on spares, as there is generally no inventory budget or other direct accountability |
| Expensing | Direct accountability for cash used for spare part purchases on a monthly basis | Misalignment of the timing of parts expenses with actual use results in misleading maintenance cost reporting |
| Monthly parts budget can constrain purchases of parts required, impacting operational output |
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
