The initial raw materials extraction or development (say, mining or chemical processing).
2. Initial manufacturing or processing into a usable form.
3. Warehousing.
4. The next stage of manufacturing or processing that creates a finished product or component.
5. Wholesaling of that component.
6. Delivery to a company that uses that component.
7. Storage in that company’s inventory.
8. Issuing to an end user.
9. Application in the company’s plant and equipment.
During this process the item continually changes from being a raw material to a work in progress to finished goods (the three standard inventory types). For example, the product produced at Step 1 is the raw material for Step 2. During processing in Step 2, it is considered to be a work in progress. After Step 2, it may be stored in a warehouse (Step 3) before becoming the raw material for Step 4 and so on along the supply chain. Further, the supply chain is made up of both material movement and information flows, so the demand from Step 4 becomes the signal for supply to Step 2. Importantly, this information flow is usually the opposite of the product flow and is the basis for production planning along the supply chain.
For typical inventory, the component at Step 5 may be sold to (say) an industrial or retail customer, and it is at this point that MRO and spare parts differ from the standard supply chain. In Figure 1.1, Step 5 is where the item is ordered for a storeroom to support maintenance and operations. During Steps 7, 8, and 9, it is removed from the storeroom and applied to repair or support the operation of a piece of equipment. And this is the defining attribute of MRO and spare parts management: being used for equipment repairs and support, not in production as a component or raw material for the next “widget” in the supply chain.
Figure 1.1. A simplified supply chain
The following are the MRO, materials, and spare parts definitions that apply to the inventory addressed by this book:
• MRO—maintenance, repairs, and operations. When used in relation to materials and spare parts, this term is referring to the items that are used to fulfill the functions of maintenance, repairs, and operations support—that is, consumables such as materials and spare parts.
• MRO—maintenance, repair, and overhaul. This really has the same meaning as the above term.
• MRO—maintenance and repair organization. MRO is sometimes used to refer to the organizations that fulfill maintenance and repair functions, but it may also be used to define the components that the organizations use and/or supply.
• Materials. Typically, this term refers to items that are purchased that are not used for production—they are not used in producing the widget. Materials are not necessarily spare parts since they could be maintenance consumables (oil, grease, welding rods, etc.) or items purchased for fabrication (for example, steel).
• Spare parts. These are items held in inventory that are used to replace failed parts or components in the equipment that is being maintained. Spare parts could be anything from a drive belt or bearing to entire components such as a pump set.
Do these definitions matter? From the above you can see that they do actually matter—the terms MRO, materials, and spare parts are not fully interchangeable. Therefore, it is important that the members of your team use the terms in a consistent way, as this will avoid confusion in their communication. One way to help with this is to ensure that you have definitions of MRO, materials, and spare parts within your spare parts management policy documentation.
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
