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 just write off the item, but while this reduces the value on the books (see the section on financial concerns), it ignores the reality that cash was used to purchase the item and that cash has shown no return.
What all these issues mean is that the risks associated with purchasing spare parts is much greater than with items in a retail and wholesale environment. This, in turn, means that companies should take more care with their spare parts decision making, not less.
1.4 Five Common Supply Chain Techniques That You Should Not Use for Spare Parts Management
An important part of any strategy, including your spare parts inventory management strategy, is to know what not to do. By understanding which inventory management techniques you should not apply to your spare parts management (and why), you might just save your company a bundle of money (and yourself a lot of heartache).
As discussed previously, spare parts inventory is the inventory that you hold for equipment repairs and support, as opposed to the inventory that is used in production for conversion to finished goods. This distinction is important, because the characteristics that set spare parts inventory apart from other inventory types also help identify supply chain management techniques that should not be used for spare parts management, including:
1. Materials resource planning (MRP). MRP is a production planning technique that aims to coordinate assembly operations by ensuring that the required components are available in the right mix and at the right time in the assembly process flow. Spare parts are not used for production assembly, and so the MRP production planning concepts of dependent and independent demand don’t apply. The term MRP has also been co-opted by some ERP (enterprise resource planning) providers as a proxy for running a reorder report, but running a reorder report is not actually the same as MRP—it’s just a reorder report! Don’t waste your time and money learning about or trying to implement this technique if you are managing spare parts.
2. Just-in-time (JIT). JIT is a production management philosophy that aims to eliminate wasted time on a production line by coordinating materials movements. It is not a management technique for nonproduction items such as spare parts. Further, holding excess stocks so that supply can be provided in an almost instantaneous manner is not JIT because it lacks the signals and coordination of JIT. Work instead on improving spare parts planning and coordination.
3. Economic order quantity (EOQ). Applying an economic order quantity sounds very attractive—who wouldn’t want to purchase in the most cost-effective manner? The problem here is that there are too many variables in the actual EOQ calculation for the results to be reliable. For example, what if more than one item is on the purchase order? Does that split the order cost? Instead of trying to make the theoretical EOQ calculation work in the real world, apply the logic explained in Section 2.6 and don’t bother with the calculation.
4. Service level. Service level is a measure of the number of times that a request for an item is filled in the acceptable time frame. It is commonly applied in fast-moving consumer goods and other wholesale industries, with the term delivery in full on time (DIFOT) being used. Having a DIFOT of 95% would be a good target in those industries, but with spare parts, if you don’t have the right part available 5% of the time your production might stop, and then nobody will thank you for achieving a 95% service level.
5. ABC analysis. ABC is an analytical approach that divides your inventory into categories to identify which are most important and then sets agreed service levels on the availability of those items and may also set the level
