Inventory Planning for Spare Parts - Part 1
This will be the first in a series of articles covering spare parts inventory planning using advanced technology solutions.
Inventory planning managers are looking for simple ways to reduce waste and improve profitability. It is becoming more apparent that advanced technology can dramatically help but the technology must be affordable, quick to implement and have a high rate of return (ROI).
Service or spare parts inventory management is a prime candidate. With many parts to manage and a lack of powerful tools, most companies with parts inventories have too many of the wrong parts. The result is unnecessary inventory expense, while still suffering service-limiting stock-outs.
Manual efforts to improve this situation fail, because of the time-intensive nature of the problem. A large number of parts, each with special considerations, quickly bog down someone trying to improve the parts purchases.
In the last five years, software products with more powerful spare parts planning capabilities have emerged. These scientific tools have proven successful at lowering inventory 20-40%, while increasing service levels. Until now, most of inventory planning products were targeted at the Fortune 500 companies. Besides being very expensive—costing hundreds of thousands of dollars or more—they are complex and require highly skilled planners to operate.
Spare parts inventory planning divides into aftermarket service parts and MRO parts
The term “aftermarket service” applies to the activity of maintaining or enhancing equipment or machinery used by a different organization. “MRO” refers to the same kind of activity, but accomplished by the same organization as the one using the equipment.
Aftermarket Service covers the maintenance and repair of equipment and machinery. For example, automobiles need routine oil changes and tune-ups as well as repair after accidents or a mechanical failure. Service actions depend upon replacement parts for worn or broken components. Unlike just-in-time manufacturing parts, service parts must be stocked “just-in-case” they are needed.
Like retail distribution items, there tend to be a large number of different service parts needed to cover support of many different types of equipment produced over many years. Moreover, these parts are needed in very low quantities. For example, a major car manufacturer reported that over 90% of their service parts have usage rates of less than one unit per month. Special forecasting algorithms can predict service parts requirements based on past history of part usage.
Aftermarket service can be performed by the organization selling the equipment to the end user (manufacturer or distributors or retail outlet), or by 3rd party service providers. For example, a Ford car can be serviced by a local Ford dealer or by a local garage or by a franchised muffler, brake, or tire center. In any case, the service organization tries to keep commonly needed parts on hand, while making sure parts with little demand can be obtained quickly when needed from an off-site location.
Another class of organization involved with aftermarket parts is the parts distributor. This company sells parts to individuals and service organizations, rather than performing the service that uses the parts.
The “MRO” acronym has two different spell-outs, depending on the situation. Organizations like electricity utilities and manufacturers with large, complex plants need to keep the facilities in good repair. This activity is called “Maintenance, Repair, and Operations.” Organizations with fleets of transportation equipment (planes, railroad cars, trucks, or automobiles) need “Maintenance, Repair, and Overhaul” service to keep this equipment in good working order. Common usage refers to the parts used for MRO as “spare parts,” rather than “service parts.”
Inventory Planning Management Objectives
These different types of organizations have somewhat different objectives in their service parts management. In aftermarket service, the primary objective is to fix broken equipment quickly to maintain the customer's confidence for future sales (and continuing service sales). This requires having the parts in stock for the service action.
For MRO and some aftermarket service situations with stringent service level agreements, the primary objective is to make sure all critical (also called “essential”) parts needed for the end equipment to operate are on hand. Other parts can be backordered if necessary. For example, a CAT scanner might be sold with a service level agreement to fix any problem within 4 hours so the hospital using it can continue to serve patients. A fuse may be essential for operating the equipment, but the plastic cap on a control box may crack with no loss in function. Hence, the fuse must be stocked locally to assure the 4-hour repair time limit.
Finally, the objective with aftermarket parts distributors is to make sure they maximize profitability of the parts sold. Thus, out-of-stock items, leading to lost sales, should either have a low margin or a low demand.
Coming soon - Part 2 of our Inventory Planning Series –MRO's
Companies approach their parts inventory planning in many different ways - from seat of the pants guessing, to team collaboration, to spreadsheets that may invoke more team collaboration and manual changes, to forecasting software and some to advanced planning solutions. The more parts and locations you need to plan, the more complex.