Surviving the Spare Parts Crisis: Maintenance Storeroom and Inventory Control

CHAPTER 1

WHAT ARE WE REALLY DOING?

MISSION

Have the right part available in time to support the maintenance function while using the least organizational resources.

Major Objectives to Support the Mission

• Provide the parts needed quickly for maintenance and others

• Minimize use of cash

Mini-Objectives to Support the Major Objectives and Mission

• Know where everything is

• Know what is being used and what is not being used

• Keep track of quantities

• Protect parts from spoilage, theft, and damage

• Report facts to management

PARTS ARE THE POINTER TO THE MAINTENANCE PROBLEMS

Parts consume 40% to 70% of every maintenance dollar. Because most maintenance jobs require some parts, reducing part usage will automatically reduce labor.

Analysis of part use is fundamental to maintenance control. Track your expenditures for part usage to uncover areas where your time would be well invested. Continuous improvement will follow from this investment. Balance the following:

MANAGEMENT OF CHANGE IN THE STORES ORGANIZATION

You can rethink how you organize the storeroom when changing an existing storeroom operation or establishing a new storeroom for a new factory or facility. It is essential that normal stores operations continue while the reorganization takes place.

Any major change in the warehouse will concern the major stakeholders. These stakeholders include:

Primary stakeholders

• Existing stores manager

• Storeroom team members

Outside stakeholders

• Operations team and managers

• Maintenance manager

• Individual maintenance worker

• Maintenance planner / scheduler

• Finance comptroller / CFO

• Purchasing agent / buyer

• Auditor

The start of any storeroom improvement effort begins with these questions:

• What is the effort’s mission and what we are trying to change?

• Is there an aspect of the operation that is broken?

• What investment is needed for fixed assets, furniture and fixtures, picking systems, mobile equipment, maintenance inventory, other machinery, and tools?

• What return on investment is required?

• Who will manage the reorganization?

• Are there physical changes needed and will the storeroom be relocated?

• How long will the improvement take?

The second component of storeroom improvement is establishing a change team. Members can include the existing stores personnel, the maintenance manager, engineering, purchasing, and finance.

ADKAR®

Prosci® is a business management consultant that helps organizations manage change. Their change management model, ADKAR®, incorporates five steps to successfully manage any corporate change: awareness, desire, knowledge, ability, and reinforcement.

A: Awareness The first step is to make everyone aware of the change. This communication should come from an officer of the organization. That officer should outline the scope of the change, the reason for the change, and the benefit of the change for everyone.

D: Desire Within the various change management groups, local supervisors have to build a desire to change. To build desire, the local supervisor might appeal to some motivators such as pride, job satisfaction, or challenge. The change might include elements that provide a better service, a more interesting job, work simplification, better competition, or some way of creating more opportunities.

K: Knowledge People won’t change if they don’t understand what to do. This phase provides training, including some hands-on activities. Your goal is to raise competence in both skills and knowledge, along with a shift in attitude.

A: Ability Your employees need the ability to make the changes they need to. This phase insures the employees have that ability.

R: Reinforcement Energy for change will often decrease over time. For the changes to be fully embedded, you must ensure substantial reinforcement — probably more than you think you will need.

In maintenance inventory control, we want to deliver a certain service level and minimize the cost to do so. In other situations, we might fix the stocking level and see what service level that generates or we might allow the service level to float. The former is the most common; the latter is more common for commodities or job lot style products (e.g., live Christmas trees).

SERVICE AGREEMENT FROM THE WAREHOUSE TO THE MAINTENANCE DEPARTMENT OR WHAT MAINTENANCE EXPECTS FROM MATERIAL CONTROL

Provisioning

• Part check out is easy, quick, and simple

• Delivery if needed (and agreed)

• Kit by work order if required (or agreed)

• Staffing storeroom as needed (increase staffing during shutdowns)

• Easy and quick to return surplus parts, incorrect parts, and parts for rebuild

Information Management

• Make stock parts easy to identify and look up

• Make it easy and intuitive to research unknown parts

• Parts people are knowledgeable about parts stocked and parts in general

• Maintain access to spare parts lists for all critical equipment

• Manage parts interchange

• Procedures are easy to follow, understand, and find (the SOP or Standard Operating Procedure)

Storage

• Prompt requisitioning and subsequent replenishment of parts that hit the ROP (Reorder Point)

• Make sure that the computer records reflect accurately the actual stock on the shelf

• Protect parts from mechanical damage, electrical damage, and pilferage

• Maintain parts in good condition (rotation of motors, etc., also air conditioning, heat, humidity, etc.)

Accounting

• Either all parts are charged to assets or parts are issued only against authorized work order (WO) numbers

• Provide up-to-date costs by part and by work order

Continuous Improvement

• Partners in finding opportunities for waste reduction

• Always looking at slow moving parts for obsolescence

• Always looking for better products, processes, and procedures for supply of parts

WHY BOTHER MANAGING THE STOREROOM?

The biggest reason for managing the storeroom is the high cost and dire consequence of downtime. Related — although the opposite reason — is the high cost of wasted money represented by the wrong maintenance inventory. Ideally, management balances downtime costs with the cost of the inventory. Inventory management means that the inventory level is just right: not too high and not too low. Management should revisit decisions to respond to real business conditions.

Warehouse management will help:

• Support the mission of your organization! From an organizational perspective, this aspect is the most important of all the reasons listed. A well-managed warehouse supports mission-critical activities.

• Your cost reduction program. The lowest cost operations over the long term are those that are well managed!

• Preserve the assets. PM systems detect when something is going to fail (before it does). Timely corrective action will preserve the function of the asset. Parts are needed for Corrective Maintenance.

• Increase the level of service or perceived service to your maintenance customers. Responsive warehousing that stays ahead of problems will have less trouble keeping and attracting good maintenance workers.

• You meet a competitive challenge. Effective warehousing and management of spare parts can be a competitive advantage

• Improve your quality of life. Dealing with problems (rather than letting them sneak up on you) can reduce your stress level. You provide an important service. Whatever segment of the market you serve, your quality of life and your good feelings about yourself can be enhanced by serving it well.

You Always Have Two Choices

You can manage the spare parts warehouse or it can manage you.

In either case, machines will break or need PM; they will need parts, supplies, and materials. When a part is needed and is not available (for any reason), who pays? Or who spends the time to find the part?

• Storekeeper. Sometimes storekeepers are not the best suited when the part is obsolete; the OEM is out of business, or significant engineering or other technical skills are needed. However, they are the best choice when the materials have been received and no one can find them.

• Purchasing Agent and Buyer. They can source and research parts, supplies, and materials, but tend to have little experience on viable substitutions. Also they are usually not engineers.

• Supervisor. They often spend time finding parts. But is this task a major portion of their day? When supervisors are finding parts, they are not supervising.

• Planner. Planners should focus on next week or next month. If they are pulled into today’s requirements, they can’t be addressing future events. That being said, some support from planners is expected.

• Craftsperson. In some maintenance shops, the trades people source their own materials. This approach does have some advantages, but is very time consuming. It asks people with no training in purchasing to negotiate with vendors.

• Manager. Occasionally managers should get involved. Typically, they will help motivate whoever is looking to source the material.

Benefits

If you do transform your storeroom, you can expect some of the following benefits, according to Michael Brown, President of New Standard Institute:

• Over-purchasing will be stopped, potentially leading to a 5–10% reduction inventory value.

• Overnight freight costs can be cut by 30%, on average, by moving to ground shipping.

• Downtime due to breakdowns can be reduced by 33%.

• Downtime while waiting for emergency delivery of parts can be eliminated.

REALITY CHECK ON THE NATURE OF OEMS AND THEIR PARTS BUSINESSES

We have created a monster and we have no one to blame but ourselves. The original equipment manufacturers (OEM) have been forced into a corner by our purchasing practices.

What happens when you want to buy a new pump?

• Create a requisition for a pump or any piece of equipment.

• First decide on a set of engineering specifications, capacities, materials, etc. This task is usually completed by an engineer or by using the last spec (replace like with like).

• Pass the specification to purchasing.

• Purchasing delivers this specification to a few pump vendors, who chose appropriate pumps based on the specs and then return prices and deliveries.

• Generally, the least expensive pump that meets all the specifications and timing is purchased.

You can specify a premium product, but you will have to write a convincing business case to get approval for spending the additional funds.

So far so good. The question is that if the OEM wants to make the sale, they will need a better price than the next guy. They are also not likely in business because of a love for pumps; they want to make a profit. But how can they make a profit if only the low bid gets the job? There are several strategies.

They could make a premium pump and hope to sell it for a premium price. Some major manufacturers have taken this tack to great effect — think of Caterpillar mining equipment or GE turbines. Both are premium product lines made available at premium prices. Both companies rely on the parts and service business to greatly enhance the profit picture.

If you read business news, you’ll see that Wall Street seems to like parts and service businesses because they produce profit with little capital investment. It is not costly to expand parts or service business (some training, tools, and small offices/warehouses). Compare that expense to expanding the fleet of haul trucks or adding jet engine assembly lines.

Outside of a few premium manufacturers, most OEMs take the easier route. By far, the most common strategy is to make the pump good enough and price it in order to win a chunk of the business. However, all the profit will then have to come through the parts counter or from the service business. This strategy is exactly the one used by most OEMs. You buy the pump on low bid and you now represent to the OEM a 15-year cash flow for spare parts.

Remember, those of us in maintenance and procurement created this environment and we feed it by buying on the lowest bid or price.

THE DIMENSIONS OF THE SPARE PARTS CRISIS

For want of a spare part, the company ground to a halt.

No matter how effective your reliability program is, you will need certain spare parts over the life of a physical asset. As a result of global factors, spare parts for maintenance repair are getting harder to obtain and inventories are harder to justify.

Already power plants have been idled, chemical plants silenced, and assembly lines stilled. Why? A critical spare part was not available when it was needed. It’s that simple and yet complex at the same time.

This problem has been developing for quite a while, but it is increasingly affecting output of production facilities globally. The competitive worldwide landscape has changed. Why did this change take place? The reasons are connected to changes in the competitive landscape. Protection of home markets along with freer trade and the simplification of global marketing started the process. The Internet pretty much finished it.

A combination of factors come into play: increasing competitiveness needed just for survival and the shortened time horizon of corporate managers (short-term decisions) who lead manufacturers, distributors, and consumers of spare parts. This combined drive for both competitiveness and short-term profit has cornered both producers and consumers of spare parts into the supply chain environment in which we now live.

Several factors have contributed to this complex problem.

• The manufacturing and competitive landscape of the OEM along with their attempt to squeeze more profit from their parts business and reduce the capital tied up.

• Distributors of the spares also optimizing their own supply chain as well as the disintermediation (buying direct from manufacturer and bypassing distributers) enabled by the Internet.

• Reducing end user inventory levels in an attempt to cut costs.

• Nature of the spares themselves. With new product lifecycles getting shorter and with OEMs reducing the costs in their supply chains, machines are supported for fewer years in terms of how long parts are available. This increased pace is driven by both technology changing at increased rates and competition being more aggressive.

Each factor, in its own way, has amplified the crisis. In historical terms, when one of the domains had supply problems, the slack was taken up by one of the other domains.

The master enabler: computerization and the ability to optimize all inventories along the supply chain

A less obvious, but important driver is the more widely available computer capability to analyze parts sales patterns, analyze turns, calculate sales per square foot, and mine the parts sales data to make more sophisticated stocking decisions. Optimization is now very popular and, whether it is appropriate or not, everyone seems to be promoting it.

OEMs

After World War II, the manufacturers were returning from military to commercial production. Spares were hard to get. The entire Allied world had to retool and make this transition. In the Axis nations, entire cities, factories, and transportation infrastructure had to be rebuilt from the ground up.

The OEMs built up deep capabilities to duplicate, repair, and reverse engineer any spares they needed. Large manufacturers developed these same capabilities. Most large maintenance departments had extensive machine shops, fabricating bays, and people skilled in a myriad of trades. If the part was too expensive or had a long lead time, the shop would either repair the one that was broken or build a new one.

This capability was kept in place until well into the 1980s. At that time, the company machine shops were no longer essential as parts supply loosened up. The few machine shops left started to close and their work was outsourced. In more remote parts of the world that have tenuous supply chains and older equipment, you still see deeper capabilities to repair, patch, build, and reverse engineer spares.

OEMs today maintain fewer SKUs (stock keeping units or part numbers) with lower quantities on hand. This is good business! If you have 10,000 SKUs, you know that probably 2000 are your best sellers. You also know that the other 8000 SKUs consist of the bulk of your business’s costs associated with spare parts. Over the years, many businesses decided to not stock those 8000 SKUs, and instead produce them only to firm orders (rather than to sales forecasts, which are used for the more popular spare parts).

Faster innovation cycle times result in faster obsolescence. In turn, OEMs keeps stock levels low to prevent write offs, resulting in lower service levels. Companies have become lean. LEAN also means low stock levels. After lean came Agile. AGILE means the company is fast to respond to signals in demand. The fast response is related to future products, not to past products.

Perhaps someday we might convince the OEMs to combine the two and create: LEAGILE — a hybrid of lean and agile — keeping long lead time stocks on hand while being quick to provide the final item.

Intermediaries (Dealers and Distributors)

In many cases, the OEMs do not sell directly to the part user. There are one or more intermediaries between them and the end customers. For example, you might buy construction equipment or mining equipment from a dealer, who provides significant service as well as local, site, and climate specific support. The dealer may also stock and sell the spare parts.

Due to the same factors impacting the OEMs, the dealers / distributors are reducing the number of SKUs they stock and the quantity on hand of the ones that remain. As a result, the traditional first lines of defense are getting weaker in their ability to mitigate the destocking of the OEMs.

In other times and places, the dealers might have stepped up their stocking to reduce the issues for their customers. However, optimization and efficiency enabled by more sophisticated computer systems have driven down the stock levels for the dealers in the same way it did for the OEMs. It is entirely logical to think that the same 8000 SKUs were eliminated for the same reason — slow or infrequent turnover.

Another force is making the business environment less profitable for dealers. The Internet has caused disintermediation. This is a fancy word that means end users, enabled by the Internet, can now buy directly from the OEM, bypassing the dealer or distributer. Before, some of the higher volume spare parts supplied the profit to the dealers to support the slow-moving stock.

The Users of the Parts

As users of any kind of physical asset, why would you want to stock parts? After all, they are expensive and take up room. Some parts need to be coddled; others go bad, get broken, or are subject to theft.

There are two financial reasons for stocking parts:

• You can buy the parts cheaper if you buy in quantity or have some flexibility about the delivery window.

• You pay less if you can use ground shipping rather than air or courier. You can also save money when you can ship a number of items at one time.

One maintenance reason for stocking parts:

• Having all the parts when you start a maintenance job results in increased worker efficiency.

By far, the biggest reason for stocking parts is operational:

• Having spares for critical equipment reduces expensive downtime, sometimes dramatically.

The Spare Parts Themselves Have Changed

In the past, the spares for a machine were available quite a bit longer. If you bought a basic Bridgeport Milling machine in 1965, the spares were probably available from the OEM or dealer for twenty years or more. Today if you buy a new mill, you would be lucky to be able to obtain parts ten years later. Models are changing rapidly and OEMs seem to be supporting spare parts for shorter time periods.

As customers, we are seemingly making the problem worse. We are a fickle lot. We always want the latest and best machine. Our attention spans are short and we are hard to impress. To keep our attention, the OEMs have to continually develop new models with newer, faster, and greater capabilities. The result is that the lifecycle for a product is dramatically shorter than it used to be. Each new model has new and different parts to be stocked. The OEM reaction has been to limit the time where you can even get the spare parts.

Case Study

A German automobile manufacturer built an assembly plant in the United States. The plant took several years to go from drawings through approval, construction, and commissioning. Tweaking the assembly line to get the high quality needed took additional time. The plant was built using the state-of-the-art manufacturing technology at the time of the design.

The line has been running just a few years and maintenance requirements are starting to emerge. Purchasing has tried to order some standard parts but has had trouble getting delivery. The situation was escalated back to Germany where the full story started to come out.

The state-of-the-art equipment (only running for a couple of years) was no longer being supported. People in the know, using the equipment, had started to empty the supply chain, knowing that parts would become hard to obtain.

Conclusion

These four areas have dramatically changed the spare parts business. In some ways, the crisis that is developing comes from using 1975 tools and mental attitudes to address 2020 problems.

Of Course, If We Could Do Without Inventories...

If there was any way to run the plant with acceptable downtime but without spares, we would certainly do it. In fact, this goal is already being achieved at your local automobile repair shop. The local shops (not the new car dealers who also supply the spare parts) do not carry many spares. That is because of highly sophisticated, competitive, and responsive vendors. Your shop troubleshoots the problem and calls the local NAPA (National Automotive Parts Association) with the parts needed to repair the car. Within an hour or two the parts are delivered.

Anyone who can deliver 99% of the parts to an oil refinery, mine, or assembly line within an hour or two is likely to have a smash hit business. Or if we can predict the demand / requirements, then we can also have low stock levels with long lead times. Unfortunately, in most instances, predicting the demand / requirements is as tough as predicting anything else!

WHY DO PARTS STOCK OUT ANYWAY?

If we do decide to stock an SKU, what are the conditions that could cause a stock-out situation?

• Incorrect calculations for safety stock, ROP, and EOQ (Economic Order Quantity)

• Bad data contributing to the calculations above

• Usage rate of the part increases; could be more problems with equipment, additional equipment, spoilage of the stock, etc.

• Adverse changes to lead time (time for a new average to be calculated)

• QOH (quantity on hand) has fallen below the ROP (Reorder Point) and part was not ordered; could be a simple mistake to a new company policy

• Items being removed without being recorded (does not matter if it is used or stolen at this point)

• Any combination of the above

Parts That Have a Usage History Are Easier to Manage

Supply is simple for certain parts. Predicting which spare parts will be needed in what quantities works well for many of your SKUs. These parts operate statistically like a retail inventory. If the usage of the part is driven by wear out and you have enough usage, the SIC (Statistical Inventory Control) system for managing inventory can be used to determined quantities using simple math. If all parts just wore out periodically and that was the entire problem, then your spare parts could be well managed by typical inventory management techniques.

CHAPTER 2

MODELS OF INVENTORY

Different types of inventory holdings require different types of management strategies. Each strategy gives us a management model. Part of the problem is that inventory is held for different reasons. Each inventory makes money for the company in a different way