Spare philosophy – A spare is required to prevent the consequence of a stock out.
The key is knowing what spare, how many and when you’ll need it.
When we say we want to cut spending and save money on our maintenance budgets, we often look to the likely place of inventory and cutting our spares.
But how actually does it work and what kind of money is tied up in inventory that would make a difference to the maintenance organisation and show on the bottom line for a company?
Inventory has been established in different ways within a warehouse. Typically It can be from parts that came with a project build, parts that were part of the OEM’s recommendation during construction phase or modifications, parts that have been bought during maintenance emergencies, or parts that have been bought as “insurance” spares..
The cost of the inventory can increase at a rate that can quickly become excessive, so done right a assessment of required spares holding can generate significant value.
As a case study we looked at 5 pieces of inventory that are typically held in an onsite warehouse that are used in maintenance activities :
- Motor
- Valve
- Gearbox
- Pump
- PCB
Each inventory item had a cost associated with the item, the amount held in inventory and the onsite location. The holding cost was 18% compounded annually on the total cost of the inventory.
In order for us to complete the analysis the company had also supplied us with some maintenance information that allowed us to determine some key criteria for the equipment:
- What the failure characteristic was
- The typical length of time between the failures
The Goal: To determine the holding policy of the inventory, that is to say, how many of the item was required to be held at the facility based on the current operating context of the facility.
The first step was to determine the current status - the “As Is” of the facility.
Cost of holding the inventory over 10 years at a holding rate of 18%
Cost : £1,167,145.33
It is a compound interest calculation with no depreciation on the assets.
Looking at the failures the company experienced we determined the following detail:
| Inventory item | Total used (10 years) | Cost per item | # Held in inventory (As is) |
|---|---|---|---|
| Gearbox | 3 | 15,000 | 3 |
| Motor | 4 | 10,000 | 3 |
| PCB | 6 | 1,500 | 20 |
| Pump | 6 | 12,000 | 4 |
| Valve | 5 | 5,000 | 10 |
Optimized cost of spares holding over 10 years at a holding rate of 18%
Cost : £515,532
| Inventory item | Total used (10 years) | Cost per item | Optimized number (To be) |
|---|---|---|---|
| Gearbox | 3 | 15,000 | 3 |
| Motor | 4 | 10,000 | 1 |
| PCB | 6 | 1,500 | 3 |
| Pump | 6 | 12,000 | 2 |
| Valve | 5 | 5,000 | 3 |
This is a saving of £651,613 over 10 years.
This case study was based on doing no optimization of the maintenance activities but merely just looking at the type of failures the facility was experiencing, how often the failures occur and the logistics associated with the spare.
Now apply the same philosophy to bulging inventory levels and the cost of holding the spares, it’s easy to see what can be saved just by analysing basic data.
There was no change to the risk profile by incurring a stock out.
Take the spares optimization one step further by looking at your maintenance practices and strategies. By doing this you can reduce the consequence of failure in terms of the safety, environmental, regulatory or cost impact and make further reductions to the held inventory at the facility.
Add this into the formalized process of Asset Strategy Management to ensure that the overall cost of ownership is maintained at an optimum level without compromising risk.
