Optimization of spare part inventory
A White Paper
Lillian Holden
Spare part inventory is for supporting the maintenance organization to complete
the task and retain production.1 Spare part management is to ensure that right
part and resources are at the right place (where the broken part is) at the right
time. With the exception of preventive activities, spare parts for maintenance
tasks are usually required at random intervals. Thus, the fast and secure
coordination of the demand for spare parts with the supply of spare parts at the
required time is an important factor for the punctual execution of the maintenance
process. Missing materials are one of the most frequently cited reasons for the
delay in completion of maintenance tasks. As spare parts for machinery are
often very high quality, this problem cannot be solved simply by increased
warehouse stock. DMAIC steps and tools in Lean Six Sigma can help company
use the tools to find solutions for better managing spare part inventory.
Spare Part & Spare part management
Spare part definition in the “answers reference” is” in supply usage, any part,
component, or subassembly kept in reserve for the maintenance and repair of
major items of equipment.” 2 Proper planning and control of spare parts
inventory is a critical component of an effective asset management program. If
the right parts are not on hand when needed for routine maintenance or repairs,
downtime is prolonged. 3If too many parts are on hand, the enterprise absorbs
excessive costs and the overhead of carrying the spare part inventory.
.
Maintenance
Maintenance, including tests, measurements, adjustments, and replacement,
performed specifically to prevent faults from occurring.4 The goal of maintenance
is to avoid or mitigate the consequences of failure of equipment. Maintenance
has mainly been defined as two parts by its nature- Preventive Maintenance (PM)
and Corrective Maintenance (CM).
Preventive Maintenance (PM)
When discussing improvement opportunities in the plant, preventive maintenance
discussion must come up. 5 Preventive maintenance is preventing the failure
before it actually occurs. It is designed to preserve and restore equipment
reliability by replacing worn components before they actually fail.
Corrective Maintenance (CM)
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Spare Parts Management
http://www50.sap.com/businessmaps/B8DF92D5B4984E1A81DB3E90D99C4572.htm
2
http://www.answers.com/topic/spare-parts
3
Managing spare part inventory. http://www.mt-online.com/component/content/article/128november2002/718-managing-spare-parts.html?directory=90
4
5
http://en.wikipedia.org/wiki/Preventive_maintenance
http://www.idcon.com/reliability-tips-311.htm
Corrective maintenance involves the repair or replacement of components which
have failed or broken down. For failure modes which lend themselves to
condition monitoring, corrective maintenance should be the result of a regular
inspection which identifies the failure in time for corrective maintenance to be
planned and scheduled, then performed during a routine plant outage.
Cost of Keeping Spare Parts
The cost for keeping inventory is usually an estimated number, often called
“inventory interest” that varies from 10-40% depending on company accounting
rules. The cost included storeroom, storeroom personnel, depreciation, etc. If you
have a spare parts and materials inventory value of 10 Million, it costs the
company 1-4 Millions (10-40%) a year to keep that spare parts and materials
inventory.
Problem
Since it is common that inventory value is the only number the plant really cares
about, it tends to get reduced. But, anyone can reduce inventory value very
easily, if it’s the only thing that matters. However the consequences will be
devastating to production since there are no any spare parts. Reducing spare
parts and providing the parts for maintenance is often conflict. Storeroom
manager wants to reduce the spare part inventory but the maintenance
organization wants to have every part in house if possible. Spare parts inventory
value is important, but to effectively reduce spare parts inventory value and
provide proficient service to maintenance organization is crucial as well.
Optimization for spare part inventory
As effectively reducing spare parts inventory value and provide proficient service
to maintenance organization are both important; fortunately, there are some
approaches we can use to help us not only manage the spare parts but also
optimize it to the maximum value. DMAIC steps in Lean Six Sigma can help the
company find solutions for better managing spare part inventory. In the Define
phase, we need to interview cross function departments such as maintenance,
storeroom, IT and purchasing departments with survey questions to understand
the pain points of the current process and identify the biggest issues regarding
the spare parts inventory. Spare parts handling processes need to be recorded
in the current value stream map.
After defining the pain points and challenges, we will move to measure phase.
In the Measure phase a list of the improvement areas (projects) can be spread
out such as SKU number cleanse, critical part identification, lead time issues
tying to the critical parts, and mean time between failures in the machine related
to the critical spare parts. Each of the examples above can be an individual
smaller project tide to the main inventory optimization project. We need to
develop a data collection plan for each topic we decide to tackle. Conducting a
Cause and Effect diagram to find out the root cause and develop a potential
solution. Setting up a benchmark for a defined topic for future improvement
measurement are the tools we can use to collect and compare data.
Inventory Record Accuracy6- (IRA)
Inventory Record Accuracy needs to be looked at two areas: accuracy in spare
part inventory and accuracy in equipment bill of material (EBOM).
 Spare part inventory accuracySpare part inventory accuracy is important to be indentified from the
beginning of receiving. The areas of accuracy include item/part number
identification, quantity and unit of measure, location and posting timeliness.
Some companies also measure other related data, such as customer/contract
number, configuration/revision letter, lot, serial number, and grade and
expiration date. SKU numbers need to be cleaned and quantities need to be
accurate. 5C or 5S can be performed to clean the SKU numbers and
optimize storage and warehouse space. Part Count Accuracy Percentage
starts from measuring the accuracy with which the suppliers deliver the parts.
Accuracy should be measured in terms of quantity. Benchmark is set at
100%.

Equipment bill of material (EBOM) accuracy
The main purpose of the materials management organization is to provide the
"right parts in the right quantities at the right time." But where do those
material requirements come from? Whether or not demand is predictable,
whether the materials are for production or maintenance, the requirements
are usually generated from a bill of material (BOM). Without a complete and
accurate BOM, decisions regarding material planning and replenishment are
often made in a vacuum, resulting in excess inventory, stock outs, expediting
charges and expensive downtime. With a reliable EBOM, a planner can
determine exactly what parts are needed. Over time, all assets should have
an EBOM. However, base the order of priority for EBOM creation on the
criticality ranking of the assets. Every critical asset must have an EBOM7.
Develop them in order of priority based on the criticality ranking as time,
resources and availability of data allow. In general, any spare parts or
components for which there is a reasonable expectation of being repaired or
replaced as a result of a preventive maintenance (PM) or corrective
maintenance (CM) work order should be included on the EBOM. At a
minimum, the EBOM should reflect any item identified as a critical spare. In
addition, the EBOM should include any other materials used directly to repair
the asset, or any item for which it is necessary or beneficial to have usage
history tied to the asset in the Computerized Maintenance Management
System (CMMS).
Turnover rate by Part
On the cost side, the first measure, inventory turnover, is the ratio of the cost of
annual usage on a spare part to the average inventory level. The higher the
inventory turns, the better the firm uses its inventory assets. Another common
measure is days of supply. A firm's days of supply is found by dividing the
6
http://www2.egr.uh.edu/~araguram/INVENTORY+METRICS-sachin1.htm
7
http://www.reliableplant.com/Read/10689/equipment-bom
average inventory level by the cost of one day's sales. This data can be used for
the decision making to identify the critical spares.
Critical Spares Reduce down-time of the production transformers is the purpose for the spare
part inventory management. If you do not have that critical spare part when you
need it, you may be in big trouble. On the other hand, it is impossible to keep an
extra factory in the storeroom. Critical inventory is the minimum level of
inventory that must be on hand. The requirements for identifying the critical spare
parts including: Spare parts list, equipment used on, and location of equipment.8
1. Spare Parts List –all suppliers should submit a full BOM with recommended
critical parts identified for the equipment they plan to deliver.
2. Use on Equipment – each spare parts list should include equipment part or
model number, standardized name and a category of equipment. The
standardized naming conventions are extremely beneficial for multi-facility
maintenance use and will support common tasking procedures.
3. Location of Equipment – this information is essential for the export to a CMS
maintenance system enabling spare parts to be set up for maintenance, work
orders created and tracked and asset management.
Pareto rules- 80/20 can be used to determine the criticality for spare parts after
gathering enough information mentioned above.
Lead TimeLead-time is defined as time period from initiating of an activity to its completion.
For inventory management we need following lead times: purchase lead-time,
manufacturing lead-time, delivery lead-time. After identify the criticality, we need
to see the impact of lead time on a part. First, company needs to identify if a part
is customized or non-customized. Assumption: A customized part needs a
longer lead time than a non-customized (or commercial) part. If a part that is
customized and it is critical, it will take longer to receive, and then the part should
be stocked. If a spare part for a machine that is no longer being supported by
the manufacturer, then the parts need to be in inventory. On the other hand, if a
machine that is still being supported by the manufacturer and they agree to send
a part within a set lead time, and then company doesn’t need any part in stock.
Lead time plays an important role in the management of inventory. It involves
the time between placing an order and the point at which it is actually delivered.
A benchmark of lead time can be set to determine if a part need to be in stock or
we can adapt just-in- time method to managing inventory.
In the Analysis phase, ANOVA tests for equal variance and regression, while ttests for proportions, which can be used for understanding the relationship
between spare part and Mean Time between Failures of the particular machine.
A check list can be developed to identify the qualified suppliers.
In the Improvement phase, a list of possible solutions to test or operating
parameters for experimentation can be lay out. A list of possible risks evaluated
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for level of seriousness and corresponding abatement actions should be
addressed. Failure Mode Effect Analysis (FMEA analysis) should be developed
to prevent the failure possibility and provide the solution. Pilot plan and
experiment can be conducted here before implementing companywide action.
An example is demand forecasting in Min/Max or MRP model. Min/max9 is a
traditional inventory push and pull models. With min-max planning, you specify
minimum and maximum inventory levels for your items. When the inventory level
for an item drops below the minimum, inventory system suggests a new
requisition or job to bring the balance back up to the maximum. Material
Requirements Planning (MRP) 10 is a software-based production planning and
inventory control system used to manage manufacturing processes. Either using
min/max or MRP, the purpose is to forecast the needed inventory in the right
place at right time. In order to decide which model is most beneficial to the
company, a list of the risk analysis can be performed. After chosen a model, the
FMEA analysis can be performed to prevent potential operation failure.
In the Control phase feedback mechanisms and mistake proofing devices
should be implemented which would be collected and developed in the FMEA
analysis earlier. Standard Operating Procedures (SOP) will be updated. Detail
improved Process Maps should be created as necessary as the current process
map may not be useful anymore. Critical part identification plan should be
developed and updated as well as ABC analysis would be used to categorize the
critical spare parts.
Summary
Although reducing spare parts and keeping the maintenance organization happy
is often a conflict. There is still a systematic method to achieve the goal.
Optimization of spare parts inventory needs to start from finding the basic root
cause, cleaning, sorting, gathering the correct data, and applying that information
into forecasting the demand of spare parts. The effort for optimization of spare
part inventory is not only from storeroom but from the related departments. The
result for optimizing inventory is rewarding because it not only generates savings
in the spare parts and 10-40% savings of spare part in managing the inventory
annually but also provides efficient service to the maintenance organization.
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http://download-west.oracle.com/docs/cd/A60725_05/html/comnls/us/inv/mnmxplan.htm
http://en.wikipedia.org/wiki/Material_Requirements_Planning
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Reference
1. Spare Parts Management. See
http://www50.sap.com/businessmaps/B8DF92D5B4984E1A81DB3E90D99C4572.htm for
further reading.
2. Spare part, answers.com, the world’s leading Q&A site. See
http://www.answers.com/topic/spare-parts for further reading.
3. Managing spare part inventory. Sheila Kennedy http://www.mtonline.com/component/content/article/128-november2002/718-managing-spareparts.html?directory=90 for further reading.
4. Preventive maintenance. See http://en.wikipedia.org/wiki/Preventive_maintenance for
further reading.
5. Definition: “Preventive Maintenance” (PM) See http://www.idcon.com/reliability-tips311.htm for further reading.
6. Preventive Maintenance on Reliability Engineering Resource See
http://www.weibull.com/SystemRelWeb/preventive_maintenance.htm for further reading.
7. Inventory management metrics table and benchmark. Engineering computer center.
See http://www2.egr.uh.edu/~araguram/INVENTORY+METRICS-sachin1.htm for further
reading.
8. The importance of an equipment BOM, Doug Wallace, Tags: maintenance and reliability
See http://www.reliableplant.com/Read/10689/equipment-bom for further reading.
9. Data Management: What to Consider in Tracking Change in Information Jackie Roberts
See http://www.dataforge.com/wpblog/index.php/tag/spare-parts/ for further reading.
10. Jones, James V., Integrated Logistics Support Handbook, page 4.2 See SAP Solution
map for details:
http://www50.sap.com/businessmaps/63CCFB75634048A7A407C10D56A7D24C.htm
11. Min/max planning See http://downloadwest.oracle.com/docs/cd/A60725_05/html/comnls/us/inv/mnmxplan.htm for further
reading.
12. Definition on MRP. See http://en.wikipedia.org/wiki/Material_Requirements_Planning for
further reading.
13. Equipment using MRP- Henry Hutchins, CFPIM
14. APICS is the Association for Operations Management. See www.apics.org for further
reading.