Managing Your Repair Parts Inventory
By Bob Boyles, Principal
Smarter Distribution

One of the topics that plague purchasing agents for manufacturing plants is the handling of their spare parts inventory. These parts make up a small percentage of the total dollars spent by a plant but it is often the area that generates the largest amount of headaches. Help is on the way.

There are several reasons for this frustration. One of the biggest sources of pain for the plant manager is that he’s been given the wrong tool for managing repair parts inventory. Some software creators think that the management of inventory is a monolithic field of study. That the rules that apply to one group of products or industry will as easily apply to another. Nothing could be further from the truth. The tools and techniques used to manage raw materials for production are not well suited for managing the repair parts inventory. Understanding that we need to use the correct tools is the first step to solving the problem.

The thing that makes repair parts management so frustrating for the plant purchasing manager is that demand is an unknown. Unlike the raw materials that will be consumed in the plant’s production of finished goods where the production run is set by the sales departments annual forecast or latest quarterly sales quota the demand for repair parts is completely random. It is this randomness that makes the work challenging. But when you combine that random demand with a set of inventory control tools designed for a production world the result can be added frustration for the purchasing agent.

The world is full of randomness, especially the world of inventory management so we’d better adapt. One of the first things I do when faced with a challenging environment is look for the examples of people that have succeeded in overcoming those hurdles and see what I can learn from them. In the world of inventory management with random demand the pros at handling that environment are wholesalers and retailers. Companies in the middle and end of the supply chain have no idea when someone is going to walk in and ask for the last widget on the shelf. But some how these same companies in the middle and end of the supply chain manage to keep the goods flowing. We the consumers have no idea what it takes to keep the shelves stocked and delivery trucks rolling. How do these companies do it? What do they know that our troubled purchasing agent doesn’t know? And can they be persuaded to share some of that knowledge and possibly make his life a little easier?

There are also differences in another area, that of “opportunity cost”. In a manufacturing environment a stock-out is a critical event that can lead to the halting of a production run. A stock out is not so drastic an event for a wholesaler or retailer. Don’t get me wrong, the efforts untaken to insure a stock out doesn’t occur are significant. But the difference is one of magnitude. The manufacturing plant may lose a significant amount of production time if an MRO part is missing. Or a critical customer may be left with their own plant down if a repair part is not on the shelf at the right time. For the wholesaler the stock out represents a lost opportunity cost from not making the sale, for the manufacturer the stock out can potentially represent a significantly larger cost in lost productivity. The opportunity cost for the manufacturing plant can be significantly larger than for the wholesaler. Still the wholesaler often achieves higher levels of customer service levels than an manufacturing plant will managing it’s repair inventory. Again, what do these companies in the middle of the supply chain know that they can pass along to our beleaguered MRO purchasing agent?

The wholesaler has become adapt at surviving in the middle of the supply chain by learning to live with erratic demand. Some of the tools they have adapted are better forecasting techniques than what you are going to see in a manufacturing environment.

There are some situations that are beyond the control of even the best inventory manager. Unexpected spikes in demand are a prime example. I like to use the examples of Grocery stores and their management of inventory since it’s a analogy that everyone can easily grasp.

One of the thrills of growing up in the middle south was that snow storms where “events” and not just another weather phenomenon. When snow was forecast the grocery stores would be ransacked by customers scared they were going to be snowed in for days. Ultimately if snow did materialize it was usually gone be the middle of the next day (after giving us the thrill of missing school for a day) and no one was threatened with starvation. However, the grocery stores were laid to waste. Their shelves of milk and bread were bare. There was nothing that they could have done to increase their supply on such a short notice. These
Types of situations repeat themselves over and over in our own supply chains. Wether it’s a hurricane that strikes the southern coast and the exhausts the countries supply of electrical parts. Or possibly a hail storm that rumbles through North Texas and damages enough roofs that there is a spike on a nationwide basis for roofing materials. Unexpected spikes in demands are going to occur. Improved forecasting can help but not for these types of situations. What does a hail storm rumbling through Dallas have to do with how you manage your repair parts inventory? Simply understand that you are going to have some level of stock outs. They only way to prevent them is to invest in significant and expensive levels of inventory that are going to sit and collect dust 99% of the time. If you’re faced with a situation where you must produce 100% service levels the key is understanding the cost that you are going to incur to provide that level of service and making sure that you are going to reap an adequate level of return for the investment.

This is where these companies that make their living in the middle of the supply chain have learned that a cooperative relationship with their suppliers and customers produces better results than adversarial relationships. They have learned to work with companies above them and below them in the supply chain and some even with their own competitors to meet the ultimate customer’s demands.

The answer to how to better manage repair parts inventory lies in using tools designed for that purpose and to re-think the strategy used to manage those repair parts inventories. So ultimately, the answer is that to manage repair parts inventory the manufacturer must think like the very breed of company that they are determined to eliminate from the supply chain, the middleman, a wholesaler.

Bob Boyles started his strategic consulting business in 2001 and focuses on the change that technology is forcing in the supply chain and how independent distributors can not only respond to that change but also maximize their return on investment. Bob spent a significant amount of time as an Installation Consultant for several of the big name software companies in the distribution market. Working with hundreds of distributors across the country on installing, upgrading and utilizing their software. Bob also worked as Corporate Systems Manager for one of the largest electrical wholesalers in the country as that company moved from a completely manual operation to an on-line real-time system.

Bob graduated from Appalachian State University (BS - 1981) and the University of North Carolina at Greensboro Graduate School of Business (MBA - 1985).

© Copyright All rights reserved 2002 Robert S Boyles, Jr. This article cannot be reprinted or reproduced in whole or in part, without the express written permission of Robert S Boyles, Jr.