Building A Solid Spare Parts Inventory Management Foundation

“Building A Solid Spare Parts Inventory Management Foundation” - Frequently Asked Questions
Dan Floen, President - Professional Materials Management (PM2) www.pm2online.com

During a recent webinar, I presented some fundamental steps that you can take to put your spare parts inventory management system on a rock solid foundation. This area is often overlooked, but the return on investment of doing this correctly is huge. Done right, companies often see their purchasing spend for spare parts reduced in the first year by 25% or more.

Here are my responses to the most frequently asked questions on this topic:

1. Why build a spare parts inventory in the first place?
Taking an example from the military, if the supply of provisions, equipment and fuel to a battalion is interrupted for any reason, the battalion stops in its tracks and may even have to return to base, losing or delaying the opportunity to advance toward its objective. In the same way, the effective management of your spare parts inventory will ensure that your employees have the parts they need to keep the business moving forward productively and efficiently.

2. Should I build a spare parts inventory in-house or contract it out?
The two deciding factors here are resources and expertise. Do you have enough resources in-house to staff this effort adequately to complete it in a reasonable timeframe? Companies that choose to “build a spare parts inventory as time allows” rarely complete it. This process takes focus and sustained resources. The sooner that you complete this, the sooner that you will realize the associated return on investment and productivity benefits.

Also, consider the inventory expertise of the in-house resources that are available to do this work. For example, are the employees well-versed in inventory layout and design? Do they have the tools and training they need to build a high quality standardized parts inventory database? Do they possess the inventory project management skills necessary to develop an effective and realistic plan, and then manage it to completion?

If you don’t have adequate resources or expertise to build a spare parts inventory well the first time, consider outsourcing the work to an expert.

3. What is the average return on investment?
Going in, we typically see spare part on-hand inventories ranging from $750K to $1.25M. These spare parts inventories are typically turning less than once per year and companies are buying “around” their inventory, for the lack of visibility to it. Employees spend an inordinate amount of time searching for parts, and when they can’t find them, they simply buy more.

Here is a typical ROI example:
Current on-hand inventory is $1M and inventory turns are 1. Also, 50% of this parts inventory is dead or obsolete. This leaves $500K of active inventory, which is turning twice per year. By managing to 4 turns on the active inventory (a 3-month supply), you will “burn-off” $250K of inventory, avoiding $250K in purchasing spend in the first year or so. (This example doesn’t include process cost savings because most CFO’s see these as “soft costs” that don’t directly affect the bottom line. However, few would argue that productivity can be significantly impacted when employees have more time to do their primary job.)

If you would like to watch the presentation, “Building A Solid Inventory Management Foundation,” click here
http://www.pm2online.com/video/PM2_Webinar_Presentation.wmv


I wish you well as you embark upon your inventory management initiative. If you need any assistance along the way, just give us a call at (813) 249-0834.