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Turn Spare Parts into Spare Cash
How to save money through better parts inventory management

The challenges of managing spare parts inventory differ from those encountered in managing the inventory of
finished product and direct materials supply chains. Unlike those supply chains, where everyone agrees on the end
goal, every spare parts manager will tell you that their spare parts are essential and optimisation opportunities are
limited. However, we find that in almost every MRO inventory, five problems tend to bloat parts stocks – all of which
can be reduced.

1. Hoarding
Obviously, manufacturing facilities need spare parts, but not every spare part is equally
critical. However, maintenance engineers often stock spare parts not on the basis of their
importance or frequency of use but out of fear. Other stocks in the plant might operate on
the principle of “just in time,” but the spare parts mantra is typically “just in case” – based
on the opinion of maintenance engineers who want to keep the plant running at all costs.

2. Random breakdowns
Another important source of complexity in MRO inventory management is the erratic
nature of demand. Typically, parts are needed either for regular maintenance or for an
unexpected repair. In the case of maintenance, activities are planned well in advance, so
requirements can be predicted with some level of certainty based, for example, on usage
rate. In the case of repairs, the difficulty becomes forecasting when a part will be needed
unless you use an hours-of-operation analysis to predict the probability of critical parts
failure.

3. Slow-moving and obsolete parts (SLOBs)

Plants often hold thousands of parts they seldom need to use. In the dairy industry, for
instance, a recent analysis showed that 60 per cent of the total spare parts inventory
value was in parts that had not been used for more than 3.5 years, and the average part
was used only every 2.5+ years (FIG. 1).

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 1
 FIG. 1 Slow-moving and obsolete

M€ Days
2,4 1100
2,2 1000
2,0 900
1,8 800
1,6
700
1,4
600
1,2
500
1,0
400
0,8
0,6 300

0,4 200
0,2 100
0,0 0
Dec Jan Feb Mar Apr May Jun Jul Aug Sep

USAGE INVENTORY COVERAGE

This typically translates into out-of-date master data information, such as duplicates
or missing manufacturer part numbers, and/or missing information necessary for any
optimised inventory management – reorder points, lot sizes, lead times, min/max levels, etc.

When demand for a part is infrequent, planners lack sufficient data to make an accurate
forecast for its use. To be on the safe side, managers tend to build a safety stock of
these infrequently used parts. And even when plant equipment is replaced, they remain
reluctant to liquidate their stock in case they can use it for some unforeseen purpose one
day. In the end, a manufacturer can end up maintaining a huge collection of parts – as we
saw with a paper manufacturer that had no demand for 42 per cent of its parts inventory
over a three-year period.

4. Long lead times

Lead times for service parts can be highly variable. The supply chain is often not closely
managed or well understood. This is especially true for repairable parts, such as motors,
that are sent to outside providers with the required expertise to complete the repairs.

5. Duplicates
The typical plant may keep 10,000 or more different spare parts in stock. Maintaining
accurate data on so many different items can be challenging, particularly as many
maintenance departments do not observe formal naming conventions or keep
standardised records for each part. Parts descriptions are often inadequate, may
include spelling errors, and may lack manufacturer names or part numbers. Often, the
descriptions are unrecognisable by anyone other than the actual engineer who set up the
item in the system. These problems can lead to a high level of duplicate inventory – as
much as 10 to 15 per cent of inventory – at a given plant, and even more overlap across
multisite companies.

Six steps toward a leaner parts inventory

All these problems might seem overwhelming, but a six-step approach can make for a
much leaner parts inventory:

1. Rate parts by their criticality.

Rather than maintaining inventories by gut instinct, managers should rate parts
inventories by formal criteria that assess their relative importance. FIG. 2 shows an
example of how to set formalised criticality ratings for the spare parts.

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 2
 FIG. 2 Part criticality

Part Criticality
High Medium Low

Resource
• Part is vital to the operation of a bottleneck • Part is needed for a non-bottleneck machine
machine resource in the plant resource
• Missing part would shut down production on • Temporary repairs can be made with other parts
the line/in the plant while waiting for delivery of the required spare
Safety

• Part is essential to ensure the safe • Part does not have a significant impact on
operation of the plant safety

• Part is required to keep plant equipment • Part is used on equipment that does not
Cost

running that have a significant impact on cost have a significant impact on cost

2. Differentiate parts for planned maintenance from parts for random breakdowns.
Parts needed for regular maintenance should be managed separately from parts needed
for random breakdowns. For example, maintenance parts should not require safety stock,
because demand can be planned ahead, but repair requirements need safety stock to
cover the uncertain demand.

Most maintenance managers would rather buffer than suffer. They need assurance that
they won’t run out of a critical part. Building that assurance demands good relationships
with suppliers. Strong supply agreements can go a long way toward giving maintenance
managers the security they need.

3. Shorten lead times.

The supply base for MRO parts is often not closely managed or necessarily understood,
which can lead to long and variable lead times. Supplier lead-time performance should be
tracked to ensure that the most reliable suppliers are used. It is also important to procure
parts from the correct suppliers along the supply chain to ensure that the lead times
match the criticality of the part. For example, a manager might choose to pay a little more
for a key part by buying it from a large distributor who holds large stocks, if it means the
supply lead time can be reduced significantly.

Once they have this data, maintenance managers can work with key suppliers to improve
lead time performance. In a recent dairy industry engagement, for example, supplier lead
time metrics were established, which allowed for comparison of lead time performance
amongst suppliers, as shown in FIG. 3.

FIG. 3 Supplier lead times

Weighted Average
Supplier Total Order Value (€) Weighted Days
Lead Time
Supplier A 1,54,677 27,19,410 17.6

Supplier B 92,563 60,39,911 65.3

Supplier C 51,486 3,08,037 6.0

Supplier D 48,646 20,75,809 42.7

Supplier E 42,416 33,03,628 77.9

Supplier F 34,747 2,47,280 7.1

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 3
 With this information, it was clear that suppliers B, D, and E were providing a poor level
of service. Based on this information, the client was able to work with this supply base
to improve delivery performance – for example, by working with supplier B to improve
supply lead times and moving some of their volumes to suppliers A and C, especially for
critical parts. Additionally, given the lower level of spend with suppliers D and E, the client
would consider eliminating these suppliers and buying from suppliers A and C instead.

4. Eliminate duplicates.
Duplicates aren’t an insurmountable problem. They can be avoided through the institution
of a robust data management approach. The MRO team should:
• Agree to a part numbering convention for all parts across all plants.
• Require a specific set of data points for each part description (for example, key
technical specs or manufacturer) to enable people to locate existing stocks.
• Record the manufacturer to help in understanding the importance of different suppliers
and the use of original equipment manufacturer (OEM) parts versus generic parts.
• Capture the manufacturer’s part number so users can easily validate that they have
found the correct part.
• Classify parts – pumps, motors, bearings, etc. – to allow for more efficient search for
parts.
• Create a bar code or RFID system that includes each part.
• Use a dedicated system for tracking spare parts. Both stand-alone systems and ERP
modules can do an excellent job.

5. Increase consignment and parts sharing.

The gains from implementing the first four steps will be seen right away. However, the
biggest long-term optimisation opportunities will come from the use of consignment
stock and part sharing between multiple regional sites. The first step in this process is
to segment the spare parts and assign appropriate inventory management rules for each
segment. This allows the team to manage every item based on its core characteristics
in the most optimal way. An inventory segmentation model based on usage volume and
value (ABCD) and usage frequency (regular, slow, very slow, no usage, inactive) helps
to identify suitable items for each strategy. ABCD classifies inventory based on usage
value, where the A items represent 80 per cent of usage value, B items 15 per cent, C
items the next 5 per cent, and D represent items without usage. For the D items, it is
important to conduct a critical review of the parts in stock to identify which ones can still
be used versus which are obsolete. Disposal strategies should be put in place for the
obsolete items. FIG. 4 is an example of such a segmentation.

FIG. 4 Inventory segmentation

Frequency of Usage
Regular Slow Very Slow No Usage Inactive

B
Usage Value €

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 4
 High-value items with low frequency of usage, for example, are typical candidates for
consignment stocks, because they incur inventory holding costs, tie up cash, and run
a higher risk of obsolescence due to their infrequent use. These items are quite often
OEM spares for key machine resources installed in the plant. Where the company has an
installed machine base that was predominantly provided by one or two OEMs, it is often
possible to negotiate good consignment stock arrangements because the OEM will be
keen to secure the ongoing maintenance business. Additionally, low-value C items with
many different part numbers to manage, such as fasteners and fittings, also tend to be
good candidates for consignment stock. Putting these items into a consignment stock
programme can reduce the time spent by staff managing a vast array of small-value
items, giving them more time to focus on higher-value A and B items.

Should consignment not be possible, regional parts sharing should be considered, in

particular for high-value items with slow and very slow consumption frequency. But it’s
important to weigh cost versus criticality. For example, it might not be possible to put
all the critical items in a regional warehouse, because the parts need to be available
for immediate use when there is a breakdown. In this case, it is possible to use a
hybrid solution where a minimum of one spare part is held at each manufacturing site
and the remaining safety stock is held in the regional warehouse. This approach would
significantly reduce inventory and cost without impacting service levels.

The use of an inventory segmentation model also helps with decision making,
because rules and strategies for items with similar characteristics can be established,
as demonstrated in FIG. 5. Having a set of predefined inventory management rules
is especially important for spare parts where you are trying to manage thousands of
different materials. For inventory held onsite, the segmentation will help to identify items
suitable for statistically calculated safety stocks (SS), define differentiated service levels,
establish min/max levels, and so forth.

FIG. 5 Inventory segmentation

Frequency of Usage
Regular Slow Very Slow No Usage Inactive

A
• Min/Max • Min/Max • Min/Max
planning planning planning
• Use of • No statistical • No statistical
statistical safety stock safety stock
safety stock
B • Min=13 • Min=26
Usage Value €

• Min=safety weeks usage weeks usage

stock + 1
• Max=26 • Max=52
week usage
weeks weeks
• Max=safety usage usage
stock + 2
C weeks
usage

• Min/Max • Eliminate
planning • SLOBs
D • Min Qty = 1 management
• Max Qty = 4

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 5
 Organising the haystack
A multisite European manufacturer decided to undertake
an analysis at three of its regional locations.

Analysts cleansed the item master data files for the three sites and standardised every
entry into a noun-modifier format that followed industry nomenclature.

They then sorted the cleansed data to identify duplicates, segmented by commodity
group into categories, and evaluated by usage and supplier. Finally, they analysed
historical inventory levels, inventory parameters and usage data for the previous three
years. The results were quite impressive.

Spare parts inventory ties up a lot of cash for capital-intensive, multisite manufacturers.
In the end, not all of it can be eliminated. However, following an analytical process and
taking a systemic approach enables manufacturers to greatly reduce the amount of
money tied up in parts inventory.

Results

•D
 iscovered that duplicate items accounted for nearly 10 per cent of the inventory.
Updated system data and settings to ensure the excess inventory would be
drawn down through usage over time.

•C
 ulled slow-moving items. Analysts discovered that 33 per cent of the total stock
were items used once a year or less, while 60 per cent of the total stock value
had had no usage in the past 3.5 years. Reviewed and updated min/max levels
for slow items. Negotiated the return of €1 million in excess stock to suppliers.

• Identified and disposed of obsolete items to generate €400,000 in cash.

Established a program for the ongoing disposition of obsolete parts.

•E
 stablished inventory management rules including statistically calculated safety
stocks, part criticality and min/max levels to enable an additional inventory
reduction of €1.1 million.

• Implemented a “share the spare” programme for sharing high-value spare parts
through a central warehouse in the regional area, further reducing stock levels at
all three locations.

•E
 stablished a set of metrics to allow better management of suppliers and the
development of a preferred supplier list. Metrics included supplier on-time
performance, order-to-ship lead time, lead time variability and past-due orders.

© 2018 The Hackett Group, Inc.; All Rights Reserved. Turn Spare Parts into Spare Cash I The Hackett Group I 6
 6. Conduct a line-item review.
To overcome the problems of low parts usage, regular line-item reviews should be
carried out on a quarterly basis. These reviews verify system data, recalculate part usage
levels for all items and adjust system settings such as reorder point and lot sizes to
reflect true and current data. Additionally, the line-item review should include reassessing
the criticality of specific parts as well as identifying and putting into place action plans
for items that are surplus and no longer needed. By manually reviewing all the MRO
inventory items in the inventory management system, inefficiencies in the system
settings can be identified and adjusted in order to optimise inventory levels and reduce or
eliminate superfluous parts.

In the end, when it comes to spare parts inventory management, the most important
thing is to have well-defined and well-communicated rules for minimum stock, maximum
stock, reorder point, and so forth for each type of material and take out “emotional
inventory” – parts kept to satisfy risk aversion – as much as possible.

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about The Hackett Group and how we can help your company sharply reduce costs while improving business
effectiveness, please contact us at 1 866 614 6901 (U.S.) or +44 20 7398 9100 (U.K.).

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