How to reduce Stores inventory – without reducing reliability

The inventory carried in Maintenance Stores in manufacturing operations can be considerable, often worth many millions of dollars, and it is usually one of the first targets when a cost-reduction programme is initiated.

There are always opportunities to reduce Stores inventory, but always remember that there is an optimum level. Having no spares at all will, obviously, result in production losses, and its equally obvious that its easy to have too many spare parts. So there is a level that is just right, somewhere in between these two extremes.

The problem is that this optimum should be established for each Stock Keeping Unit (SKU, or “bin”) on its own, and in a large plant there may be up to 100,000 SKU’s. Applying a general rule to all SKU’s is risky.

There are many approaches to reducing inventory, but the wrong way (and in our observation, the most common way) is to eliminate, without analysis, those SKU’s that have not seen any movement for some time, perhaps 5 years. As mentioned elsewhere, this is exactly the logical equivalent of eliminating fire extinguishers or smoke alarms that have not been used for a long time and has the same result – it creates a high level of risk. This approach will eliminate many protective devices, such as fuses and shear pins, that have a very short “failure development period” and which, of course, may be needed in an emergency. The reason that this approach is commonly taken, is that it is easy. The “system” will tell you which SKU’s have not seen recent activity.

It is equally illogical to reduce all re-order quantities without understanding the consequences. For example, one company decided to reduce all order quantities to one unit, which, of course, created problems when replacing V-belts which were used in sets, or replacing fuses in a 3-phase circuit.

The following recommendations will lead to a reduction in inventory without reducing plant reliability.

1. From the maintenance computer system, extract a list of SKU’s that have not moved in, say, 5 years. Give this list to the appropriate experts (e.g. maintenance engineers) and assign them the task of reviewing each SKU on the list and deciding whether it is economical to keep it in stock, and the appropriate re-order point and re-order quantity. The factors to consider are purchasing lead time, the effectiveness of the preventive maintenance programme to maximize the failure warning time, the criticality of the component, the Economic Order Quantity, the ability to take some contingent action to allow equipment to continue operating long enough to purchase the correct replacement component after a failure and, of course, obsolescence (i.e. is it a spare for equipment that is still operating). For more on this subject, see “What parts should be in your Maintenance Storeroom and why?“.
2. Eliminate all “project” materials from the Storeroom. In many Storerooms it is common to find bins with far more parts on hand that are ever likely to be used for maintenance. For example, in one large paper mill a bin was found that contained 12  6″ schedule 40 316 stainless steel elbows. The Maintenance Supervisors agreed that it was extremely unlikely that more than one would ever be required at any time for maintenance, and that the other 11 were just there for “projects”. There were many other bins in this Storeroom with far more piping, mechanical and electrical parts that would ever be required for routine maintenance. The savings that result from eliminating project materials may well exceed the savings from eliminating slow-moving SKU’s.

Of course, to reduce project materials it is necessary for an experienced person to check all bins and identify the ones where the number of units can be reduced, and such a person is usually difficult to release from his/her normal duties to do this kind of work. However, there will be a strong Pareto effect – just identifying the 80% of the bins with the biggest opportunity for reducing stock may take 20% of the time required to carefully check the entire inventory.

3. Ensure that the preventive maintenance system is well-managed. Many Storerooms have components on hand that are obviously unnecessary IF a good inspection programme is in place and can be trusted. A simple example we have seen is a large inventory of solid lift-truck tires. These tires have one common failure mode, and that is normal wear. Checking tire wear regularly provides plenty of time to order replacements before a complete failure occurs. The same logic applies to many parts, such as conveyor components, drive chains and sprockets, V-belt pulleys and other moving parts.
4. Make it easy to order parts when they are needed. The use of an integrated zero-stock materials catalogue will discourage requests for items to be added to stock and, conversely, will allow some existing stock to be removed.
5. Critically assess the need to carry spares for large, expensive and perhaps critical components. The risk involved in not carrying such spares can be reduced to an acceptable level by applying Reliability Centred Maintenance^®principles. See “Reducing the risk of unspared critical components“.
6. Use a maintenance computer system with excellent search functionality, and maintain a high standard of naming parts. With the all-too-common limited searching ability of many systems, combined with unstructured or illogical part names (especially names assigned by people who are not experienced local equipment experts), duplication of stock items will invariably occur. For more on this, see “Naming parts“.
7. Eliminate parts that are obsolete. Unfortunately, if maintenance inventory is expensed on issue (i.e. it is considered to be “working capital”), eliminating parts will increase current operating expense. It often also requires your most valuable maintenance experts to determine if parts are, in fact, obsolete and not still needed for plant that is still operating.  A complete set of spare parts lists for all equipment simplifies this process by allowing reliable use of a “where used” search, but few plants have such complete parts lists. Establishing a special account for expensed obsolete inventory will demonstrate that this additional expense is a special line item and does not reflect an increase in maintenance spending.
8. Ensure that parts are purchased from the lowest-cost supplier, with the over-riding basic rule that quality and service are not compromised, as assessed by your equipment expertsand not as assessed by Purchasing staff.
9. Use a logical process for deciding which parts to add to stock (see item 1 above). Requests to add stock for emotional reasons such as “we’ve been burned before” should be challenged – the appropriate action may be re-design or improvements to the preventive maintenance programme.

Note that a key factor in deciding whether a component should be stocked or not is the purchasing lead time. The analysis of stock that takes place during an inventory-reduction project may reveal that local and national suppliers’ and manufacturers’ lead times have increased substantially because of their own efforts to reduce inventory. Including this factor in the stock/don’t stock decision may result in adding some new items to the Storeroom.

Any project to reduce Maintenance Storeroom inventory should be carefully managed and decisions to eliminate SKU’s or reduce re-order points and quantities must be made by Maintenance or Engineering equipment experts.

We have seen plants in similar locations and producing similar amounts of the same product with similar reliability where the value of Stores inventory has differed by a factor of two or more. The application of the principles listed above can effectively reduce inventory without affecting operating reliability.

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©Veleda Services Ltd

Don Armstrong, P. Eng, President