Developing a Stocking Strategy

A Risk-Based Approach to Spares Management

I want you to image a storeroom. Really, close your eyes and think about a storeroom with;

No access control
Stocking 2 years worth of electrical boxes
No naming system for parts
A kitting shelf with parts received 3 years ago
Parts in stock from equipment that was removed 8 years prior
V-belts dry rotted on the shelf, corroded valves, and bearings out of their packaging
Anyone could stock a part in the control room

Does this sound familiar? Unfortunately, it is all too common in industry and is often the result of not having a defined stocking policy. With a proper stocking policy, spare parts can be managed properly.

A look at most storerooms will provide an insight to their stock. Typically you will find that the storeroom has a few different types of stock;

Active Inventory – Inventory that is being used regularly and has appropriate inventory levels
Excess Active Inventory – Inventory that is being used, but is over stocked
Inactive Inventory – Inventory that is not being used, but the equipment still exists on site
Obsolete Inventory – Inventory that is not being used and the equipment has been removed from the site

By implementing a stocking strategy, the level of inventory moves from all inventory types to the active Inventory category, ensuring any organization can stock more of the right parts and get the value from the capital spent.

Developing a stocking strategy is not overly complicated, but requires a well thought out process to ensure all variables are considered. A great way to develop and implement a stocking strategy is;

Define criteria for stocking
Develop stocking equations
Gather data
Determine stock level
Review & improve

By utilizing the framework above, a stocking strategy will guide how the storeroom manages stock.

Define Criteria for Stocking

In order to evaluate what parts should be and how they should be managed, spares need to be classified. There are typically three or four classifications in which spares can be added to;

Critical Spare – Any item kept on-hand because it is essential to the overall reliability of the operation. A critical spare may have a high cost, high lead time, or have a significant impact on health, safety, environment, or operations.
Stocking Spare – A spare part that is normally kept on hand in the storeroom.
Vendor Management Inventory – A spare part that is stocked by the vendor at the customer location. The spares are only charged for when the spare is used.
Non-Stock – A spare part that is not normally kept on site and only ordered for a specific task.

Determining which classification a spare part belongs to is where defined criteria come into play. This criterion needs to be organization specific, based on the potential consequence of not having the part and the estimated usage of the part.

Often times this criterion includes;

Asset Criticality – The ranking of assets according to the potential operational impact.
Probability of failure – The likelihood of a failure occurring on the specific part
Type of use (predictable or non-predictable) – The part is predictable if it has a predictable usage pattern or provides a lead time to failure. If not, then it is not predictable
Quantity of parts used – the expected usage or historical usage of the part over the last year
Lead time – The average lead time to have the part on hand.

The criteria are broken down into a 1-5 scale with definitions for each level. The product of all of the criteria becomes a Risk Priority Number (RPN) for that specific spare part. This RPN is what is used to select the classification of the spare, which will drive the stocking levels.

Develop Stocking Equations

Having a defined repeatable way to establish the stocking levels is critical minimizing the costs associated with the storeroom. On average it costs and organization 24% of the storeroom value to maintain the inventory. By utilizing a defined and repeatable way to establish stock levels, the overall inventory may be reduced, or it may remain the same, but stocking more of the right parts.

There are a few simple equations which could be used to establish stock levels;

Min = (usage per year / 365) x Lead time
Max = min + average consumption during lead time
consumption during lead time = daily usage x max. lead time
Predictable usage safety stock = (max lead time – normal lead time) x normal consumption rate
Economic Order Quantity = √(2DS/H)
D = Usage per year
S = Ordering cost per order
H = Inventory carrying cost

There are also many advanced equations using statistical analysis, but that is beyond the scope of this post. but consider the business context and develop equations that are fit for the business.

Gather Data

In order to use the formulas provided above, or more advanced models, data is required. This may be simple data such as;

Part price
Lead time
Historical usage
Estimated usage

In more advanced organizations, the parts will be identified on an FMEA or RCM analysis which will provide the list of parts to stock. Combine this with an update to asset criticality analysis, and the decision-making ability of the organization to stock the right parts increases greatly.

It is key to establishing who will be responsible for collecting the data. Sometimes collecting the data can be difficult, but it is required to make an informed decision.

Another key component in the data portion is to name and categorize the part according to a specific taxonomy. This includes building a standardized description, categorizing spare parts, and developing attributes. This step will allow the organization to verify the part is not already in stock or in the CMMS. It will also enable the organization to consolidate Fit , Form, Function duplicates.

Determine Stock Levels

Once the spare part has been evaluated, classified and data collected, it is time to use the formulas to determine the stocking levels. Be sure to utilize the formulas and criteria defined previously.

Once the formulas have been used, be sure to look at the actual values and make sure the values make sense. This is especially important when using Economic Order Quantity, as it may state that a lot of parts should be ordered, or very little.

Once the stock levels have been established, be sure to seek the appropriate approval levels. Approval levels are typically setup based on a cost tier;

<$500 – Maintenance Supervisor
<$1500 – Storeroom Supervisor
<$5000 – Maintenance Manager
<$20,000 – Plant Manager

By utilizing the various approval levels, the financial decision and risk can be distributed to the right the levels in the organization. It also requires everyone to fully understand the balance between stocking parts vs potential downtime.

Review & Improve

As will all programs, it is vital that the process and the performance of the process are reviewed, analyzed and improved. Establish KPIs for the process, such as;

Time to process new parts requests
Parts created right first time
Parts meeting the data standard

Once the process is being monitored, look to the actual performance of the storeroom. SMRP has a great guide for looking at the performance of an organization. An organization could start by monitoring;

Stock Turns
Stock Outs
Inventory Accuracy

Make sure to utilize the Plan, Do, Check, Act methodology to the drive improvements to the organization.

Benefits to a Stock Strategy

Once the organization has implemented this approach, it will quickly start preventing the wrongs spares or excess spares into the storeroom. According to a recent study, 30% of spares will never be used. By using this approach, any organization will be able to greatly reduce that 30%.

How many of you have a stocking strategy? Is it effective at preventing the wrong parts from going into the storeroom?

Over the next few weeks, I will be covering;

The Inner Workings of a Storeroom
Storeroom Optimization
Assessing Your Storeroom

If you have any requests or specific issues you would like addressed in this series, please let me know at info@eruditio.com

Remember, to find success, you must first solve the problem, then achieve the implementation of the solution, and finally sustain winning results.

I’m James Kovacevic
Eruditio, LLC
Where Education Meets Application
Follow @EruditioLLC