Moving Parts Planning Forward

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1 2013 Moving Parts Planning Forward In less than six months, we ve reduced our inventory by more than $75,000 and expect to reduce it by $150,000 by the end of the first year. Valogix e-report Series Since automating planning and replenishment processes, we ve increased productivity and have been able to secure discounts as much as 10% by referring to our forecast prior to ordering inventory. Gone are the days of buying lots of inventory just to get a deal. VALOGIX helps us get a good deal by ordering just what we Copyright 2012 Valogix LLC, All Rights Reserved need, when we need it. -Phil McBee Controller McDonald Dash

2 Overview Failure to optimize your Inventory may result in the loss of money and even more importantly good customer service. Service or spare parts inventory management is a prime candidate for advanced inventory planning software. With hundreds to thousands of parts to manage and a lack of proper tools, most companies with parts inventories have too many of the wrong parts. The result is unnecessary inventory expense, while still suffering service-limiting out-of-stocks. Manual efforts to improve this situation fail, because of the time-intensive nature of the problem. A large number of parts, each with special considerations, quickly bog down someone trying to improve the replenishment purchases. Many software suites (ERP systems) come with inventory management or inventory control modules. These are not equivalent; they depend very much on the problem area they serve. There is a common need to make sure materials or finished goods are in stock when needed. Each has uncertainties handled by specialized forecasting calculations Parts for Manufacturing Manufacturers control the flow of materials to provide for smooth, uninterrupted flow along the production lines. In many cases, the lines produce a small number of items. Likewise, there tends to be a limited number of materials, but these must be obtained in large quantities. Techniques to reduce inventory with just-in-time deliveries include Material Requirements Planning (MRP) software, kanban-based pull systems, and advanced planning and scheduling (APS) software. APS systems plan both the production and the materials flow together, so that actual orders and forecasted customer demands are satisfied while maintaining a just-in-time inventory strategy. Retail Parts Retail handles finished goods and parts that the retailers think will sell and have demand for. There are usually a very large number of different SKUs, particularly with distinctions such as size, color, and style. Demand can be reasonably steady, as with food and hardware or highly seasonal, as with clothes. For steady demand items, retailers tend to set an order point and order quantity. For example, whenever the number of an item in stock goes below 3, order 12 more. A technique called Distribution Resource Planning (DRP) was developed in the early 1970 s for the wholesale and then the retail environments. It combines field-level demands to determine demand at regional and central warehouses. For seasonal items, retailers usually buy the items from suppliers before the season, and there is seldom a chance for replenishing stocks mid-season if the item is a big seller. Experienced fashion buyers earn their salaries by predicting what items will sell in what quantities in a region and even by store. Valogix ebook Spare Parts Planning Report 2

3 Aftermarket Service Service covers the maintenance and repair of equipment and machinery. For example, automobiles need routine oil changes and tune-ups as well as repair after accidents or a mechanical failure. Service actions depend upon replacement parts for worn or broken components. Unlike just-in-time manufacturing parts, service parts must be stocked just-in-case they are needed. Like retail distribution items, there tend to be a large number of different service parts needed to cover support of many different types of equipment produced over many years. Moreover, these parts are needed in very low quantities. For example, a major car manufacturer reported that over 90% of their service parts have usage rates of less than one unit per month. Special forecasting algorithms can predict service parts requirements based on past history of part usage. Spare (Service) parts planning divides into aftermarket service and MRO The term aftermarket service applies to the activity of maintaining or enhancing equipment or machinery used by a different organization. MRO refers to the same kind of activity, but accomplished by the same organization as the one using the equipment. Service Aftermarket service can be performed by the organization selling the equipment to the end user (manufacturer or distributors or retail outlet), or by 3rd party service providers. For example, a Ford car can be serviced by a local Ford dealer or by a local garage or by a franchised muffler, brake, or tire center. In any case, the service organization tries to keep commonly needed parts on hand, while making sure parts with little demand can be obtained quickly when needed from an off-site location. Another class of organization involved with aftermarket parts is the parts distributor. This company sells parts to individuals and service organizations, rather than performing the service that uses the parts. The MRO acronym has two different spell-outs, depending on the situation. Organizations like electricity utilities and manufacturers with large, complex plants need to keep the facilities in good repair. This activity is called Maintenance, Repair, and Operations. Organizations with fleets of transportation equipment (planes, railroad cars, trucks, or automobiles) need Maintenance, Repair, and Overhaul service to keep this equipment in good working order. Common usage refers to the parts used for MRO as spare parts, rather than service parts. Inventory management objectives These different types of organizations have somewhat different objectives in their service parts management. In aftermarket service, the primary objective is to fix broken equipment quickly to maintain the customer's confidence for future sales (and continuing service sales). This requires having the parts in stock for the service action. Valogix ebook Spare Parts Planning Report 3

4 For material release orders (MRO) and some aftermarket service situations with stringent service level agreements, the primary objective is to make sure all critical (also called essential or high priority) parts needed for the end equipment to operate are on hand. Other parts can be backordered if necessary. For example, a CAT scanner might be sold with a service level agreement to fix any problem within 4 hours so the hospital using it can continue to serve patients. A fuse may be essential for operating the equipment, but the plastic cap on a control box may crack with no loss in function. Hence, the fuse must be stocked locally to assure the 4-hour repair time limit. Finally, the objective with aftermarket parts distributors is to make sure they maximize profitability of the parts sold. Thus, out-of-stock items, leading to lost sales, should either have a low margin or a low demand. Service or spare parts inventory management is a prime candidate for advanced inventory optimization Single location situation In this simple case, there is a single stocking location (stockroom or warehouse) supporting the service organization, A planner (perhaps the owner or a manager) at this location determines what parts to stock in what quantities and places orders with suppliers to obtain the parts. Service teams then requisition the parts they need from the stockroom or warehouse. Most single-location service organizations work with a reorder point/reorder quantity inventory management scheme. When current inventory dips below the reorder point, they place an order for the amount set by the reorder quantity. With no tools to set these numbers, they tend to be static. Over time the lack of connection between the order points and order quantities with current usage patterns leads to two problems. Multi-echelon planning (1) Parts with declining usage are over-stocked. Much more capital is tied up in those parts inventories than needed, and many of the parts will become obsolete. (2) Parts with increasing usage are under-stocked. Stock-outs are common, leading to delays in service. Multi-location planning adds complexity. Organizations with large service operations work with multiple levels of supply. Central sites purchase and stock most of the parts. Slow-moving and less important parts can be sent quickly to field sites when needed, while fast-moving parts are stored in the field to enable most service actions to proceed without delay. In many cases, a second level of warehousing occurs on a regional basis. Valogix ebook Spare Parts Planning Report 4

5 Advantages of this multi-echelon service parts supply chain include: Consolidating inventory reduces the quantity required Consolidating purchasing gives greater leverage to obtain discounts from suppliers However, multi-echelon planning brings considerable complication. How much of a particular part should be stocked at each location? How should we support transfers of parts from one field location to another? If a part is on short supply, how should we allocate it down from the central warehouse to field locations? Service parts have an important life cycle The figure below shows the important milestones in a part s life cycle. This section examines how those milestones impact parts planning. Time: Weeks Months or Years The part life cycle has a high impact on inventory planning. New part Part in use New parts usually show up when a new demand is recorded by the transaction processing system. With no history of usage, there is no data to create an automatic forecast. Someone must decide how to project a usage forecast for at least a few months. After a few months of experience, usage history should guide an automatic forecast. The period that the part is active and stocked can be very long perhaps ten to fifty years! Usually there is a ramp up in usage as more equipment using the part enters the field. Then, as the equipment ages and more modern parts supersede this one, usage of the part declines. Usage trends change over time sometimes rather rapidly so it is important that part ordering strategies recognize these changes. Valogix ebook Spare Parts Planning Report 5

6 Last-time buy Obsolescent date While well into the active period, the part supplier may notify the service organization that the part is being discontinued. The supplier then indicates the last date that the part can be ordered. This stimulates an analysis to decide how to handle the problem. Is there an alternate supplier? Can parts be cannibalized from other equipment going out of service? Is repair of failed parts a sufficient source? If all else fails, the service organization has to order a large number of last-time-buy parts to satisfy anticipated needs for the rest of the period the part will be needed. There are two ways a part can become obsolete. There may be an engineering change to the equipment that uses the part, so that another part supersedes this one on a given date. The other possibility is that all the equipment using this part either goes out of service or goes off vendor support as of a given date. Obsolete inventory represents wasted investment. By tracking when there is an excess of parts or when parts are likely to become obsolete, steps can be taken to avoid over-ordering to sell parts while they still have some worth. Tracking repairs complicates planning. Expensive parts may be much cheaper to repair than to throw away and buy new. However, repair adds complications that are important to recognize and deal with: Repaired parts may have a separate item code (sometimes called the stock keeping unit) to distinguish from the corresponding new part. Need to track how many failed parts are in inventory that could be sent to a repair center. Meet demands with repairs first, only ordering more expensive new parts when no repairable failed parts are available. If demand is low and we have many failed units in stock, wait to repair them until they will be needed. Some failed parts will be too broken to fix, so we need to consider a yield rate with our repair orders. For example, if we have a 90% yield rate, then we will have to send 10 parts out for repair, on average, to get back 9 good ones. These repair concerns are difficult to handle manually, so it is important for a parts planning software product to handle them automatically. Valogix ebook Spare Parts Planning Report 6

7 How are Spare Parts different from production parts? Spare parts are used by a company to support maintenance, repair, and operations of fleets and facilities. Service parts are used by equipment vendors to service customers using their equipment. To simplify the discussion, we use the term spare parts below for both spare and service parts. It is even more difficult to decide what to stock for these parts than for manufacturing parts because of the characteristics: Characteristic Spare/Service parts Parts for Production Usage rate Low High Type of demand Random, subject to surprise spikes Life cycle Multiple life-cycle stages: new, steady-state, end-of-production, end of life Known from production schedule Single life cycle stage (production) Parts diversity Large number of SKUs Small number of SKUs Parts sources Manufacturer, distributor, another stocking location, or repair Manufacturer or distributor Low usage rates (often less than one a month) make it difficult to procure spare parts in a just-intime manner. Small orders have no clout with suppliers, and may have long lead times. Moreover, it is common to have large demand spikes, such as a month with a demand for 6 units when the average usage is 2 units per month. This leads to a tendency to add extra safety stock known as just-in-case stocking and spare parts need to be stocked throughout the whole life cycle of the part. Whereas parts for production are only used during the short period that the parts are used in making a product. When the part is new, there is no history to base stocking policies on. When it goes out of production, users (planners) must decide how much to order in a last-time buy. At end of life, any stock is obsolete and usually must be written off or sold for pennies on the dollar. Because spare parts stocking covers a comparatively long period, there are many more SKUs than planners need to deal with in manufacturing. These include a wide selection of part types, from small nuts and bolts items to complex assemblies. Finally, spare parts can come from a variety of sources. Besides buying new parts from a manufacturer or distributor, there are often options of getting the part from another stocking location or repairing a part. Still, many companies revert to de-manufacturing a piece of equipment to get access to the parts needed. Valogix ebook Spare Parts Planning Report 7

8 Why are Spare Parts Important to a Business? Companies usually put more attention into manufacturing parts, but there are good reasons they should also plan spare parts intelligently. On average, over 55% of service and maintenance calls require a part to complete a repair. Lack of part availability prevents first-time fix, which causes either lost business or multiple repair calls both expensive to incur. Lack of part availability is a major cause of down time and customer dissatisfaction. On the positive side, parts can be a substantial source of company profits. Quality service and part availability can dramatically improve up time, resulting in customer loyalty. For these reasons, Best in Class companies have a spare part inventory strategy. It gives them a distinct competitive advantage. Inventory planning and optimization software dynamically calculated to give the best tradeoff between stock-outs and excess stock. It works by using a variety of part information, business parameters, and sophisticated forecasting algorithms. Typical results include: Reduction in Critical Parts Stock-Out Rate A planning tool that helps to minimize stock-outs of parts that are necessary to keep equipment running (up time) and/or contribute heavily to the profit stream. A low stock-out rate, particularly on these parts, is directly correlated to higher customer satisfaction and higher first-time-fix rates. Improved Customer Satisfaction Customer research studies show that equipment uptime and parts availability are in the top five factors rated as important in evaluating supplier performance. These factors are also used in making new equipment purchase decisions. Parts inventory planning is driven by customer-centric uptime criteria. Reduction in Spare Part Inventory Advanced inventory optimization dramatically reduces the need to allocate scarce budget dollars to carrying questionable buffer (safety) stock. It allows planners to work more effectively with lead times, order frequency, and vendor policies. What About Using Standard Replenishment Approaches for Parts How should a planner set the reorder point and reorder quantity (or order-up-to level) for thousands of items, perhaps at multiple locations? Due to the absence of an intelligent planning system, three commonly used approaches have been Brute Force Review, Economic Order Quantity, and periods of supply. Valogix ebook Spare Parts Planning Report 8

9 In Brute Force Review, planners examine each item at each stocking location and manually set the min and max controls most often in spreadsheets. This is such a time-intensive process that the results get out of date, yet nobody has the time to update them. Moreover, without good tools there is no guarantee that the controls will be set well even at the start. Economic Order Quantity (EOQ), a simple calculation of the reorder quantity as a tradeoff between the cost of carrying inventory and the cost of placing an order, is another commonly used approach. Frequent reorders minimize inventory holding, but incur high ordering costs. Likewise, buying in quantity reduces the ordering cost, but results in low inventory turns and high carrying costs. Although EOQ calculations are frequently available in Enterprise Resource Planning (ERP) systems, planners have difficulty determining the two driving parameters, order cost, and inventory holding cost. Another common approach is to apply periods of supply for the maximum quantity. For example, average demand may be 120 units per week over the last four months. Taking 2 weeks of stock for the min and 8 weeks for the max, this approach would calculate min of 240 units and max of 960. Such an approach has the advantage of being easy to calculate. Although it is safe for high volume items, it works poorly for low and medium volume items. The biggest problems with both EOQ and periods of supply are that neither: 1. Fully considers the real potential or level of a spike in demand; or 2. The impact of short life cycles; or 3. The timing of trend or seasonal changes. These inefficiencies combined with situations where the planner may not have a system that handles every item requiring to be planned, accounts for the over or under buying that occurs daily. Finally, the weeks of stock approach assumes that demand will stay constant. This is often not the case, because demand is increasing, decreasing, or driven by season. Hence, this common approach tends to cause too much inventory investment or insufficient service levels. In conclusion, modern advanced planning systems due to heavy lifting will improve results. Valogix ebook Spare Parts Planning Report 9

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