VERY LOW TURNOVER SPARE PARTS INVENTORY MANAGEMENT

Spare parts inventory management constitutes a separate chapter in the literature and practice of inventory management. This is because high acquisition costs, long supply response times and very low turnover, characteristic of spare parts, are pitfalls frequently found when defining inventory policies (how much to order, when to order, what is the level of service) .

Spare parts inventories can account for one of the largest portions of corporate costs in companies from different sectors of the economy. In the auto industry, for example, the annual costs of opportunity, warehousing, depreciation, insurance, and moving spare parts range from 25 to 35 percent of the book value of all inventory in a typical company. As a consequence of all these factors, spare parts inventory management is little understood in the management environment, despite representing a significant capital investment in service-oriented companies.

Despite the existing pitfalls, the symptoms of existing problems in the management of spare parts inventories are the same found in the management of finished products or raw materials:

1. excess inventories, as a result of a policy of anticipating future use, implying high opportunity costs of maintaining inventories and obsolescence costs.
2. shortage of stocks, as a result of a conservative policy regarding the actual rate of use of stocks, implying a deterioration in product availability levels.

In addition, the mission of spare parts inventory management is also similar to the management of raw materials, parts in process and finished products: to reduce inventory levels without compromising the availability of parts.

2. CONSIDERATIONS ON SPARE PARTS TURNOVER

Companies and academics, in general, refer to spare parts as low or very low turnover items. Very low turnover items are those with historical average consumption of less than one unit per year. In several production and logistics systems, such as shipyards, steel mills, public service concessionaires (water, electricity and telephone), for example, the average opportunity cost of stocked spare parts is considerable, since the unit cost of acquiring these parts is high, and a policy of always having a part in stock is normally used. Faced with situations like this, with very low turnover, companies should decide, based on an economic analysis of total costs, whether it is more appropriate to always keep a single unit in stock, or not to keep the part in stock, triggering the replacement always against order .

Low-turnover spare parts are those items whose historical average consumption can vary between 1 and 300 units per year, that is, on average, one part per day. For these items, an inventory policy based on the definition of the replacement level and the replacement quantity is normally recommended. The replenishment level is the stock level below which a replacement request would be made with the quantity of parts, its arrival being defined by the response lead time from the supplier. In this way, the replacement level must be defined based on the level of availability of parts that you want to offer to the production/logistics system based on the expected average consumption during the response lead-time. The replenishment quantity must consider not only the expected inventory level at the end of the replenishment lead time, but also the balance between the opportunity costs of holding inventory and the costs associated with processing the replenishment.

In this article, the next sections will be dedicated to the presentation of a methodology for managing very low turnover spare parts inventories. Inventory management of low-turnover spare parts will be dealt with in another article in the future.

3. VERY LOW-TURN SPARE PARTS MANAGEMENT

According to the previous definition, very low-turnover spare parts are in demand for less than one unit per year. In these circumstances it must be decided whether it is more economical to have 0 or 1 replacement item in stock. For this decision, the methodology that is described below can be applied and considers the time horizon of one year. In addition, it must be considered that:

• CTR is the Total Cost associated with placing a supply order (R$);
• Caq is the unitary cost of acquisition of the part (R$);
• LT is the order response lead time (months);

l be the historical consumption rate per year (piece/year);

• T is the annual capital opportunity rate (% per year);
• Cip is the Cost of Unavailability and Penalty, expressed as an absolute value incurred every time a spare part is requested and it is not in stock (R$).

In this way, the total logistical cost (CT0) associated with the policy of not keeping the spare part in stock is given by l*(CTR + Cip), that is, by the product of the historical consumption rate per year with the sum of the cost total resupply of the part with the costs of unavailability and penalty, resulting from the lack of the part at the moment in which its use was needed. The following figure illustrates the consumption-replacement dynamics for this type of policy. In many companies it is common practice to estimate or arbitrate a level of costs associated with the unavailability of a part in stock for immediate use. This value will be greater or more relevant the greater the importance of the part in question for the machine, for the process or for the operation itself.

On the other hand, for the alternative policy of holding a unit in stock, a unit is held in stock until demand occurs, beginning a stock-free period of duration equal to the supplier's response lead time. Considering a time horizon of 1 year, the expected time with inventory (TECE), measured in years, is given by:

In reality, what this last equation seeks to estimate is, given the historical consumption rate of the spare part, and considering that this consumption occurs and implies a period equal to the replacement lead-time without having any part in stock, what is the fraction year or twelve month period with spare part stock. The following graph shows the behavior of the expected percentage of the 1-year period with stock, considering different replacement lead-times and different rates of historical consumption of the spare part. It should be noted that in the case where the replenishment lead-time is 4 months and the average historical consumption is one piece per year, the expected percentage of the one-year period with inventory is 75%, or 12 / (12 +1*4).

Furthermore, the expected number of occurrences during the expected out-of-stock time is given by l*(1 – TECE). The fact that the spare part that was in stock has already been consumed does not eliminate the possibility of an atypical year, with yet another request for the part in question, even if this is, in itself, a remote probability. In this way, the total logistical cost associated with the policy of always keeping a part in stock (CT1) must take into account the possible occurrence of another request during the response lead-time, and its implications in terms of resupply costs and costs of unavailability and penalty:

The following figure illustrates the replacement consumption dynamics for the policy of always keeping a spare part in stock.

The next section presents a practical example with the application of this method of analysis and decision-making in relation to the inventory policy for very low turnover items.

4. PRACTICAL EXAMPLE

Two of a company's total replacement parts in the shipbuilding industry are a starter motor and a truss. Its product, operation and demand characteristics are presented in the following table. Historical consumption data refer to the last fifteen years.

Therefore, different characteristics imply different cost structures, leading to different policies. In the case of the truss, the lowest cost policy is always to keep a unit in stock, while in the case of the starter, no unit should be kept in stock, and the replacement should be triggered when there is a need for immediate use.

5. CONCLUSION

Spare parts inventory management is a separate chapter in materials management. Their characteristics can be profoundly different from those of raw materials and finished products, especially with regard to turnover, response times and added costs. In general terms, the spare parts of various logistical and production systems could be classified as low or very low turnover. This article presented a methodology for decision making regarding very low turnover parts, implying the choice between not keeping the part in stock or always keeping a part in stock based on total logistical costs. In the future, another article will address the issue of low-turnover spare parts inventory management.