Materials, Parts, and Inventory Management

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Almost all quality improvement comes via simplification of design, material, manufacturing layout, processes, and procedures.

  • 1 Introduction
  • 2 Terminology
  • 3 Types of Inventory
  • 4 Physical Layout and Storage Equipment
  • 5 Optimizing Tools and Techniques
  • 6 Measures of Performance
  • 7 Summary
  • 8 QUZ

Learning goals:

  • • Maintenance store operations
  • • Types of inventory
  • • Tools and techniques to optimize inventory
  • • How to ensure availability of parts and materials on time
  • • Effective storeroom layout and storage equipment

1 Introduction

Maintenance storerooms play an important role in supporting the maintenance function. The objective is to provide the right spares, service parts, and supplies at the right time in the right quantities. If the right part is not available when needed, the repairs will have to be delayed. Any delay in restoring a failed asset will increase the maintenance and operations costs. Thus, a storeroom may be considered a very important enabler in reducing the maintenance cost.

It’s not uncommon to see maintenance technicians spending a considerable amount of their time (as much as 20-30% in a shift) hunting for the right parts. To provide the best possible support for the maintenance technicians, a reasonable amount of spare parts and materials must be available in stock. Readily available spare parts will enable emergency repairs on a timely basis. Availability of routine adequate supplies such as lubricating oil, gaskets, etc., will facilitate the performance of scheduled routine maintenance. Items that are very expensive and not routinely stocked may be purchased when needed to reduce inventory carrying cost.

In many manufacturing and support facilities, the budget for spare parts can be a significant percentage of the total maintenance budget. This level may be justified because of the fact that non-availability of spare parts could substantially increase the cost of taking care of failures. It’s inconceivable and impractical for a maintenance department to carry all the required spares in stock. This is prohibitively expensive. Therefore, managing inventory of spare parts, supplies, and tools is a very important function in maintenance and reliability. Usually quantitative decision techniques for determining when and what to buy are used. An overview of quantitative techniques available for reducing inventory costs is presented in this section.

In practice, application of these techniques has produced the following results:

• 20% reduction in the workload of maintenance planners

• 30% reduction in the number of purchase orders for replenishment parts

• 40% reduction in manually-prepared direct purchase requisitions

• 30% reduction in maintenance storeroom inventories

• 20% reduction in total maintenance costs

A maintenance storeroom, also simply called a storeroom, is responsible for the following functions:

• Provide the right spare parts, supplies, and tools

• Deliver the needed items to the right location at the right time.

These major responsibilities of a maintenance storeroom may be met with good advanced planning based on best practices. However, for certain parts, these expectations could be unrealistic due to cost, unexpectedly high failure rates, and high lead time. Maintenance, engineering, purchasing, and management must work together in developing a plan to determine the most economical stocking levels for critical items. Some items have small or negligible lead times and can be bought with very little lost time; as such, these items won’t likely need to be stocked.

The right time to decide what parts and material should be stocked, and in what quantity, is before placing an asset or system in service. The manufacturer of the assets and systems typically provides a recommended list of spare parts as well as a preventive maintenance program based on a Failure Modes and Effects Analysis (FMEA).

[FMEA is a tool to identify failure modes; it’s discussed in more detail in Section 11.]

The failure modes and frequency of failures should optimize the spares list and provide a good estimate of what and how many are required to be stocked during a specified period.

Placing an order has costs because the process requires writing the specification and identifying the potential sources. After the sources are identified, bids may be solicited and a qualified vendor selected. These functions, which cost money, are called the ordering costs. The cost of stocking an item and holding it in inventory could be as much as 30% of item cost per year. The last few sections cover different techniques that can be applied to reduce inventory costs.

2 Terminology

Bill of Materials (BOM)

A list of materials needed to complete a particular assembly or fabrication job. The BOM can also be a listing of items necessary to support the operations and maintenance of an asset or component.

Commonly Used Parts

A combination of standard replacement parts and hardware items that may be used on multiple assets.

CMMS / EAM (Computerized Maintenance Management System / Enterprise Asset Management)

A software system that keeps record and tracks all maintenance activities, e.g., maintenance work orders, PM schedules, PM masters, material parts, work plans, and asset history. Usually it’s integrated with support systems such as inventory control, purchasing, accounting, manufacturing, and controls maintenance and warehouse activities.

Emergency Spares / Parts

Replacement parts required for critical assets and equipment that are kept in reserve in anticipation of outages caused by man made or natural disasters. The demand for these parts is unpredictable. Usually their cost is high and they have long lead times to procure. Not having these parts in stock may result in extended downtime and major production loss. Sometime these spare parts are called insurance spares.

Inventory Turnover Ratio (or Inventory Turns):

This ratio indicates how often an inventory turns over during the course of the year. Because inventories are the least liquid form of an asset, a high inventory turnover ratio is generally positive.

However, in the case of inventory, the inventory turnover ratio is usually low, less than two.

Inventory turns = Inventory issued in a year / Average inventory Average inventory = (Beginning inventory + Ending inventory) / 2 Just-in-Time Inventory (JIT)

A method of inventory management in which small shipments of stock are delivered as soon as they are needed. JIT minimizes stocking levels.


Maintenance, Repair, and Operations. Sometime "O" is referred to as Overhaul.

Store Maintenance, repair, and operations store; it stocks all the material and spare parts required to support maintenance and operations.

Service (Self-Service) Stock Commonly-used parts and maintenance supplies kept nearby in high maintenance areas or outside the storeroom. Withdrawal of this stock requires no requisition or paperwork. Sometimes referred to as Dime Store.

Spare Parts

Replacement items found on a bill of material and/or in a CMMS; inventory management system that may or may not be kept in inventory to prevent excessive downtime in case of a breakdown. Stock Keeping Unit (SKU)

An inventory management term for individual stock items carried in inventory, with assigned inventory numbers.


A technique that separates data gathered from a variety of sources so that a pattern can be seen.

3 Types of Inventory

The traditional vocabulary definition defines inventory as the quantity of goods or material on hand. All inventories are not alike. For example, retail or consumer inventory includes TVs, clothing, cars, and groceries whereas production or operations inventory includes pumps, motors, steering wheel assemblies, valves, steel plates, and spare parts that are vital to plant operations.

Inventories in a production process are often divided into four categories:

1) finished goods, 2) work-in-process, 3) raw materials, and 4) maintenance and operating items such as spare parts and operating supplies, including consumables.

The spare parts, consumable items, and other materials that are required to keep assets operating in a plant are the focus of this section.

The maintenance inventory meets emergency, short-term, and long term maintenance requirements to keep the assets operating. Inventory is a hedge against the unknown. If we knew exactly when a part was required, we wouldn't need to carry it in stock. We would simply buy the part and have it delivered exactly when needed. This view sounds good in theory, but because we don't know exactly when we'll need that part, we have to carry it. Thus, inventory is sometimes called "buffer stock against use." Inventory also protects us from the uncertainties of delivery. If we knew exactly when a supplier would deliver our order, we would never need to have inventory to cover for erratic delivery schedules. Suppliers have problems, too. Thus, inventory is sometimes called "buffer stock against delivery." Buffer stock, also called safety stock or level, can and should be kept to a minimum by applying practices and techniques discussed later in this section.

Inventory Classifications

Inventories can be classified into three major categories based on their usage rate:

1. Active inventory

2. Infrequently used inventory

3. Rarely used inventory

Active Inventory (AI)

Active Inventory includes items that are used frequently enough that future demand can be predicted with good accuracy. If an item or part is used at least once a month, it’s considered an active inventory item.

Active items are:

• Smaller spare parts, e.g., standard bearings, oil seals

• Commodity or supply items, e.g., safety gloves, bathroom supplies

• Items that have generally high demand each month

• Predictable future demand

Infrequently Used Inventory (IUI)

These are the items which are infrequently used, usually less than 10 times per year, but the demand still can be predicted with some accuracy.

FIG. 1 Materials, Parts, and Inventory Management. Active items; Infrequently/rarely used items

Rarely Used Inventory (RUI)

These are items that fall into the category of "Must Have." These parts are almost impossible to obtain or lead time to acquire them is so long that it often seems like we can't get them. They sit on the shelves, and there is little we can do about it. The vast majority of store items fall into this category. An analysis of 100 stores indicated that 50% or more items had no usage during the past two years. Yet, most of these items must be on hand when needed.

A typical Inventory profile of more than 100 plants is shown in FIG. 1. Over 80% of the items in a typical store can be classified as infrequently and rarely used items, as shown by the first bar in the figure.

In order to reduce the costs of RUI items, some organizations have started to team up with other organizations in their area to share high value RUI items such as large motors, valves, and transformers.

The middle and right bars in FIG. 1 represent the percentage of inventory value and the percentage of transactions for active items vs. infrequently and rarely-used items.

Analysis (Inventory Stratification)

Analysis, sometimes called inventory stratification, is another technique used to classify and optimize inventory levels. In this technique, inventory is classified based on an item's value and usage rate. This classification system is used to distinguish between the trivial many and the vital few. In fact, this classification system reflects the Pareto principle.

Most of the items in classification A are one-of-a-kind parts with long delivery, high cost, and low demand. They may cost over $500/unit to as much as $100,000 or more- For example, a large 10,000 HP electric motor required for a critical operation. Items in this classification are usually most critical. Their demand is difficult to predict and unavailability can cause long downtime/shutdown. These items are needed in order to have good inventory control. It has been found that the number of inventory items in this category usually range from 10 to 20% of all items, aver aging 15%. Their cost, however, range from 60 to 80% of total inventory cost. They can be compared to Rarely Used Inventory (RUI) discussed earlier.

FIG. 2 Analysis. Percentage of Inventory Items; Percentage of Dollar Value

Items in the B classification are standard parts that may be stored in vendor's warehouses and made available by a local distributor in a few days to a few weeks. Usually these items are mid-to-high cost, possibly $100/unit or more. Items in this category are less critical and infrequently used. Their future demand can be predicted with some effort.

It has been found that in the B category, the number of items usually ranges from 20 to 35%, averaging 25% of all inventory items. Their cost ranges from 15 to 25% of all costs. They can be compared to Infrequently Used Inventory (IUI) discussed earlier.

FIG. 2 shows a typical inventory analysis and value stratification.

Most of the items in the C classification are standard parts-consumable or commodity items that can delivered by the vendor on a regular schedule or made available by local distributors in a few hours or a couple of days. Usually they cost less than $100/unit. Items in this category are actively used; their future demand can be accurately predicted and may not need inventory control.

It has been found that in category C, the number of items ranges from 55 to 75%, averaging 65% of all items. Their cost ranges from 5 to 15% of all costs. They can be compared to Active Inventory (AI) discussed earlier.

A typical inventory stratification example is shown in Figures 5.3 and 5.4. FIG. 3 shows 21 items with their unit cost and their demand rate for the current and last three years. FIG. 4 then shows each item's classification category and current cost as well as the percent of items in each category and their costs. The objective of this analysis is to move items from category A to B and from B to C in order to minimize inventory costs.

For criteria used to classify items in this example, see FIG. 3: A items = Value over $1,000 and usage rate less than 6/year B Items = Value of $100-999 and usage rate over 6/year C items = Value below $100 and usage rate over 12/year

The criteria should be tailored to meet your needs, environment, and type of inventory.

FIG. 4 shows the data after analysis. Again, our objective is to review item cost and usage (or demand) on a regular basis in order to reduce the number of items to stock in the store without impacting the maintenance needs.

Figures 5.3: Inventory costs.

FIG. 4 ABC results.

Data in this table indicate the following: 11 items in Category A with 73% of the total cost; 10 parts, 109 items in Category B with 22 % of the total cost; and 7 parts, but 727 items in Category C with only 6% of the total cost. Obviously, efforts attributed towards: A items should be greater than that for C items. Items in Category A should be reviewed frequently whereas Category C can be reviewed with lesser frequency.

Another type of inventory-hidden stock-covers those items that mechanics stash under conveyors and stairwells, inside cabinets, and in toolboxes. This is the material called "lost" each year when physical inventory is done. It's a real problem because the condition of those parts is unknown when the mechanic finally uses them. If the parts are bad, a costly second downtime period may be needed to fix the asset correctly.

Usually organizations that have high hidden stocks have a reactive culture.

You may also have items in store which can't be classified. They are dead stock. They may be spares for assets that were removed long ago.

Can this dead stock be sent back to the supplier or one of the customers? Other solutions are to sell it to a surplus operator or for scrap, or just trash it. Dead stock still takes space to store and the organization has to pay inventory taxes too. In some states, businesses have to pay property taxes that cover inventory. Remember too that it costs, on average, 25% per year to store the material.

4 Physical Layout and Storage Equipment

The physical layout of the store is an important factor in gaining productivity. Two issues are involved in this decision: the location of the maintenance store itself and the location of parts and material within the store.

FIG. 5 Disorganized and Well-Maintained Storerooms

The maintenance store should be located as close as possible to where work is performed-near the assets. Most of the time, a maintenance store becomes a hub of maintenance activities. The physical layout of the store room should be planned for efficient material flow. To ensure that the store room is run efficiently and effectively, the layout should consider the following:

• The store room should be separated from main plant operations either by walls or with a secured cage. The secured area is required to discourage pilferage of tools and expensive items.

Many organizations have started using access cards issued to each employee. The card provides controlled access to the storeroom as well as the tool crib. Nevertheless, organizations need to make sure that any material issued gets charged to the right asset and project.

• The parts-materials area should be sized and equipped appropriately for the type of parts-material to be stored. Keep heavy parts low, close to or on the floor.

• Parts that are slow movers should be stored in the back of the storeroom, and fast movers in the front for easy and fast access.

Consumable items and low-value items such as bolts, nuts, fit tings, filters, and gaskets that may be needed for frequent maintenance tasks should be located near the front of the storeroom or outside the storeroom for easy access.

• Oil supplies should be kept away from the main storage area.

Any oil supply area needs to be designed to meet all fire and environmental safety requirements.

• Each storage location and parts storage bin should be properly labeled.

• The storage area should be free of clutter and debris to ensure personnel can move around to access the parts easily. There must be sufficient lighting in the area so that store personnel and maintenance technicians can easily see and count the parts.

• Like a retail store, the storeroom will receive returns. Sufficient space should be available to handle returns. A smooth process for accepting and accounting for these returns must be implemented.

Two different storerooms are shown in FIG. 5. On the left is a disorganized store room and on the right is clearly a well-maintained store room. It will be difficult to find an item in the one on the left. A typical material flow in a facility with a storeroom is shown in FIG. 6. When designing the storeroom, ensure that material flow is smooth and reduces travel and procurement time.

Parts-Material Storage and Retrieval System

There are many different storage and retrieval methods that can be used to handle parts and materials in the storeroom. Use of each method will depend on the characteristics of the part and its demand.

Storage Equipment

Parts storage equipment can generally be broken down into two main categories: man to part and part to man. The first category, man to part, will be most familiar to personnel and consists of storage standbys like pallet racks, shelving, and bin storage. In this arrangement, we go to the part to pick it. This arrangement is very common in small stores.

FIG. 6 Material Flow Involving and Stock Supplies

In the part to man arrangement, the part comes to us. With the advent of system-directed storage, and particularly when integrating with production and distribution storage, part to man systems-such as horizontal and vertical carousels, and Automated Storage and Retrieval System (AS/RS)-have become viable. They may offer significant improvements in parts storage efficiency.

Man to Part

Man to part storage systems are the mainstay of parts storage. Initially cheaper than automated part to man storage systems, they can provide dense part storage. Of the two types, man to part is easier to manage manually. On the downside, this type of storage (by itself) does not provide part check-in / check-out control and inventory tracking, which can lead to lower inventory storage accuracy. The three major types of man to part storage are described below: Shelves/Bins Installed at some level in virtually all parts storage areas, shelving and bin storage is perhaps the most common type of part storage. It’s most appropriate for smaller, slower-moving parts not accessed on a regular basis. Available in numerous configurations and styles, shelving and bin storage will always have a place in parts storage methodology.

Pallet Rack

The big brother to shelving and bin storage, pallet rack is the second most common type of parts storage. It’s used primarily for parts that are too big or too heavy for shelving. Pallet rack storage has the common advantage of having a low initial installation cost and virtually no maintenance; it’s very configurable. Negatives include a lower storage utilization density than shelving or modular drawers. Furthermore, either rack decking or actual pallets are required for storage on the rack beams.

Modular Drawers

Modular drawer storage consists of lockable storage cabinets containing multiple custom-divided drawers that closely match the specific part/tool configuration requirements. Particularly well suited for small part storage and tool storage, modular drawer storage can provide very high-density, secure storage. Best utilized for very slow moving parts or as a dedicated location for secure tool storage, the custom-con figured nature of this type of storage makes it less suited for constant access and random part storage. Modular storage cabinets are generally more expensive than standard shelving. Some level of systematic tracking, rather than simple paper records, is often required to manage large numbers of modular storage cabinets. However, the extreme storage density and security of modular drawer storage makes it a consideration for use in all storage strategies.

FIG. 7 Horizontal Carousels and Vertical Carousels.

Part to Man

Part to man storage systems are usually automated storage devices that offer several advantages over standard man to part methods.

These advantages include controlled access that provides more part protection and security, check-in / check-out processes that aid in access supervision and tracking, and ease of access to a greater vertical dimension. This last feature often results in more effective storage density per square foot of floor space.

One of the major disadvantages of part to man systems is high initial cost. Automated storage systems are more difficult to recon figure than more traditional storage methods; they also have an on-going maintenance cost associated with their use. Regardless of configurability and upkeep concerns, the high initial cost of these systems has been most responsible for the relatively low numbers of automated storage equipment in use for stores. With the advent of integrated systems, and the resulting ability to combine stores with production and inventory stores, this investment cost is not specific to maintenance and can be spread across other department budgets. This ability to spread investment costs across departments has resulted in an increase in the use of automated storage systems and warrants their inclusion in any discussion of planned storage. The three major types of part to man storage are described below:

Horizontal Carousels

Horizontal carousels consist of multiple sections of shelving (often called "bins") mounted on a revolving track system ( FIG. 7, left side). Control for these systems can be manually or systematically directed. Often the least expensive of the automated systems, horizontal carousels are becoming increasingly common for both general inventory and parts storage.

Vertical Carousels

Similar to horizontal carousels, vertical carousels consist of shelving layers (often called "pans" or "trays") mounted on a vertically-revolving track system ( FIG. 7, right side). Generally constructed with a solid metal enclosure, vertical carousels provide a very secure environment for high-value parts storage.

Automated Storage and Retrieval Systems (AS/RS)

An Automated Storage and Retrieval System (AS/RS) is a combination of equipment and controls that moves (handle), stores and retrieves materials as needed with precision, accuracy and speed under a defined degree of automation ( FIG. 8). Systems vary from relatively simple, manually-controlled order-picking machines operating in small storage structures to extremely large, computer-controlled storage/retrieval systems totally integrated into a manufacturing and distribution process.

AS/RSs are categorized into three main types: single-masted, double masted, and man-aboard. Most are supported on a track and ceiling guided at the top by guide rails or channels to ensure accurate vertical alignment, although some are suspended from the ceiling. The 'shuttles' that make up the system travel between fixed storage shelves to deposit or retrieve a requested load (ranging from a single guide in a library system to a several ton pallet of goods in a warehouse system). As well as moving along the ground, the shuttles are able to telescope up to the necessary height to reach the load, and can store or retrieve loads that are several positions deep in the shelving.

To provide a method for accomplishing throughput to and from the AS/RS and the supporting transportation system, stations are provided to precisely position inbound and outbound loads for pickup and delivery by the crane.

Automated Storage and Retrieval Systems are typically used in applications where: there is a very high volume of loads being moved into and out of storage; storage density is important because of space constraints; no value adding content is present in this process; or accuracy is critical because of potential expensive damages to the load.

No matter which storage, retrieval, or parts identification technology is used, the important issue is that the parts-material usage history must be analyzed to determine the movement. Each alternative will have a different payback as labor and productivity savings offset the capital investment.

FIG. 8 Automated Storage and Retrieval System

5 Optimizing Tools and Techniques

Computerized Inventory Control System

Most Computerized Maintenance Management Systems (CMMS) and Enterprise Asset Management (EAM) systems have a built-in inventory management system. Each item is recorded in the CMMS system when it’s purchased or issued on a work order and gets charged to specified equipment.

Parts are assigned locations in the inventory management system of the CMMS/EAM, and a physical inventory verifies quantity and location CMMS/EAM systems can usually generate a physical inventory form sorted by location, bin, and part number, description, etc.

A process should be set to evaluate parts usage and lead time, and reviewed periodically to adjust minimum/maximum quantities and the Economic Order Quantity (EOQ). Economic order quantity may be considered as the order quantity that will minimize the total inventory costs.

Note the total inventory costs consist of ordering costs and inventory carrying/holding costs. The real power of an inventory control system embedded in a CMMS is its ability to capture and analyze usage data both to apply EOQ and pay greater attention to a classification. These applications in turn enable the company to optimize inventory cost.

"Shelf Life" Management and PM Plan for Stored Items

Components and sub-assemblies such as blowers, motors, motor gearbox units, and bearings need to be appropriately lubricated for storage and may also require rotation of shafts to reduce damage to the bearings at specified intervals. It has been found that improper storage can damage parts and reduce their life. Similarly, rubber and chemical materials, e.g., o-rings, oil seals, cylinder cups, and adhesives, have limited shelf life. All of these types of materials should be identified in the CMMS system with a PM or shelf-life management program.

Inventory Accuracy

Achieving a high level of inventory accuracy is a critical factor in the success of storeroom operations. Accurate inventory is defined as the actual quantity and types of parts in the right location in the storeroom matching exactly what is shown on the inventory system in the CMMS/EAM system. If a part, quantity, or location is not correct when matched against the system, then that location is counted as an error.

Some limited variance can be tolerated in the case of certain supplies such as nuts and bolts, as they can be considered consumable items.

Inventory accuracy is important for several reasons. The consequences of inaccurate inventory are:

• If the part is not found in the location indicated in CMMS records, the repair cannot be completed on time, thus delaying the asset availability for operations.

• An out-of-stock condition can occur because parts won’t be ordered on time if the actual quantity is lower than the system record.

• If the system record number is lower than the actual inventory record, then the parts will be flagged for reorder by the system, even if not required, resulting in unnecessary inventory.

• Maintenance and operations personnel will lose confidence in the inventory system, CMMS, and in stores management. This situation can encourage hiding stock items in technician's tool boxes or floor cabinets.

Because inventory accuracy is very critical for the maintenance store, it’s important that a process is established to ensure that high inventory accuracy of 95% or better is maintained. This means that 95% of the time, a part or material is found in the right location and that the quantity in the bin matches with the system inventory number.

Achieving a high level of inventory accuracy requires ensuring:

• All parts-materials received against a purchased order should be recorded in an inventory system/CMMS.

• Additional information regarding parts -- specific data such as manufacturer's number, serial number, lot size, cost, and shelf life -- should be recorded in the system.

• All parts-materials issued to a work order should be recorded accurately along with the employee name, number, equipment, and projects.

• All parts-materials not used after a repair or PM should be returned and recorded in the system and put back into the correct location.

FIG. 9 Kitting Bins

A process should be set-up to perform cycle and location counts on a regular basis. This count can be daily, weekly, monthly, or yearly depending on the size of the store, value, and other factors such as current accuracy level. The store personnel can be assigned a number of bins/locations to be counted on a daily basis or a pre-assigned schedule to cover all items in the store in, for example, six months or one year. In some stores, specifically consumer warehouses, where a large number of items such as books and CDs are kitted and shipped on an everyday basis, a weekend count by special part-time employees is performed to ensure inventory is accurate at the start of the week.

Parts Kitting Process

One of the functions of the storeroom is to provide parts, materials, tools, and consumable supplies for the technicians to perform PM and repair tasks. The storeroom can build PM or repair part kits in advance of the scheduled PM tasks. The CMMS/EAM system should send a PM or repair schedule with a materials request to the storeroom in advance to hold parts inventory and to provide parts at the right location on the scheduled day.

The parts listed on the PM work order are picked from the storage locations and are placed into one of the kit bins. These kit bin locations are an extension of the storage locations, and the inventory control system in CMMS will track these kit locations with a staged status. When picking is completed, the entire cart is moved to a kit holding area, and scanned into the hold area location. The area maintenance supervisor or scheduler, or in some cases the technician, is informed of the kit status and its staged location. On the scheduled day to perform the PM or repair, the technician picks up the kit and communicates with the inventory/CMMS system for any changes. In fact, in some organizations, the kit and other material are delivered on site, near the asset before the repair task is start ed. FIG. 9 shows examples of kitting bins on mobile carts.

Total Inventory Costs

Operations and maintenance are the customers of a store. Customers usually perceive quality service as the availability of goods, parts, materials, and tools when they want them. A store must have sufficient inventory to provide high-quality customer service. On the other hand, high inventory levels require investments. Inventory costs consist of:

• Carrying cost: the cost of holding an item in the store

• Ordering cost: the cost of replenishing the inventory

• Stockout cost: loss of sales or production when an asset cannot be repaired and made available to produce due to a part stockout.

Economic Order Quantity (EOQ)

Economic order quantity (EOQ) analysis is one of the techniques which could be used to optimize inventory levels by ordering the "right" quantity at a specific time interval in order to minimize inventory cost but still meet customer needs.

EOQ helps optimize order quantity that will minimize the total inventory cost. EOQ is essentially an accounting formula that determines the point at which the combination of order costs and inventory carrying costs are the least. The result is the most cost effective quantity to order.

Although EOQ may not apply to every inventory situation, most organizations will find it beneficial in at least some aspect of their operation. Anytime we have repetitive purchasing of items such as bearings, filters, and motors, EOQ should be considered. EOQ is generally recommended in operations where demand is relatively steady. Still, items with demand variability such as seasonality can still use the model by going to shorter time periods for the EOQ calculation. We have to make sure that usage and carrying costs are based on the same time period.

To determine the most cost-effective quantities of an item, we will need to use the EOQ formula. The basic Economic Order Quantity (EOQ) formula is:


D = Demand / Usage in units per year S = Ordering cost per order H = Inventory carrying cost per unit per year

The calculation itself is fairly simple. However, the task of determining the correct cost data inputs to accurately represent inventory and operations can be a bit of a project. Exaggerated order costs and carrying costs are common mistakes made in EOQ calculations.

Annual Demand

The number of units of an item used per year may be explained as the annual usage.

FIG. 10 EOQ and Stocking Levels

Ordering Cost

Also known as purchase cost, this is the sum of the fixed costs that are incurred each time an item is ordered. These costs are not associated with the quantity ordered, but primarily with physical activities required to process the order. There is a big variation in this cost. We have found that an order cost varying $20-200 per order depending upon factors such as organization size. Usually order cost includes the cost to enter the purchase order or requisition, any approval steps, the cost to process the receipt, incoming inspection, invoice processing, and vendor payment. In some cases, a portion of the inbound freight may also be included in order cost. These costs are associated with the frequency of the orders and not the quantities ordered.

Carrying Cost

Also called holding cost, carrying cost is the cost associated with having inventory on hand. It includes the cost of space to hold and service the items. Usually this cost varies between 20-30% of the item's value on an annual basis.

FIG. 10 graphically portrays the concept of a typical EOQ and stocking levels. The illustration assumes a constant demand-consumption, failure rate, and constant lead time. In real practice, demands are not always constant and often reorder cycle changes with time.

The next two examples demonstrate how EOQ and total inventory costs may be computed.

Example #1

A plant buys lubricating oil in 55-gallon drums and its usage rate is an average of 132 drums of oil in a year. What would be an optimal order quantity and how many orders per year will be required? What would be the additional total cost of ordering and holding these drums in store if ordering cost is increased by $10/order? Plant data indicates that:

a) Preparing an order and receiving the material cost $60/order

b) The oil drum carrying (holding) cost is 22% per year. The average cost of a 55-gallon oil drum is $500.


The economic order quantity (EOQ) is:


Annual usage D = 132 Ordering cost S = $60 Annual carrying cost H = 22% of item cost = 0.22 x $500 = $110 Average number of oil drums on hand = = 6 drums Numbers of orders / year = 11/year

Total annual cost (TC) of ordering and holding oil drums in inventory Now, if the cost of ordering is increased by $10 to $70 per order, the new EOQ and total cost (TC) can be calculated as follows: Total annual cost (TC) of ordering and holding oil drums, An increase of order cost by $10 has resulted in an increase of total cost by $105, from $1320/year to $1425/year.

Example #2

A plant maintenance department consumes an average of 10 pairs of safety gloves per day. The plant operates 300 days per year. The storage and handling cost is $3 per pair and it costs $25 to process an order.

a)What would be an optimal order quantity as well as the total cost of ordering and carrying this item?

b) If carrying cost increases by $0.50 per pair, what would be the new EOQ and total cost of carrying this item in store?


a) Given, D = Annual demand = 10 x 300 = 3000 pairs S = Ordering cost = $25/order H = Carrying cost = $3/pair

Total annual cost of ordering and holding safety gloves (TC) If we change order quantity to 250/order, the new TC If we change order quantity to 200/order, the new TC An order quantity of 200 or 250 would give us the same total cost.

Therefore, we could go with an EOQ of 200 gloves/order.

b) If the carrying cost is increased to $3.50/pair D = Annual demand = 10 x 300 = 3000 S = Ordering cost = $25 H = Carrying cost = $3.50/pair Total annual cost of ordering and holding safety gloves (TC)

If we change order quantity to 200/order, the new TC With increased carrying cost from $3.00 to $3.50 per glove, the new EOQ is still 200, but the total cost of ordering and carrying safety gloves would increase to $725 per year.

New Technologies

New technology such as bar codes, Radio Frequency Identification Device (RFID), and handheld data collectors similar to those used in supermarkets or FedEx/ inventory systems could effectively help improve productivity of storeroom operations. The introduction of bar coding, auto ID (identification) systems, and now RFID technology into storerooms has resulted in a significant contribution to storeroom productivity, inventory accuracy, and error elimination. Use of this new technology in store rooms is a best practice.

Automated ID Technology

No discussion of parts storage would be complete without some discussion of automated ID technology. Although commonly used in distribution operations for years, the use of automated ID in -tied mainly to CMMS use-is only now beginning to increase. Whereas a stand-alone maintenance system (particularly a smaller one) may function well with manual entry and tracking of parts, integration with manufacturing and distribution parts storage systems will almost certainly warrant the investment in and use of some form of automated ID technology. The discussion below covers the two most common automated ID technologies: bar coding and radio frequency identification (RFID).

Bar Code

A barcode is an array of parallel bars and spaces arranged according to a particular symbology that allows automated scanning devices to read them. In use for over three decades, bar codes are now familiar and commonplace in distribution and retail operations. However, only in recent years have maintenance organizations begun aggressively implementing barcode systems in stores. When combined with a systematic storage process, the use of barcodes can virtually eliminate misidentified parts and the selection of incorrect parts, and greatly increase the efficiency of reusable parts and equipment tracking. Automated bar code tracking is a baseline enabler of systematic ID tracking and is a prerequisite for any effective storage strategy. Organizations not currently using barcodes for stores should investigate their use in the near future.

Overall benefits of a bar code solution include:

• More accurate and timely information

• Faster service

• Easier work for employees

• Lower labor costs

• Higher productivity than manual counting and recording

• More accurate inventory information

Many maintenance practices have been discussed in this section.

Most of them are good or best practices depending upon where you are in your journey to maintenance excellence. All of them, when implemented and tailored to suit your environment, can provide better inventory control and service, and more efficient maintenance and purchasing activities.

For example, when an organization redesigned its maintenance operations to capture all labor and material costs used on specific assets, it assigned a bar-coded metal tag to each piece of asset. This eliminated all labor and material charges against the wrong job and resulted in hundreds of hours saved because employees no longer had to fill out paperwork and key them into the system. This change also provided for 100 percent data cap ture. The organization used the information to develop a cost-effective preventive maintenance program.

Radio Frequency Identification (RFID)

RFID is an automated identification and data collection technology that uses radio frequency waves to transfer data between a reader (interrogator) and items that have affixed tags (transponders). Unlike bar codes, which are familiar and well known to most people, RFID is still in limited use in industry, and even less so in maintenance operations. RFID is similar to bar coding in many aspects, as both use tags and labels affixed to the part for identification, and both use special readers to read the tag and/or label data. The major difference in the two is that RFID uses radio waves to read the tag data, whereas bar code readers use light waves (laser scanners).

Although still in early adoption, RFID offers several distinct advantages over traditional bar coding, including:

• No line of sight required

• Dynamic tag read/write capability

• Simultaneous reading and identification of multiple tags

• Tolerance of harsh environments

Many organizations have piloted RFID programs, and an increasing number are actively using RFID technology in stores. Some areas of documented savings include:

• Reduced inventory control and provisioning costs

• Accurate configuration control and repair history

• Part installation and removal time tracking

• Accurate and efficient parts tracking

• Reduced parts receiving costs

• Elimination of data entry errors

• Improved parts traceability

• Reduced risk of unapproved parts

All maintenance organizations, even those currently without any system control, should investigate the use of RFID in both their parts stores and directly on assets to replace so-called Brass Tag identification. The current rapid adoption of RFID in industry may soon allow it to overtake bar codes as the new industry standard for automatic parts or assets identification.

6 Measures of Performance

Several performance indicators measure the efficiency of storeroom operations. Some of these key indicators are:

1. Percentage of inactive inventory. Number of inactive items (SKU) / total items issued.

2. Percentage of classification. The inventory items are divided into three categories (A, B, and C), according to a criterion established by the organization such as revenue generation, or value. Typically, A items represent 20 percent in terms of quantity and 75 to 80 percent in terms of the value. Also called usage value analysis.

3. Inventory Variance (Inaccuracy). Difference between the actual number, amount, or volume of an inventory item and the balance shown in the inventory records. Such differences are summarized in the variance report that is prepared to record and resolve inventory control problems.

4. Service Level. Inventory level at which demand for an item can be met from the on-hand stock. Usually, expressed as percent age of order satisfied.

5. Percentage inventory cost to plant value. The total cost of inventory divided by the total plant replacement value.

6. Inventory Shrinkage Rate. Cost of material / items lost through deterioration, obsolescence, pilferage, theft, and/or waste divided by the total inventory cost.

7. Percentage Vendor Managed Inventory (VMI). Inventory replenishment arrangement whereby the supplier (vendor) monitors the customer's inventory with own employees or receives stock information from the customer. The vendor then refills the stock automatically, without the customer initiating purchase orders. The items managed by VMI divided by the total items in inventory.

8. Inventory growth rate in number of items and suppliers.

This measure evaluates how many more items have been added to the inventory list. The objective is to reduce the number of items by standardization or managed by the vendors /suppliers in their storage and delivered on time when we need it.

Similarly, we also track number of suppliers / vendors.

9. Percentage of stock-outs. Number of stock outs / total items issued. Could be trended to include past years.

10. Inventory turnover ratio. Number of times an organization's investment in inventory is recouped during an accounting period. It’s calculated by value of issued inventory divided by an average inventory value in an accounting period.

It’s a good practice to track these performance measures on a regular basis to evaluate the improvements that have been made or to set-up improvement goals.

7 Summary

Continually changing business pressures are forcing maintenance departments to review their operational processes and find ways to run leaner, faster, and more efficient than ever before. Unless stores are integrated with purchasing, operations, and material planning, any optimization of maintenance strategy will be suboptimal, often resulting in reduction of overall organization efficiency. Managing inventory / material and parts storage effectively is a key strategy that can't be overlooked.

Efficient storage principles, such as storing pre-kitted parts and storing parts close to the point-of-use, can greatly improve maintenance store performance. The parts storage equipment that best fits with the overall storage strategy of the organization can then be selected to meet maintenance and operations needs. The sharing of storage equipment often results in the ability to justify storage automation, which can lead to efficiency gains not only in maintenance, but also across the organization.

Almost all scheduled maintenance requires specified materials and parts to accomplish the task. Advance planning for maintenance processes and pre-kitting of the parts can greatly increase the efficiency of maintenance and reduce the wait time for maintenance personnel.

Parts held in inventory needed solely in the event of an unscheduled asset failure are critical spares. Planned maintenance activities use service parts on a regular schedule. The part usage is fundamentally different between the two categories, and so the storage strategy of each should vary as well. A major aspect of spares storage is balancing availability against the cost of storage. Tracking the usage of all parts by user, task, location, etc., allows reporting and analyzing of specific usage patterns.

Particularly with consumables, the very act of tracking usage will cause awareness, and overall usage will decrease.

Tools such as analysis and EOQ should be used to optimize inventory. The benefits of optimizing materials and spares inventory include reduction in inventory costs, elimination or reduction of craft wait time, and reduction in stock returns. The decision of what spares to stock should not be based on vendors' recommendations, but instead on FMEA/RCM analysis, the stocking costs, the lead time to procure, and impact on operations if spares are not in stock.

Holding all critical parts in inventory can result in very high storage expenses. Consider partnering with local industry and vendors for sharing some critical spares. Eliminating idle inventory is possible by negotiating delivery controls and establishing vendor trust.

Focus on implementing the following best practices to improve store effectiveness:

• Create a culture to emphasize that the storeroom is a service provider and its objective is to provide the right part-material at the right location at the right time.

• Ensure inventory accuracy.

• Perform daily/weekly cycle counting as a part of routine store Room operations.

• Use auto ID to streamline data entry and reduce errors.

• Build PM / repair kits in advance.

• Establish shelf life and PM program for stored items.

• Ensure all parts-materials get charged to the correct asset.

• Establish KPIs to measure and track performance.

8 Quiz

__1 Inventories into a plant are generally classified in what categories?

__2 What is meant by ABC classification as related to inventory?

__3 Discuss how the cost of inventory can be optimized.

__4 How you will organize a store room? Discuss the key features of a small store room you have been asked to design.

__5 Why is inventory accuracy important? What will you do to improve it?

__6 What are key factors used in calculating EOQ?

__7 Explain the benefits of using RFID technology to label stock items - material?

__8 Explain inventory turnover ratio. What are the benefits of tracking this ratio?

__9 Identify three key performance measures that can be used to manage MRO store effectively.

__10 What is meant by shelf life? What should be done to improve it?

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