MRO Today - First, you need a definition

First, you need a definition

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The simple solution to maintaining a high level of uptime on plant equipment is to maintain a high level of parts in inventory. That way, whatever the service requirement, you have stuff on hand.

However, accountants don’t like to see huge sums of money tied up in inventory. So, you must make do with less. But how much less? How much inventory do you need to carry? How do you determine how much inventory should be carried?

These are questions I will address in subsequent issues of MRO Today.

But to start understanding inventory, we must begin with a definition. What is inventory? At first thought, it’s the materials you keep handy in your storeroom. But there is more to it than that.

I want to give you something to think about by providing different definitions of inventory. That way, you get an idea why you have inventory and what it really is. Once you understand why you have inventory, you can determine what you need to keep on your shelves.

I define inventory by what it’s used for. In my opinion, inventory is:

Material: In the traditional sense, inventory is the parts and material stocked to meet your short-term and long-term sourcing requirements.

A fixed investment: If you have $2 million in inventory now, you’ll always have $2 million in inventory. You use parts and materials from your inventory supply, but you immediately replace it with new stock upon consumption.

Insurance: What is insurance, really? It’s being reimbursed for an incurred loss. Insurance minimizes your loss if disaster strikes. So, isn’t inventory just that — insurance against an inability to get parts to repair a major breakdown?

A bet: Similar to insurance. When you carry auto insurance for your teen-age son, you’re placing a bet that he will wreck the family car. The insurance company is giving you 10-to-1 odds that he won’t. As a manager concerned about inventory, you’re like that insurance company. You bet there will be no downtime, and you stack the odds in your favor by the amount of inventory you carry.

Buffer stock against use: Inventory is a hedge against the unknown. If you knew exactly when a part was required, you wouldn’t need to carry it in stock. You’d buy the part and have it arrive exactly when needed. This sounds good in theory, but because you don’t know exactly when you’ll need that part, you carry it.

Buffer stock against delivery: Inventory also protects you from the uncertainties of delivery. If you knew exactly when a supplier would deliver your order, you’d never need inventory to cover for erratic delivery schedules. Hey, suppliers have problems, too.

Safety stock: How big of a risk taker are you? What are you willing to risk by not having parts on hand? We’re always being asked to reduce inventory and we come up with excuses for not meeting the reduction goals. The flip side is, if you reduce inventory and then run out, you are past the excuses point in defending your inventory policy. That’s when you get yelled at.

CYA stock: We all know what “cover your a--” inventory is and why we have it. See above.

A quantitative measure of your inability to control yourself: I can always tell how well a person is able to run his or her operation by looking at the amount of inventory. The better you manage your operation, the better you control your inventory level.

Unobtainium: There is a layer of parts that fall into the category “Must Have.” These are rare, almost impossible to obtain parts; or, the lead time to acquire them is so long, it just seems like you can’t get them. These sit on your shelf, and there is little you do about it.

Hidden stock: This is inventory your mechanics stash under conveyors, under stairwells, inside parts cabinets or in toolboxes. This is the stuff you call “lost” each year when you do physical inventory. It’s a real problem because you don’t know the condition of those parts when the mechanic finally puts them into equipment. If the parts are bad, you face a costly second downtime period to fix the machine right.

Rogue parts: These are the parts you don’t list in your system. When you “lowered” your inventory value, you funneled these to a mechanic, who safeguards them. These parts may be good, and they have a use, but many times you can’t find them when you need them. The mechanic misplaced them, he’s on vacation, or has quit or retired. The parts are out there somewhere.

“Cheapest way to do it” inventory: There are many ways to get the parts you need, but what it really comes down to is, what is the cheapest way to get those parts when you want them? Sometimes this means ordering them only when they’re needed, or it may mean you keep the parts on consignment on your shelf and someone else owns them. It also could mean the local supplier brings the parts over when you call, or maybe you order them off the Web.

However you get these parts, there is a cost to acquire. But there might be a cheaper way to have parts available to you: inventory. That’s right, the cheapest way of getting parts for your operation might be buying in batch and putting the items on the shelf. This won’t apply to all your parts needs, but you’ll find there is a group of parts that fall into this category.

Reasons and answers
Now that I’ve given different definitions to your inventory, we must know why we name these different groups. If you look at the goals and objectives top management gives you each year, you see items such as:
• Reduce inventory
• Lower inventory costs
• Improve on-hand availability of parts
• Reduce annual parts costs
• Shorten time to repair machinery

What you really see are the savings management wants to realize from your inventory. What management fails to do is give you the tools or road map to achieve those lofty goals. That’s where this feature comes in.

So, just add the words “how to” in front of the five bullet points above and you’ll see an outline for this feature’s future articles:
• How to reduce inventory
• How to lower inventory costs
• How to improve on-hand parts availability
• How to reduce annual parts costs
• How to shorten the time to repair machinery

Now you know why we spent the time defining inventory. Before you can work on the five “how to’s,” you must define the reason you have inventory in the first place.

"Chris" Christensen directs the University of Wisconsin School of Business' operations management program. He can be reached at .

This article appeared in the June/July 2000 issue of MRO Today magazine. Copyright, 2000.