The cash equivalence of spare parts inventory
Imagine walking into a storeroom or warehouse and finding the shelves stacked high with cash — $10,000 on one shelf, $2,000 on another. Over there is a storage bin filled with $20 bills. Everything is neatly labelled and catalogued like a bank vault in a movie, except everything is on display.
Now imagine the value of the cash diminishes rapidly, but not in the usual slow way that cash loses relative value over time. Instead, it loses value in the same manner that new cars lose value as soon as you drive them off the lot. Once the cash is on the shelf, it is as good as gone and can’t be used to buy anything.
Imagine you need to have at least some cash on those shelves because not having enough cash costs you greatly. Worse still, you don’t know exactly how much you will need. Despite your best efforts, you can’t tell whether you have too much or too little.
What would you do?
Would you check whether past assumptions on how much cash to hold worked out OK? Probably not.
Would you monitor how much cash there is on the shelf a couple of times a year and not really worry much between checks? Definitely not.
Would you let just anybody in your company decide how much cash to put on the shelf? Absolutely not.
Get ‘cash’ off the shelf
You know I am not literally talking about cash; I am talking about spare parts inventory.
In asset-intensive organizations, spare parts kept for equipment repairs and maintenance behave just like cash on the shelf. Once you buy them they lose value. Rapidly. The purchase of a spare part uses up a valuable resource, cash, in a way that means it cannot be reassigned or re-spent. For all intents and purposes, once it’s used, it is gone.
Purchase too few of the required part and you can pay a large penalty in terms of downtime and lost production. But purchase too many and the extra parts provide you with exactly zero functional utility. They add no value to your organization. In fact, it’s just the opposite: They use up a valuable resource that cannot be renewed.
What should you do to manage that cash?
Continuously monitor how much was spent, what it was spent on and what the total was? Naturally.
Check whether your systems are delivering good outcomes and adjusting your settings based on the results? Good idea.
Be very careful about who you allow to make decisions on how much to hold? Smart move.
Provide specific guidelines on how to make those decisions? Smarter move.
For most companies, the problem with spare parts inventory management is not that inventory management is hard. It’s not. The problem is they look at the spare parts only as engineering components and so think their inventory decisions are engineering decisions. They’re not. Or they think the management of this type of spare parts inventory is the same as generic inventory management. It’s not.
Spare parts inventory management is a financial decision-making process bound up in engineering and supply chain constraints. Once this is understood companies can then start making decisions to influence these constraints so that they create better financial outcomes. NP