In most areas of management, the relative size of a number correlates with its relative impact on the business. For example, if we spend 3 percent more than budgeted on a project, we can generally expect that the impact of that will be small. (Whether it is tolerable to management is something else altogether.)
With spare parts inventory management, however, this is not always the case.
Yes, if you have 3 percent more inventory than expected that will only have a minor financial impact. But what if your accuracy is out by 3 percent? Or availability drops by 3 percent?
These may look like small numbers, but they can have a big impact.
Let's Look First at Accuracy.
Accuracy is usually based on the results from a stocktake or cycle count and it is important to note that there are two types of accuracy: accounting accuracy and storeroom accuracy.
Accounting accuracy measures whether the total value of the inventory actually in stock matches the expected total value based on computer records. It is measured in aggregate. For example, the inventory management software indicates we should be holding $1 million of inventory in total but the stock count indicates we actually have $970,000. That is a negative variation of 3 percent. While that is still $30,000 unaccounted for, it is relatively not that great. It’s worth investigating, but to many companies not that big a deal.
Storeroom accuracy, on the other hand, measures whether the actual quantity of each item in stock matches the expected quantity, again based on computer records. While this sounds similar to accounting accuracy, the big difference is that it reflects variation at an individual item level, not in aggregate. For example, if there are 10,000 items held in the inventory and there is a 3 percent variation, that means that 300 items are wrong.
If these items are wrong because you are holding fewer than expected, then you could be in big trouble.
Items that are wrong from a storeroom accuracy perspective are also most likely to be the ones used most often. (By their nature, slow-moving items are rarely incorrect.) If those items are also the ones required to keep your plant going in the event of a breakdown then you are really going to be in trouble. No stock means no production. And that can cost big bucks.
The real problem is that you don’t know until it is too late. Finding the error at a stocktake gives you the chance to correct the error, but up until that point you have been operating with a high-risk situation. And you probably didn’t even know it.
It is similar with spare parts availability. Almost all methods for determining inventory-holding levels require that you identify an availability target. This enables statistical analysis to be used. A 97 percent availability means you are actually planning for having no stock available 3 percent of the time. Most people don’t realize this. You have based your plan on the non-availability of the parts.
If the required part is critical to your operations, then you will experience down time and lost production. It is unlikely that anyone will congratulate you for achieving a high level of availability when your plant is stopped on the 3 percent of occasions that you don’t have the required parts.
In any area of management, it is easy to be seduced by the relative size of numbers, and usually small numbers have a small impact. With spare parts inventory management, however, small numbers sometimes have a big impact. Not being aware of this is like walking a tightrope wearing a blindfold. NP