Why is it that, despite the best efforts of management teams, the vast majority of spare parts inventories remain bloated with excess, surplus and obsolete items yet don’t provide the level of service expected by users?

How can companies achieve the right balance between inventory cost and parts availability? The answer lies in the concept of true optimization.

Why inventory optimization (mostly) isn’t optimization

Optimization is a problem-solving process that aims to make something as functional and effective as possible.

The problem is that what is mostly described simply as ‘optimization’ is actually ‘constrained optimization.’ That is, the function is being optimized within some constraints and the constraints go unchallenged.

Why is this a problem? These constraints limit the possible outcomes of the solution.

These constraints aren’t limited to things like time and quantity. They can be any assumption that limits the possible outcome of the optimization activity. They can be self-imposed (i.e., assumed) or systemic (e.g., supplier minimum order size).

In the case of spare parts inventory, this includes assuming that:

• the future will look like the past (in terms of parts demand);
• the lead time for delivery is already optimal (or at least can’t be varied);
• team behaviors such as hording (which affect demand variability) cannot be changed;
• repairable parts will be managed appropriately;
• and end-of-life disposal will happen quickly and efficiently.

This list is not exhaustive, but I think it illustrates why what most people think of as inventory optimization isn’t really optimization at all.

The goal must be true optimization

True optimization requires recognition of the constraints, both self-imposed and systemic, and then challenging these through a continuous process of review and improvement. Breakthrough improvements can only be achieved by challenging the constraints in the original thinking.

High levels of materials and spares inventory are a symptom of the broader issues with the way in which inventory is controlled, supplied, accessed, purchased and managed. Inventory levels are determined by a combination of supply-chain management, internal policies and processes, and people’s behavior and training.

These issues involve a wide range of personnel who come from engineering, maintenance, stores, inventory management, procurement and even finance.

Achieving true optimization and lasting results requires an understanding of all the behaviours, context and process factors that influence the inventory.

How do you achieve true optimization?

First, aiming for true optimization doesn’t mean that you shouldn’t use optimization software as a decision support tool. When faced with thousands (or tens of thousands) of items to review, the use of software that can complete that review with the click of a mouse is an obvious choice.

But your endeavor should not end there.

Achieving true optimization requires examining the range of constraints that could limit the achievement of the optimization goal.

There are many issues that might limit the effectiveness of the approach and that should be addressed. The following is a selected sample:

• Is the management structure and allocated responsibilities aligned with the overall goal or does it interfere with the achievement of the goal?
• Does that structure result in the most appropriate allocation of resources to achieve the goal?
• Could alternative procurement and supply arrangements enable better pricing, better quantities or a more efficient process?
• Is the master data management suitable for the purposes, ensuring few or no duplicates, for example?
• Are the policies in place appropriate for the goal, and does the organization actually follow them?
• Is obsolescence and disposal handled in a timely and effective manner that maximizes the return on these outdated assets?
• Is the team sufficiently trained to know what’s important, what’s effective, and what makes a difference?

The final question in the above list really speaks to whether the team knows where to prioritize when going beyond the application of software.

Every company will be in a different position, so this prioritization is not trivial.

Are the results worth the effort?

The extent to which aiming for true optimization will benefit your company really depends on where you stand now. Some companies may be satisfied with the inventory results they achieve while others will know that they need help.

For all companies, however, the question isn’t what are the inventory results today but what could they be if the right approach is applied?

Most companies’ spare-parts inventory is far from optimal. Even companies that use well-known and sophisticated software have glaring issues and bloated inventories because their management systems allow this to happen. NP