Materials, Parts, and Inventory Management
5.3 Types of Inventory
The traditional vocabulary definition defines inventory as the quanti-ty of goods or material on hand. All inventories are not alike. For exam-ple, retail or consumer inventory includes TVs, clothing, cars, and gro-ceries 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 cate-gories: 1) finished goods, 2) work-in-process, 3) raw materials, and 4) maintenance and operating items such as spare parts and operating sup-plies, 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 chapter.
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 chapter.
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 is 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.
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 Figure 5.1. 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.
Figure 5.1 Materials, Parts, and Inventory Management
120 100
Percent
80 60 40 20
0 # of items value $ # of transcations
Active items
Items
Infrequently/rarely used items
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 Figure 5.1 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 tech-nique used to classify and optimize inventory levels. In this techtech-nique, inventory is classified based on an item’s value and usage rate. This clas-sification 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 usu-ally 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 inven-tory 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.
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 infrequent-ly 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.
Figure 5.2 shows a typical inventory analysis and value stratification.
Most of the items in the C classification are standard parts—consum-able 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 cou-ple 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 ear-lier.
A typical inventory stratification example is shown in Figures 5.3 and 5.4. Figure 5.3 shows 21 items with their unit cost and their demand rate for the current and last three years. Figure 5.4 then shows each item’s clas-sification 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 Figure 5.3:
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.
Figure 5.4 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.
Chapter5
10001 Bearing, roller xxxxxx $85.00 C 50 100 29 $2,465.00
Part # Part Description Unit Cost $ Classification Past Year Demand Stock Cost
10002 Gloves, Safety $15.00 C 120 400 60 $900.00
10003 Oil Seal, xxxxx $6.50 C 40 100 38 $247.00
10004 Slings, wire rop #abc $370.00 B 5 10 4 $1,480.00
10005 Slings, wire rop #xyz $850.00 B 3 5 4 $3,400.00
10006 Wire rope Crane, #xxxx $1,450.00 A 0 1 2 $2,900.00
10007 Bearing, Spespherical xxxx $180.00 B 8 6 6 $1,080.00
10008 “O” rings - misc sizes kit $1.90 C 200 680 80 $152.00
10009 Hydraulic Cyclinder Repair kit $48.00 C 18 40 20 $960.00
10010 Hydraulic Cyclinder #xxxx $860.00 B 6 10 4 $3,440.00
10011 Motor, elec, zzzzzHP $8,400.00 A 0 1 2 $16,800.00
10012 Motor, elec, xxxxxHP $48,000.00 A 1 2 1 $48,400.00
10013 Valve, servo #xxxxx $1,250.00 A 4 3 4 $5,000.00
10014 Utility Supply misc. $1.30 C 600 2000 340 $442.00
10015 Gearbox #xxxxxx $2,600.00 A 1 0 2 $5,200.00
10016 Pump-motor unit xxxx $180.00 B 15 40 18 $3,240.00
10017 Pump Hyd xxxx $680.00 B 4 10 5 $3,400.00
10018 Bearing, friction roller #xxxx $120.00 B 24 90 20 $2,400.00
10019 Misc. Fittings $3.20 C 200 1000 160 $512.00
10020
Figures 5.3: Inventory costs.
Materials, Parts, and Inventory Management127
Figure 5.4 ABC results.
10011 $8,400.00 0 1 2 $16,800.00
A Motor, elec, zzzzzHP
10012 $48,000.00 1 2 1 $48,000.00
A Motor, elec, xxxxxHP
10013 $1,250.00 4 3 4 $5,000.00
A Valve, servo # xxxxx
10015 $2,600.00 1 0 2 $5,200.00
A Gearbox # xxxxxxx
10016 $180.00 15 40 18 $3,240.00
B Pump-motor unit xxxx
10017 $680.00 4 10 5 $3,400.00
B Pump Hyd xxxx
10018 $120.00 24 90 20 $2,400.00
B Beaming, friction roller # xxxx
10020 $110.00 60 100 30 $3,300.00
B Card, Circuit board xxxx
10021 $105.00 14 20 18 $1,890.00
B Wire, electrical roll, misc
10004 $370.00 5 10 4 $1,480.00
B Slings, wire rope #abc
10005 $850.00 3 5 4 $3,400.00
B Slings, wire rope #xyz
10007 $180.00 8 6 6 $1,080.00
B Bearing, Spepherical xxxx
10010 $850.00 6 10 4 $3,440.00
B Hydraulic Cyclinder # xxxx
10019 $3.20 200 1000 160 $512.00
C Misc. Fittings
10001 $85.00 50 100 29 $2,465.00
C Bearing, roller xxxxxx
10002 $15.00 120 400 60 $900.00
C Gloves, Safety
10003 $6.50 40 100 38 $247.00
C Oil Seal, xxxxx
10008 $1.90 200 680 80 $152.00
C “O” rings - misc sizes kit
10009 $48.00 18 40 20 $960.00
C Hydraulic Cyclinder Repair kit
10014 $1.30 600 2000 340 $442.00
73%
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 cul-ture.
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.