To the inexperienced, managing repair parts is as simple as procuring a lot size of components to support production and adding a healthy safety stock to accommodate any repair-related sales. But this technique often results in either too much or not enough inventory to consistently satisfy both requirements. Components for production are dependent demand items, and the same components—when sold as repair parts—are independent demand items. Market forces create different variations in each demand pattern, which are combined and magnified when attempting to satisfy both demands from a single inventory.
Instead, dependent demand production parts should be held in a separate inventory and managed with any of the time-tested techniques familiar to APICS practitioners. Likewise, independent demand repair parts should be in their own inventory and managed with techniques appropriate for independent demand items. Current enterprise resources planning (ERP) systems can accommodate the same part numbers in different warehouses for managing production and repair parts separately.
Here is why it’s better to hold two inventories instead of one: Even if repair parts sales is just a small contributor to your bottom line, it is arguably more important to your company’s reputation than end-item sales. An order for a repair part probably means an end item is out of commission and someone is inconvenienced or perhaps even losing money. Providing repair parts quickly maintains customer goodwill and reinforces the likelihood of future sales—and it helps prevent your customer from reaching out to a competitor for the needed part.
Also, repair parts are more difficult to manage than production parts because independent demand parts must be forecast, and forecasting is typically uncertain, so results are measured in degree of error. Don’t make repair parts even more difficult to manage by adding dependent demand variation to the mix. If you combine repair parts and production parts in a single inventory, any error or variation in their planning will put both at even greater risk.
In the 1970s, I worked for a manufacturer of large, capital machinery. Our repair parts sales were profitable, and our short lead times maintained excellent customer responsiveness. But when a new vice president of operations began using repair parts inventory to cover late deliveries from suppliers or the factory’s failure to complete components on time, things changed. The factory became so dependent on this new process that the manager of repair parts was even told to increase his inventory. Repair parts inventory became a huge safety stock, and discipline over suppliers and internal production was lost, along with our reputation for customer responsiveness.
Fortunately, the next vice president reversed the trend. He instructed the plant superintendent and purchasing manager to break their dependency on repair parts and straighten out their own areas. The repair parts manager was told not to provide any repair parts to production unless he had excess—and if he did, he sold it to the factory for full price. That cost was booked as variance against the superintendent’s and purchasing manager’s budgets. Needless to say, that put the attention back on supply management and the factory schedule, right where it belonged.
Randall Schaefer, CPIM, is an industrial philosopher, speaker, and retired consultant. He may be contacted at firstname.lastname@example.org.
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