MRO Today - How to classify inventory

How to classify inventory

by R.T. “Chris” Christensen

I’ve received a bunch of e-mails over the last few months from folks looking for me to clarify types of inventory — safety stock, critical inventory and the like. Since I get similar questions in my maintenance storeroom classes at the university, I decided to address the topic in this column.

Let me start by saying that I hate inventory. Inventory is money spent on something you don’t need right now. It consumes space, requires maintenance, must be insured, becomes obsolete, rots and requires time trying to remember where you put it. As I get older, I spend more time not only trying to remember where I put it, but remembering what it was I was looking for in the first place.

Murphy has a law on inventory, too. It states, “If you buy it and put in on the shelf, you will never need it.” I’ll bet you there are hundreds and hundreds of parts still sitting on maintenance storeroom shelves that I bought eons ago during my days in industry. Maybe this is why Murphy also states in his corollary to inventory, “You never bust anything that you have a spare part for.”

Amen, brother Murphy.

I really, really hate inventory. But there are times that you do need to have some of it around. Here is how to tell when you need inventory. The basic rule is that you will stock a part when the pain and agony is just too great to not have it when it’s needed. When the plant is shut down and the part supplier says it will take an extended period of time to get what you need and those around you don’t want to hear that, this is probably a part to carry in inventory.

What we need to do then is differentiate between safety stock, availability and critical spares. While the definitions do seem to be alike since these concepts protect you from having no parts when the unknown and unforecastable breakdown occurs, there are major differences. Safety stock protects you from the unknown of the breakdown coupled with the unreliability of supplier delivery. The critical spare part issue is having that special part made out of unobtainium available when you need it. And lastly, while we don’t want to have any inventory, there is a tip here to help you determine when you must have inventory based upon availability.

SAFETY STOCK: This is the on-hand inventory that protects you from having an outage while you wait for a part or parts from the supplier. Standard inventory is an amount of inventory you consume from the time you reach a reorder point and the time that the new supply arrives. Anything above this is safety stock. This protects you in the event of an additional breakdown or if the supplier is late in delivering.

If you can tolerate an outage, then you carry little or no safety stock. If it’s critical to never have a stockout, you carry the additional inventory. That way, you don’t have to listen to all the screaming and yelling going on about running out of parts. Safety stock is sort of CYA inventory.

CRITICAL SPARE PART: This is one of those parts that if you don’t have a ready replacement, the plant or equipment is shut down and you can lose a ton of money. It’s similar to water for your fire hose. If you have a fire, you obviously need water pressure and need it now. If you don’t have pressure, you’re in trouble. A critical spare part is like that water pressure. By not having a readily available part for a major piece of equipment, there is substantial risk.

The cost of the part does not define criticality. Cheap part or expensive, if you don’t have it and can’t get it, it’s critical.

Impact to the business defines this part. If you are out of a necessary part that impacts the business, you can be in serious trouble.

AVAILABILITY: This is the last definition in determining whether to stock or not stock a part. For availability, if you can get a part from a local supplier in the time between the determination of need and the need to install it, you don’t have to stock the part. Just buy it when the need arises.

For example, you have a pump that needs repair and you determine that you need a new shaft and bearings. If you can get the new shaft and bearings from a supplier before you are ready to reassemble the pump, there is no reason to stock those parts. Just buy them when you need them. On the other hand, if your need for the parts is quicker than you can get them, you must carry them in inventory. Put simply, it’s “How quick can the supplier get the parts to me?” Quick means no inventory. Slow means inventory.

Think about these definitions and see how you can apply them to your storerooms and better understand your inventory needs.

R.T. "Chris" Christensen is the director of the University of Wisconsin School of Business' operations management program. If you have a question, contact Coach Christensen by phone at 608-441-7326 or e-mail cchristensen@execed.bus.wisc.edu.