MRO Today - What are you willing to bet?

What are you willing to bet?

by R.T. "Chris" Christensen

For those of you following my Coach articles, you've probably figured out that I'm expanding on the inventory definitions I summarized in the first article (April/May 2000 issue). This article continues with that theme.

Last issue, I wrote that you might want to think of inventory in the same manner as car or home insurance. Inventory, in that vein, protects you from losses incurred from an known event (an accident, fire, etc.). Now, for this installment, I want you to put on your gambling hats and pinky rings and think of inventory as nothing more than a bet.

A bet is a risk you're willing to take in the hopes of gaining some type of reward. In Las Vegas, you wager money in the hopes of a larger financial reward. And we assume you can afford to lose that money should you bust at the blackjack table or roll snake eyes at craps. The more you feel you can afford to lose, or the higher a risk-taker you might be, the more likely you'll make higher, more risky bets.

Is that not what inventory is? You carry an inventory of parts to protect you and your operation from a loss should there be an equipment malfunction requiring replacement parts. But how much inventory should you carry? To answer that, ask yourself the following questions:

How much am I willing to gamble to not have the part when I need it? How big is your bet? What are you willing to gamble that your equipment will continue to run and not need spare parts? This is a bet the business side of your company wants you to take because they see cost savings tied to not carrying inventory. Hence, they encourage you to play it risky.

If you are a big risk-taker, you'll bet that you won't need inventory to protect yourself from a loss. And if you don't have an equipment breakdown, you're the big winner. You gambled against inventory because you believed there wouldn't be an equipment breakdown.

On the other hand, if you aren't a risk-taker, you'll minimize your bet and have any and every part you'll ever need, in-house and ready to use, in the event of a outage. You aren't willing to gamble.

Which type of risk-taker are you? High? Low? What level of risk does your company want you to take?

How can you apply the idea of risk-taking to your department or company? Simple. What we're doing here is looking at a different way to determine the level of inventory to carry in stock or have readily available if and when the need arises. Just as there are some bets that are better than others because of the risk involved, the same applies to inventory.

What you must do is change the level of your bet based on the use rate of the equipment you're in charge of maintaining.

If the machine has a high utilization rate and very little available downtime and also generates a high sales value for the product it produces, then don't make a large bet on inventory. Minimize the loss, carry inventory. But if it's a lower-utilized piece of equipment, and there is little profitability on the parts produced, raise your bet for this machine and carry little inventory. Take a larger risk and lower your parts inventory for that equipment based on a lower probability of need.

So this is your challenge. Take a hard look at your parts inventory and think of it as a bet. High risk, low bet. Low risk, high bet. Now base your stocking levels on your bet. It just gives you another way to look at the level of inventory you need from a non-scientific point of view.

"Chris" Christensen directs the University of Wisconsin School of Business' operations management program. He can be reached at cchristensen@execed.bus.wisc.edu.

This article appeared in the October/November 2000 issue of MRO Today magazine. Copyright 2000.