Cash management

What we really DO with inventory

by R.T. “Chris” Christensen

We all look at inventory as a necessary evil. By an operational definition, inventory is the result of a means to protect you and your company from the uncertainties of use and need balanced with the uncertainties of delivery. Especially in maintenance, we at times find it difficult to project or forecast demand. We can do a good job at forecasting needs for PMs and new construction and expansions, but forecasting becomes a crystal ball function when it comes to planning for outages, natural disasters or the effects of weather.

As hard as we try, we cannot accurately forecast items of this nature. When faced with this situation, we are left with protecting our companies’ assets by carrying inventory of parts, components or spare parts of the equipment — and even equipment itself. What we are really saying is that we are protecting ourselves and our company from a major loss and costs associated with it with some inventory.

Closer to home, we can understand this when we look at our own car. We carry extra parts and components with us and necessary tools that we need to use during an “outage.” In plain English this means we carry a spare tire, a jack and a wrench to change out a flat tire. We can plan an oil change, a filter change and other service items. We can also plan for replacements and updates like new tires or brakes and tune ups. For these we do not carry inventory, but we do for the flat tire because a flat is an unplanned and unforecastable event.

Looking at your maintenance shop, you do not carry inventory for the planned event. Your purchases on demand are like new tires and brakes. If I can plan a job, then there is no need to carry parts in inventory because I can buy them as needed. If the speed of delivery is fast enough and reliable enough for what you are doing, then there is no need for inventory.

One in the trunk
Now let’s look back at your car with the flat tire. If someone like AAA road service could get you a spare tire faster than you could get yours out of the trunk, then you wouldn’t need to carry the spare with you. But you can change a tire in about 15 minutes and AAA would take about an hour. Inventory in the trunk is the best way to do this.

This defines a need for inventory in maintenance for those repairs where I can not get parts as fast as I need them. I solve that problem with inventory.

But what if I can’t forecast the outage and can’t get replacement parts as quickly as I need them? Here we have what is called “unforecastable demand” and the only way we have to cope with this situation is called inventory. This is the flat tire. That defines why and where you need inventory for the business need from your side of the business.

The second component of inventory is with the supplier. If the supplier of the parts cannot meet your delivery requirements, by not being a reliable supplier and/or you cannot count on the supplier to deliver on time, then you must stock those items.

We have now defined your inventory and why you need it:
   • No inventory is needed if you can plan a job
   • Inventory if you can’t get parts fast enough
   • Inventory for when the event is unforecastable

If you can’t count on your supplier, then it is an inventory item. It really boils down to a definition of inventory as the cheapest way to do it. Somewhere it is just cheaper to carry some inventory for all the reasons stated above.

Managing for minimum investment
This brings up the interesting part of inventory. It is obvious that our goal should be to carry no inventory at all because this is the goal for a minimum in investment in your company. Seeing this is impractical, we need to look at what it is when we are talking about inventory. We really aren’t talking about parts or numbers of parts or types of parts when we talk about inventory — we are talking about money.

And we talk about how much money we have tied up in inventory. Going through the different reasons we have inventory, we see that in some instances we do not need to invest any money in inventory, and in some cases we do.

The concern here is not that we have parts but that we have money tied up. This is where vendor-owned or consignment inventory comes into play. Consignment means we don’t have to pay for the items until we use them. This means that all the inventory we have defined as needing to be in stock is owned by someone else and not us. It is in our best interest to have someone else own as much of this “must have” inventory as possible and then pay for it when we use it.

This is cash management. This is what we talk about on inventory management. We buy when we need some items and stock others on our floor or our suppliers’ floor on a consignment basis and then pay for it after we use it.

Cash management: It’s the cheapest way to manage inventory.

R.T. “Chris” Christensen is Emeritus Faculty at the University of Wisconsin, Madison, and is Emeritus Director of Operations and Maintenance Management Certificate Programs at the Universities Executive Education Department in the School of Business. Contact Coach Christensen at 262-613-0073.
E-mail: crchristensen1958@wi.rr.com.

This article appeared in the June/July 2007 issue of MRO Today magazine. Copyright 2007.

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