Reducing the Value of Spare Parts in a Maintenance Organization - Coursework Example

The Various Steps in Reducing the Value of Spare Parts in a Maintenance Organization CONTENTS Page 1. Executive Summary 3 2. Introduction 4 3. Controlling Inventories 5 3.1 Consignment partnership 6 3.2 Vendor Managed Inventory 7 3.3 Slow Moving/ Obsolete Parts Control 9 3.4 Cost Reduction by Design 12 3.5 Standardization 16 3.6 Just in Time inventory 18 3.7 Product Line Rationalization Cost Reduction 19 3.8 Outsourcing 20 4. Conclusion 22 Executive Summary In any organization, maintenance is a separate department that is responsible for the function. The new business strategy aims at focusing on streamlining the process, reducing the inventory and cost without putting in danger the production and manufacturing thus making the process more efficient and effective. This report provides planning and scheduling of strategies and techniques that enable a maintenance manager to reduce inventory. The level of inventory is a function of great length in the supply chain. Reducing the supply chain will reduce the inventory, releasing cash and improving the flexibility in the company. The ways to reduce inventory exists for all the companies through ongoing reviews with the suppliers, management reviews, production planning, forecasting and stock locations. Poor forecasting and planning, outdated IT systems, inefficient production models, lack of closeness with the suppliers/customers and poor transparency of stock locations will result in excess inventory. Inventory management includes consignment stocks from suppliers, returning inventory in case of slow moving parts, streamlining the product range, special incentives for disposal of old and slow moving spare parts. Outsourcing some elements of the supply chain will also help in reducing the inventory levels as the manufacturers outsource small units to lower cost territories and thus the supply chain costs is reduced in terms of cost of purchases and improving cash flow for the company. Inventory constraints, logistical issues of the spare parts etc... are some of the criterions taken into account. The management strategy decision has to be integrated with the set of hierarchy process models to resolve issues at different levels. An inventory policy matrix is linked with different classes of spare parts to achieve the best control strategy for the spare stocks. Inventory management technique will help to improve the stock turnover ration and convert assets into cash. The principles of the theory and the problems faced and how one can resolve these issues are reported in this paper. (Denis O’ Connor) Introduction A Maintenance Manager is responsible for guaranteeing that all mechanical and plant equipment is in good operating condition. Inventory is defined as a resource having a monetary value. Inventory control aims at maximizing the working capital and developing procedures on optimizing these procedures. (Gopalakrishnan & Banerji, 2004, p301) If one can get the spare parts with the lowest cost quickly without any downtime, then the use of maintenance stockroom is not necessary but the reality is that it is very difficult to get the stocks in short notice. Maintenance management is considered as the direction and organization of resources and the tasks associated can be divided into 3 areas- Work Management, plant condition control and cost control. (Joel Levitt, 1997) The total cost of maintaining the desired inventory level should be reasonable but the inventory should also be enough for the company to effectively merchandise the products. The business will be not be able to survive if the managers cannot control the inventories as there are huge costs involved with keeping large inventories. Implementing an inventory management begins with the stock and the type of storage location. Controlling Inventories Incorporating a well organized inventory plan will increase the profitability of achieving the desired results. Inventory is the measuring stick for the company’s entire supply chain and the best way to control the inventory is to improve the supply chain processes. Fundamental strategies should be implemented and the strategies for desired management plan include- (a) Analyzing data to construct the baseline inventory stock, and evaluate the metrics for inventory stock. (b) Evaluate the present inventory status and the warehousing processes involved. (c) Documentation of the potential reasons for high inventory stocks and the reasons for the variance. (d) Performing testing of gap analysis and conducting data analysis to confirm the issues. (e) Developing a plan to addressing the root cause and the ways to reduce the inventory. (f) Developing a business case and implementing the business plan. (Inventory Control) 1. Consignment partnership One of the main strategies for the reduction in inventory and cost is by implementing consignment stock. Arranging to pay for items that are sold or used is called as consignment stocking. This flexibility helps the business to reduce supply costs through better and improved manufacturing and supply chain efficiencies. This yields more results and benefits of reduced inventory and reduced costs. (Braglia & Zavanella, 2003) Hill’s model focused on minimizing the total cost per year of the vendor buyer system. The main strategy is the cooperation between the vendor and the buyer which provides a greater benefit than a non collaborative relationship. Application of CS will lead to reduction of the vendor’s inventory as the vendor will use the buyer’s warehouse for storage. The buyer guarantee’s minimum and maximum quantity of spare parts stored in the warehouse and supports additional costs induced by stock out conditions. (Philip Slater, 2005) The business pays the buyer on a daily basis and the buyer stores the quantity required to cover the production planned and this provides fresh and immediate consumption on the consumption trend. The various tasks implicit in the Consignment Stock Policy for the buyer Has a guaranteed minimum stock. Pays for the goods only when they are effectively used. Does not pay any capital linked holding costs. The policy for the vendors states that the opportunity to reduce the inventory stock and using the space of the warehouse for storing raw materials, additional productive capacity. Advantages to the business: Reduction in inventory value and improved cash flow for the company as more liquid cash is available. Purchasing will not be involved in planning and in replenishment. Any slow moving spare parts can be sent back to the supplier in exchange of new spare parts and thus reducing obsolescence costs. Consignment stock does not drastically reduce the overall costs in the supply chain. Some of the cost is transferred to the supplier and the goods are placed in the customer’s site. 2. Vendor Managed Inventory The aim of Vendor Managed Inventory (VMI) is to integrate the key customers in the supply chain process. The business can implement VMI in the below scenarios- If the products requested by the customers are standardized. If the key customers constitute a high sales volume in the vendors annual sales. Product growth is not too high and if the requirement from the customers is stable and constant. As long as the customers and the manufacturers have good mutual understanding VMI can be implemented in any business. Extensive information sharing is required so that the manufacturer has a good understanding and better visibility on the goods at the customer’s location. The manufacturer acts as an inventory manager for the customer and is responsible for stocking and replenishing the goods at proper intervals. Wal- Mart is one such company who has mastered VMI. Benefits for the manufacturers are, Produces steady, predictable sales and constant flow of income for the manufacturer and reduces the risk of the customer of switching over to another supplier. Reduction in inventory will be achieved as the spare parts stock will be transferred to the customer sites on regular intervals. (Scott Frahm, 2003) Manufacturing units are facing challenge to maximize production quantities while maintaining quality and reducing costs. Cost reduction strategies can result in significant cost saving when companies are interested in cutting the cost. Cost reduction can be done in the following ways- Cost reduction by Design Lean Production cost reduction Overheard cost reduction Standardization cost reduction Product line Rationalization cost reduction Supply chain management cost reduction Quality cost reduction Total cost measurement to support all cost reduction activities (David M. Anderson, Cost Reduction) 3. Slow Moving/ Obsolete Parts Control Obsolescence, non moving spare parts are common in every business organization in all sectors of the economy. The task of the maintenance manager is to reduce the incidence of obsolescence if not eliminate them completely. This consists of surplus, obsolete and scraps parts that would need to be disposed off from the warehouse. Surplus spare parts are defined as excess of demand due to wrong judgment during procurement. Obsolete spare parts which cannot be used in the future and need to be disposed. Issues on Obsolescence Spare parts To reduce the obsolete items, the business needs to identify the causes for this the list consists of: Introduction of new machinery parts as a part of design modification renders spares of old machinery obsolete Procurement team not providing the correct provisioning of spare parts at the time of purchase. Many of the non moving spare parts are retained as insurance spares but it is desirable to have limited provision for this as it will not be likely to be used for a long time Concept of modular approach to replacement which is removal of the total assembly also causes few spare parts to be out dated. If the projected sales forecast is not met, it results in surplus items which become obsolete after sometime. If the procurement team tends to hoard the spare parts considering that the future price of the spare parts will be higher than the cost of equipment. Faulty store keeping methods, incorrect bookkeeping, inadequate application of preservatives also result in obsolescence. Purchasing spares in the event of expansion which may not materialize will also result in obsolescence in few cases. Changes in product mix, modernization, new technology, and expansion will result in the existing stocks of spares obsolete. Solutions to the above issues The solution is to have a better planning, forecasting, information technology, proper maintenance of records and good communication between different sub divisions in terms of any technological changes, product mix, change in designs Buyers must have a buy back option in the initial provisioning so that the excess non moving spare parts can be exchanged with the fast moving parts Effective point advice (EPA) must be introduced to communicate in advance any changes relating to designs, material consumption, and details of new inventory procurement details, phasing out of equipment and machinery. EPA helps in reducing non- moving stock, cancellation of prior orders made. This also helps in having better coordination between different departments for profitable introductions of new changes with minimum risks and loss as there is better planning. Introduction of life cycle costing and cost benefit analysis of the new equipment that is introduced. The suppliers should also be given sufficient notice for the change in the decision, up gradation of new technology. Standardization of the new equipment should also be made at industry level so that interchangeability of the spare parts can be made. Standardization of the equipment would help in reducing the obsolescence of the old parts and reduce the working capital lock up. To determine more information regarding the pattern of demand and items which are likely to be obsolete, the items in the warehouse need to be classified under fast moving, slow moving and non moving categories. This process is called as FSN analysis and the number of years and categories can be modified. It is very necessary to carry out the periodic check which will enable us to solemnize the current position of the stocks available in the warehouse. (Gopalakrishnan & Banerji ,2004) (Gopalakrishnan & Banerji ,2004) 4. Cost reduction by Design Outsourcing manufacturing to different manufacturers helps not only with increase in the delivery time but also reduces the value of the spare parts. There are various means of reducing the cost at the design level for parts, labor, material and administrative overheads. (A) Concurrent Engineering Concurrent Engineering is a process by which the company simultaneously manufactures both the product and the manufacturing processes. Design for manufacturability is the process that helps in proactively designing products which help in using and optimizing the manufacturing functions such as procurement, shipping and service. Since the product can be easily assembled, it helps in reducing the costs. DFM also encourages standardization of the products with standard design features. This reduces the development time; development cost, and reduces turn around time in manufacturing these products. Design for manufacturability can reduce the product cost as most of the products are assembled with fewer parts. Companies who have applied DFM have realized extensive payback. Cost and turn around time have been reduced at least by 50% with momentous improvements in delivery, quality, and customer satisfaction. The product development team needs to look into the following in order to design for manufacturability- Understand rules, guidelines and how the products are being manufactured in the market. The design teams specifically need to understand the process to be used to design the product. The development team needs to work with the marketing, manufacturing units, finance, purchasing, Vendor, regulation compliance specialists not only to design for the functionality but also to optimize the cost, delivery, time and customization of the products. Only 8% of the cost is incurred by the time the product is designed. The creative concept phase is the time taken to reduce the costs drastically and this phase has the highest impact of cost reduction strategies. Product designing phase is a crucial stage in deciding the technology, parts utilization, determines supply chain strategies. (David M. Anderson, Cost Reduction) Design for Manufacturability guidelines: Understanding the manufacturing issues with the current and past products. Following the specific guidelines for processes such as welding, casting, forming and molding. Use of concurrent engineering helps in reducing the tooling costs and complexity. Minimize the cutting tools and setup costs as for machined parts and how to reduce the costs in future. The product design determines help in improving just in time and flexible manufacturing. The product design establishes 80% of the total product costs and has significant impact on quality and costs. (David M. Anderson, Cost Reduction) (B)Lean Production Cost Reduction “Lean manufacturing is a systematic approach in identifying and eliminating wastes through continuous process improvements, flowing the product at the pull of the customer in pursuit of perfection” Lean production helps in accelerating production by eliminating wastes such as set up costs, turn around time and excess inventory. Product line rationalization and standardization of the products are the prerequisites of lean production. The main attribute of lean production is the capability to build the products parts quickly and efficiently and to produce the parts rapidly; unwanted setups must be evaluated and eliminated. (Lean Manufacturing, 2004) Advantages of Lean production, Double the labor productivity across the manufacturing unit. Reduce inventory in the warehouse by 90% and cost reduction by 90%. Offer wide variety of products with slight increase in additional costs. Elimination of set up costs can reduce the labor costs, eliminate inspection time, scrap costs, and improve machinery tool utilization. Batch size of one allows mass production, eliminate wastes and restocking costs, eliminate production delays. It also allows dock to stock delivery and this eliminates the inventory costs of raw materials. Improve job satisfaction and encourages the workers on continuous improvement. Improve the quality of the parts manufactured with the feedback. Eliminate inventory costs by 25% of the value of the inventory. Principles of Lean manufacturing, Lean principles cannot be universally applied but they are suitable for manufacturing units as they are customer driven. The customer values need to be focused and understood completely. The business need to analyze the steps in the business process to determine which areas adds value and which process steps are non value added and need to be removed. (Lean Manufacturing,2004), (Lean Manufacturing, 2004) 5. Standardization This supports the customization of mass products and helps in reducing the overall costs and improves flexibility. It focuses on reducing cost and inventory by improving the flexibility. This is a very effective tool in reducing the number of part types by standardizing the preferred parts. The methodology is termed as zero based principle which basically starts with zero and adds only what is needed for the manufacturing and removing unwanted parts. The steps involved are: Establishing baseline from usage history ( graph below), Eliminate parallel lines of parts and add new ones if required, Optimize the availability of resource, Receive constructive feedback from the quality and purchasing team(David M. Anderson,2009, Part Standardization) (David M. Anderson, 2009, Part Standardization) Raw materials, tools, features and processes are the other forms that can be standardized. If the raw materials are standardized, the process will be flexible to make any changes without much change to materials, cutting tools or mechanism. Different tools are used to determine assembly tools, repair and service. Standardization on company tools can be made by determining and analyzing the existing products and prioritizing the usage history and tool preferences. Standardization of processes from the concurrent engineering can be done to ensure that the processes are specified by the design team. (David M. Anderson, 2009, Part Standardization) Benefits of Standardization: Reduce the overhead costs and simplify the supply chain. Inventory cost reduction and purchasing cost reduction. Implement better product and process development. Improve the quality of the spare parts by continuous improvement. Helps in flexibility as there are no setups, simplify the supply chain and helps in flexible manufacturing (David M. Anderson,2009, Part Standardization) 6. Just in Time inventory In 1970, the Japanese companies developed a philosophy for manufacturing companies that minimized waste and improved quality. This advocates Lean approach to production. Most of the manufacturing companies store lot of inventory which is risky as the items might be stolen, damaged or deteriorate. Just in time helps in tight control on the manufacturing process so that these parts are available at any point of time. . (Just in Time ,JIT) The key benefits of Just in time are- Low inventory Lost cost and wastage High quality of production and increase in turn around time High customer responsiveness By applying JIT the process is continuously monitored and this provides opportunity to make the production more efficient JIT Strategy and implementation Inventory costs contribute a significant amount to the company’s expense and this can be minimized by taking JIT approach to inventory control. The implementation of this process requires close monitoring at every stage of production and inventory carrying points. There are multiple systems in place for monitoring the continuous supply of inventory and one such tool is Kanban. Kanban is a visual signal that helps to identify the stock replenishment. If the supply of the spare parts falls below the yellow line that is painted inside the storage bin. The yellow mark indicates the foreman to order for supply of the spare parts which is passed on to the purchasing department. It is very essential that there is strong relationship with the supplier chain and this helps the business to make more improvements in production and inventory. (Just in Time ,JIT) 7. Product Line Rationalization Cost Reduction Rationalization is a powerful technique to increase the profits of the company by reducing the resource and simplifying the supply chain and the operations. Most of the companies have 80% profit on sales from 20% of the best products. Product line rationalization encourages the companies to focus on the best selling spare parts by eliminating or outsourcing the weak products and by doing this the manufacturing company can focus resources on the best products being sold. The procedure for implementing this is that the product line is divided into 4 phases: The least profitable spare parts will be dropped from the production and these products can be outsourced and thus simplifying the supply chain and operations. The main products manufactured will be focused on process development, operations and marketing. (David M. Anderson 2009, Product Line Rationalization) David M. Anderson (2009), Product Line Rationalization Benefits from rationalization of products manufactured Reducing the inventory by outsourcing the products that are not selling too well. Increase the profits by reducing the overheads and efficient procurement. Improve the flexibility and simplifying the supply management. Improve the quality of the best selling products by continuous improvement and quality techniques. (David M. Anderson 2009), Product Line Rationalization) 8. Outsourcing For several years, many companies have been focusing on Outsourcing manufacturing on areas such as research, sales and manufacturing of spare parts. Some companies outsource manufacturing completely. Unfortunately, too much of outsourcing has also caused issues with the supply chain as it takes longer lead time, delivery of goods on demand. The manufacturers should also consider the value of responsiveness, customer satisfaction and customization on the products outsourced. Through outsourcing, the manufacturers try to have control over supply chain and also reduce the below costs, Labor costs as it can be reduced by Lean study and design for manufacturability, Inventory and material costs as it can be reduced by standardization, product line rationalization. Companies need to always ensure the spare parts are available for customers even for products in or out of production. It is often believed that the managers outsource manufacturing spare parts as spare part production is disruptive to operations when the manufacturer has implemented lean production or mass customization. It is also advantageous to outsource standard parts that has no variations and are likely to go obsolete. The supply chain management is very critical as all the parts and materials have to be made available spontaneously. In order to accomplish this, the supply chain must arrange for fast on time delivery of spare parts from the outsourced suppliers. (David M. Anderson 2009, Outsourcing) How can the inventory cost under control in the future? The principles that the manufacturer needs to follow to keep the inventory stock under control are by: Building products on demand will help the business in immediate financial benefits on the inventory costs by removing the inventory carrying costs and batch production, Streamlining and rationalization operations by eliminating spare parts that have very high overheads , Combine duplicate spare parts into a single part for low purchasing costs, Pre selecting partners and vendors will also help in reducing the inventory costs, Co-locating engineering along with manufacturing helps in building good team work and avoid high inventory costs. (David M. Anderson 2009, Outsourcing) Conclusion Cost reduction can save significant product cost savings, life cycle product saving for manufacturing units. The level of the inventory is a function of the supply chain and shortening the supply chain will always reduce the inventory, improve cash flows and improve flexibility. The potential to reduce the inventory value depends on the management of goods, suppliers, planning and distribution. (Denis O’ Connor) Literary References Denis O’ Connor, Cash is King- Effective cash management in a downturn, Retrieved 4th Feb 2010, http://download.pwc.com/ie/pubs/effective_cash_management_in_a_downturn.pdf David M. Anderson (2009), Cost Reduction, retrieved 4th Feb 2010, http://www.halfcostproducts.com/index.htm#Cost%20Reduction%20by%20Design David M. Anderson (2009), Part Standardization, retrieved 4th Feb. 2010, http://www.halfcostproducts.com/Standardization.htm David M. Anderson (2009), Product Line Rationalization retrieved 5th Feb 2010, http://www.halfcostproducts.com/rationalization.htm David M. Anderson (2009), Outsourcing- The reality for Cost Reduction, retrieved 5th Feb 2010, http://www.halfcostproducts.com/outsourcing.htm Inventory Control, Retrieved 6th Feb 2010, from http://www.protiviti.com/EN-US/SOLUTIONS/COST-WORKING-CAPITAL-OPTIMIZATION/SUPPLY-CHAIN/Pages/Inventory-Control.aspx Just in Time (JIT), retrieved 4th Feb 2010 http://www.mindtools.com/pages/article/newSTR_78.htm Joel Levitt (1997), The Handbook of Maintenance Management, 1st Edition, Industrial Press Inc, New York Lean Manufacturing (2004), retrieved 4th Feb 2010 http://www.mindtools.com/pages/article/newSTR_78.htm M. Braglia, L. Zavanella (2003), Modeling an industrial strategy for inventory management in supply chains: the ‘Consignment Stock’ case, 41 (3793-3808) retrieved 5th Feb 2010, from http://giano.ing.unibs.it/impianti/Pubblicazioni/Zavanella/Consignment%20Stock%20(IJPR).pdf P.Gopalakrishnan, A.K. Banerji (2004), Maintenance and Spare Part Management- Inventory Control of Spare Parts, Philip Slater (2005), The Five Myths of Inventory Reduction, retrieved 6th Feb 2010, http://www.initiateaction.com/Business_Focus_Oct05%20IA.pdf Scott Frahm (2003) Vendor Managed Inventory (VMI): Three Steps in Making it Work, retrieved 4th Feb 2010, http://scm.ncsu.edu/public/lessons/less030305.html Read More