A Consideration for Contractors Maintaining Their Own Bench Stock of Parts - Research Paper Example

A Consideration for Contractors Maintaining Their Own Bench Stock of Parts by Full ATerm Paper Submitted to ERAU Worldwide in Partial Fulfillment of the Requirements of the Degree of MGMT 524 Embry-Riddle Aeronautical University Worldwide Online Campus Month Year Abstract Researcher: Authors Full Name Title: A Consideration for Contractors Maintaining Their Own Bench Stock of Parts Institution: Embry-Riddle Aeronautical University Degree: Master of Science in Year: 2015 This paper examines why contractor should maintain their own bench stock of parts. The paper explores the advantages that can be derived from maintaining an inventory as opposed to adopting the just in time model. The paper is case study of an aircraft maintenance contractor involved in the maintenance of the 3 aircrafts. Data for this study is obtained from the various departments involved in the logistics and the maintenance of stock. Data such as lead time, demand data, unit cost of parts, variable costs and reorder costs is collected using forms. The data collected is analyzed using Economic Order Quantity equation and the Just-In-Time model. The analysis helps to obtain information such as the optimal economic order quantity and the lead time that should be allowed in the delivery of parts. It is recommended that the contractor should employ both Just-In-Time and Statistical Inventory Control model to ensure optimal utilization resources such as space and money. Chapter I Introduction Aircraft maintenance contractors are normally required to purchase a large bench stock of about 250 parts every month. Normally a contractor orders between 350 and 500 parts per aircraft per month. This translates to between 1050 and 1500 when a contractor is required to maintain 3 aircrafts. Taking into considerations that contractors are in perpetual competition for these parts with other contractors and customers, it is difficult to receive them promptly as you place the order. This implies that contractors face many delays and work stoppages due to the delay in receiving the parts. Bench stock is the low cost but high usage parts of the aircraft that require regular maintenance and replacement. These parts include batteries, electronic parts, cases, capacitors, transistors, seals, repair kits, gasket, and resistors(Base, 2012). These parts normally cost between $0.17 and $500 and the rate of their consumption is normally unpredictable. In order to meet strict timelines contractors are forced to use Fedex to ship bench stock parts. Normally Fedex charges over $4500 per month per aircraft. Stocking the bench stock can help the contractor reduce equipment downtime which can lead to cost cutting on emergency shipping and outsourcing the maintenance services from other contractors(Base, 2012). Management of bench stock parts is vital in the maintenance of the aircraft on a regular basis(Chief, 2011). Good bench stock management can help avoid high value inventories, minimize costs that could result from obsolete inventories and prevent wastage and monetary abuse. To ensure proper management of bench stock, regular inventory inspection should be conducted(Chief, 2011). Parts that need to be kept in the bench stock inventory must be crucial and important in the maintenance of the aircraft(Chief, 2011). It will only increase the cost of inventory keeping parts that are not crucial. It is not necessary to keep as bench stock inventory parts that aircraft can continue operating for several days before they arrive(Base, 2012).. For instance, if the aircraft can operate for 7 days, then one should consider ordering those parts when needed. However, if the delay of the in delivery of some parts is greater than can be tolerated, the contractor should consider maintaining a high quantity of the parts as bench stock to avoid unsafe practices, and work stoppages. Some parts may cause the aircraft to be out of service if not repaired or replaced. When an aircraft goes out of service it can lead to massive losses to the airline. These losses may include cancelled flights, and lost employee hours(Chief, 2011). The cost of cancelling flights is far much bigger than the cost of replenishing the worn out parts in time. Therefore, parts that are deemed critical for the functioning of the aircraft should be maintained as bench stock. Contractor should consider the consumption rate of the various parts when determining whether to maintain a bench stock(Base, 2012). Parts that are consumed fast such as the tires should be kept at high quantities. The contractor should consider the pipeline time for various parts(Chief, 2011). Bench stock parts that have long pipeline time should be maintained as inventory. The contractors should evaluate different options of delivery and chose the one that has the best pipeline time while considering the cost involved. It is important to consider variables such as the cost of repairs of different parts of the bench stock(Chief, 2011). Some parts may have high cost of repair while others may have small costs. Sometimes it is more economical to replace the parts with high cost of repair than to repair those(Base, 2012). In such cases where the cost of repair is high, maintaining a bench stock of such part is necessary. The number of aircraft the contractor is maintaining plays a huge role in determining the quantities of bench stock parts; they need to keep as inventory. High number of aircrafts will demand large quantity bench stock of parts. Shelf life is a huge consideration when determining the quantities of the bench stock to maintain. Keeping a large quantity of bench stock parts with short shelf life will lead to huge losses when they expire (Gupta, Maranas, & McDonald, 2000). The main objective of good inventory management is to reduce costs by minimizing wastages and storage costs. Contractor should regularly monitor the age of the bench stock parts (Gupta, Maranas, & McDonald, 2000). The likelihood of a part breaking down increases with age(Base, 2012). The contractor should maintain a high quantity of bench stock of parts that are old in order to maintain the aircraft when they break down. Assumptions The following variables will be assumed to affect the cost of the aircraft maintenance; 1. Number of aircrafts 2. Importation charges 3. Insurance costs 4. Days delayed 5. Cost of obsolete parts Note: The additional cost for setting up and maintaining the bench stock will be zero since man hours are already accounted for in the maintenance contract; also the facility and equipment required for storage are already in place List of Definitions Economic order quantity— A set of calculations that determine the most effective quantity to order Just-in-time – An approach of managing inventory that requires delivery of parts exactly at the time they are needed. Lead time- Paper work Lead Time + Vendor Lead Time + Stocking Time List of Acronyms JIT- Just-In-Time SIC- Statistical Inventory Control ROP- Reorder Point EOQ- Economic Order Quantity IMS- Inventory Management System ISC- Institutional Services Contract KSC- Kennedy Space Center SEMO-Supply and Equipment Management OfficerChapter II Description of the Problem Economics form the basis of good inventory management and therefore any stocking decision should be made in order to achieve the lowest overall cost. Inventory management requires consideration of three major factors; the cost of the item including acquisition costs; delivery costs and the lost work of not having the item at hand. Shortage of materials occurs as a result of poor inventory management methods and poor delivery of materials(Chief, 2011). In order to utilize the Just-In-Time strategy, the inventory management team and the logistics team must work hand in hand to enhance a proactive environment that can forecast demands and respond to them(Michalski, 2008). In the case where there lack proper coordination between logistic team and inventory management team, it is better to have some stock on hand. Having stock in hand can lead to increased costs of inventory and risks of obsoleteness, fire and theft(Michalski, 2008). It is therefore important for the contractor to have only essential materials on hand. One method employed to control and maintains the stock is the Statistical Inventory Control (SIC) method (Michalski, 2008). Using the SIC method, contractors use historical demands for parts to optimize the inventory management Figure 1: The SIC Order Cycle(Michalski, 2008) At no point should the maximum inventory be exceeded nor safety (reserve) stock be depleted(Michalski, 2008). In cases where the maximum inventory is exceeded or the minimum stock is depleted, the inventory management system should be re-examined to adjust the reorder point and safety stock. Airlines normally regulate the quantities of the bench stock to be stored by the contractor (NASA, 2012). All bench stock is normally maintained and controlled using Inventory Management System (IMS). According to NASA (2012), bench stock at one location cannot exceed $75,000 and only those parts that are indispensable should be included in the bench stock. ISC contractor supported bench stock parts are restocked by KSC ISC supply and Equipment System (NASA, 2012). Parts that are repairable and items requiring special packages are not stored in bench stocks uless a special permission is granted by KSC SEMO through the ISC contractor Inventory Management. Kennedy Space Center specifies that equipment requiring special treatment such as cleanliness specifications should not be stocked. According to NASA (2012), hazordous items such as petroleum and oils shouldnot be stocked unless approved by the KSC fire inspectors. It is not advisable to stock controlled equipment and special inventory control point equipment such as butt-weld fittings (NASA, 2012). A 30 day lead time is normally allowed for the supply of the high usage parts. This paper is case study of bench stock management of an aircraft maintenance contractor. The contractor runs maintenance on 3 aircrafts at a time and orders between 350-500 parts per aircraft per month. The contractor is in competition with their customer for these parts which are normally at zero balance due tothe customer also conducting maintenance. Contractor faces many delays and even work stoppages for parts. The cost of parts to be ordered ranges from $0.17- $500. Many times the contractor is forced to ship parts using Fedex in order to meet delivery timelines. Fedex charges per aircraft are over $4500 per month. Keeping a bench stock of common items will reduce delays, work stoppages and reduce Fedex charges. Parts required for bench stock will be enough to cover 6 aircraft. Maintaining a bench stock for 6 aircraft will provide the ability to conduct maintenance on the second set of 3 aircraft until restock arrives. The cost to order parts is $17500 per aircraft, $105,000 total. The additional cost for setting up and maintaining the bench stock will be zero since man hours are already account for in the maintenance contract, also the facility and equipment required for storage are already in place. The parts requests to be kept on bench stock are regularly used during maintenance and also the ones that are normally out of stock causing delays. Below are the delays and cost per aircraft. Acft # days delayed fedex charges 1 7 $4674 2 17 $8389 3 5 $4439 4 11 $5319 5 6 $4489 6 9 $5321 Factors Influencing Inventory Decisions Reasons to hold Inventory Keeping inventory helps the contractor to meet variation in demand (Michalski, 2009). The demand for the bench stock parts varies according to the usage of aircraft. The usage of the bench stock parts is highly unpredictable for particular aircraft. The contractor must therefore have bench stock inventory to deal with critical demands at all time. Purchasing materials at large quantities offer the contractor the economy of scale when placing the orders. The cost of shipping parts in large quantities is significantly less per item than the cost of shipping a single item. Maintaining inventory helps the contractor to take advantage of the changes in prices in the market. When the price of a certain part falls, the contractor can buy that particular part in large quantities and stock it for future use. Buying parts in large quantities and stocking them help the contractor to reduce transit time and transit costs involved. Shipping the bench stock according to the demand is quite costly. These costs can be offset by buying the parts in bulk. Long lead time, critical, and high demand items should be held in inventory at all times. The delay in delivery of critical items can lead to huge losses due to work stoppages. Reasons to avoid inventory Although there are many obvious benefits of maintaining an inventory, the quantities maintained in the inventory should be limited due to several costs of inventory. Excessive inventory consume a lot of capital that should be utilized for other economic activities (Chen, Sim, Simchi-Levi, & Sun, 2007). Contractors with excessive inventory can find themselves lacking capital for day to day operations. Inventory consumes a lot of space that must be paid for. In some cases the costs of paying for the spaces occupied by the inventory may exceed the benefits obtained from maintaining the inventory (Chen, Sim, Simchi-Levi, & Sun, 2007). Some parts maintained in the inventory has risks of expiring or becoming obsolete. Contractors should avoid maintaining large inventory to avoid cases where some parts become obsolete before use. The parts stored in inventory face numerous risks posed by fire and theft. The contractor should avoid stocking flammable materials in the inventory. Fire and theft can cause huge losses and therefore the contractor should insure the inventory against these risks (Chen, Sim, Simchi-Levi, & Sun, 2007). Chapter III Methodology Sources of Data The data was collected from management, maintenance, stores, purchasing and receiving, and logistics department (Michalski, 2008). The management office provided data such as the number of suppliers contracted to supply different parts of the bench stock. Maintenance department provided data such as the maintenance procedures and the number of parts required to maintain one aircraft per month. The stores department provided information such as the space available for storage of bench stock, the cost of storage, and the procedures involved in storage and protection of the stored bench stock parts. The supply and receiving department provided data on when orders for the bench stock parts are placed, the cost of ordering and maintaining inventory. The logistic department provided data such as the lead time, the various means of transport employed in delivering the bench stock parts, and the charges for transportation. All this data was tabulated in forms in order to compare the JIT model and the SIC model employed by the contractor under study. Procedures The researcher identified data to be collected and their sources and developed forms that were used to collect data. A written letter was sent to the contractor requesting for permission to collect data on inventory management system from all the departments involved. The letter explained the purpose of the study and the ethical considerations to be undertaken by the researcher. The researcher promised to protect company information and confidential personal information. Upon collection of the data, the Economic Order Quantity (EOQ) and Just-In-Time equation will be employed to determine what give the best value for money. Chapter IV Data Collection The following data was collected; Demand data: it was determine that the contractor uses between 350 and 500 parts per aircraft per month. This translates to an average of 425. Therefore, when the contractor is maintaining 3 aircrafts, they need 1050 to 1500 hundred parts per month. To ensure there is a reserve of bench stock parts for one month, two month quantity of bench stock parts should be obtained in the first month and replenished at a regular period of one month. Unitcost: the cost of various bench stock parts ranges from between $0.17 and $500. An average cost of $ 250 can be assumed Reorder cost: the cost of reordering for bench stock materials is over $17500 per month per aircraft Holding cost: The additional cost for setting up and maintaining the bench stock will be zero since man hours are already accounted for in the maintenance contract; also the facility and equipment required for storage are already in place. However, a cost of $0.1 per bench stock item will be assumed in order to cater for risks such as fire, theft, opportunity costs, and obsoleteness Lead time: a lead time of a maximum 17 days was determine between reordering and the delivery of materials on site Variable costs: the cost charged by Fedex was found to variable according to the level of delay. Below are the delays and cost per aircraft. Acft # days delayed fedex charges 1 7 $4674 2 17 $8389 3 5 $4439 4 11 $5319 5 6 $4489 6 9 $5321 Chapter V Data Analysis Economic Order Quantity Economic order quantity is determined using the following equation; Whereas; RC is the reorder cost, D the demand, and HC is the holding cost per aircraft. Thus, the Economic Order Quantity is given by; = = = 592 parts per aircraft For 3 aircrafts, this translates to 1776 parts per month. Optimal stock cycle length = = 1.39 of a month This translates to about 40 days Variable cost per unit time: VC = + = + =12564+ 403 =$12,967 Just-In-Time Method Number of Kanban = = = 14.45 Maximum stock level = K X C = 14.45 X 500 =7225 In the case of 3 aircrafts, the maximum stock level is 21675 Chapter VI Recommendations Both SIC and JIM are needed to optimize the bench stock at a level that supports the contractor to maintain the aircrafts reliably. The bench stock parts that have large lead time available should depend on the JIM to reduce the costs of inventory and the risks of fire and theft. However, parts that are needed in the case of emergency breakdowns have no lead time. This lack of lead time implies that the contractor needs to have a well-managed and quickly accessible inventory to deal with emergency. The JIM optimization should be employed for proactive maintenance work, while SIC should be employed for reactive works. Based on the above reasoning, it is recommended that, the contractor to use the store room inventory exclusively for parts needed in emergency maintenance of the aircraft. The contractor however should avoid relying on the inventory to do proactive maintenance services. It is recommended that the contractor should ensure that bench stock parts needed for emergency maintenance consume about 10% of the space available for storage. The contractor should classify materials according to their criticality. This classification should ensure that the contractor does not experience stock outs on critical items. Experiencing stock out on critical items can lead to serious consequences to the airline. Therefore classification of the material should be done based on the consequences of the stock outs. References Base, T. A. F. (2012).By Order Of the Fighter Wing Commander Tyndall Air Force Base. Fob, 7250, 7274. Chen, X., Sim, M., Simchi-Levi, D., & Sun, P. (2007). Risk aversion in inventory management. Operations Research, 55(5), 828-842. Chief, I. C. B. M (2011). Contractor-Operated Parts Stores: Is Change Overdue?. All FlKEjBUINAL-LlGtSnCS, 12. Gupta, A., Maranas, C. D., & McDonald, C. M. (2000). Mid-term supply chain planning under demand uncertainty: customer demand satisfaction and inventory management. Computers & Chemical Engineering, 24(12), 2613-2621. Michalski, G. (2008). Corporate inventory management with value maximization in view. Zemedelska Ekonomika-Praha-, 54(5), 187. Michalski, G. (2008). Value-based inventory management. Value-Based Inventory Management: journal of Economic Forecasting, 9(1), 82-90. Michalski, G. (2009). Inventory management optimization as part of operational risk management. Economic Computation and Economic Cybernetics Studies and Research, 213-222. NASA. (2012). Supply and Equipment System Manual. Florida: John F. Kennedy Space Center. Read More