TechServ LLC
--an Affiliate of TechLabs
TechServ LLC
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(Preprint of an article appearing in the Maintenance Manager's Newsletter, October 1998)
This is the first in a series of short articles on making your maintenance and facility management systems more effective. TechServ is an IT and maintenance engineering company, a subsidiary of TechLabs, in business with its predecessor since 1967. TechServ is devoted to maintenance and facility automation, and improving maintenance operations trough the intelligent application of information technology, operations analysis, training and data management.
TechServ frequently works on fixed price contracts.
Good inventory management results not only in:
(1) cost savings and inventory reduction, but also:
(2) reduced capital costs through longer equipment life,
(3) higher equipment and production uptime, benefiting the bottom line as well as the customers.
(4) employee, management and stockholder (or taxpayer) satisfaction, and
(5) demonstrating that good management practices are being used on a daily basis.
Sophisticated (but not complicated) inventory management can easily save an enterprise the costs of the entire inventory management system, if it is designed as a strategic management tool, not just a bookkeeping system.
Inventory systems which support either plant operations or facility and maintenance management must meet multiple goals:
1. They must provide the parts needed at the time needed, with acceptable delays and acceptably low out-of-stock probabilities (no system is perfect!).
2. They must be low in total cost of inventory, measured in terms of inventory shrinkage, obsolescence, and the cost of capital devoted to inventory (less inventory means more money available for other needs).
We have repeatedly found that careful analysis based on facts and probabilities will show major savings and deficiencies in an inventory system, and often these imbalances in stockage are contrary to what intuition or casual inspection would reveal.
In one recent case, we discovered that the client had over 5 years' inventory of one item which tends to deteriorate in about a year, but the low unit cost of that item led the warehouse staff to ignore the problem.
In another case the item for which dollar usage was most excessive with respect to demand was a middle-priced component which was so ordinary that it escaped review.
In a third case data analysis showed that the real annual cost of inventory was 3 times as important to profit than equivalent dollar savings in manpower, yet the organization was intent on cutting staff, not optimizing inventory and procurement strategies.
Effective inventory management depends on a well-known statistical result: the dollar usage and required stock of inventory items, when sorted in order of size, shows a statistical distribution which is common to human endeavors: the exponential distribution. Almost all of the time, between 10 and 20 Percent of the items in an inventory account for 90% of the costs. This is the basis of the ABC method, which pinpoints where Management must pay attentionin a large inventory system.
There are three basic methods of evaluating inventory usage:
1. Dollar usage per month of each item.
2. Number of months of inventory on hand.
3. Excess inventory dollar stock in excess of stockage and emergency requirements, based on acceptable out-of-stock probability and EOQ.
Each has its uses, and all three need to be tracked.
Following the experience of the heavily skewed nature of typical inventories, people have come to use ABC Analysis as the basic management tool (whence the title of this note). ABC Analysis depends on identifying three groups of stock:
A: The items representing the top 10% in total cost, based on criteria 1, 2 or 3.
B. The items representing the next 10% in total cost, based on criteria 1, 2 and 3.
C. The remaining items, again based on criteria 1, 2 and 3.
The Payoff: In our experience Category A (the top 10%) and sometimes Category B (the next 10%) account for 90% of the inventory cost.
In a recent case, we found that the client could control 90% of the issue cost of a 1586-item inventory by watching only 215 items (Criterion 1, Categories A and B), about 2.2% of the items. The specific items to be watched were not obvious before the analysis was done. An analysis can be performed for Criteria 2 and 3, depending on the client's financial rules.
Below is an actual clip from the summary spreadsheet of that case. The entire analysis tracks every item by usage, identifies the "hot" items, and picks up anomalies which might require further investigation.
Anomalies might result from theft, from unexpected failure rates, from problems with the reorder cycle, or from a disconnect between inventory requirements and changes in the facility or systems that the inventory supports.
Managing inventory is a day-to-day operation requiring online accounting and statistical analysis, and daily exception management reporting.
The payoff: combined lower inventory costs with rapid response to unusual demands, and, at the same time, less likelihood of running out of an item.
Good analysis demands good data (which many inventory systems supply) but easy and timely management access. It must be based on facts, not hypotheses or educated guesses. Moreover this analysis must be ongoing, at least 3 times per inventory turnover period. This in turn requires:
1. an accessible IT structure,
2. good continuing analysis of actual usage, more than a bookkeeping system, and, most important,
3. good user interfaces, good training, and
4. a "buy-in" by the entire staff, to assure that data are used to manage the operation, and are timely and accurately recorded.
Good inventory management, as we have described it, results not only in:
(1) cost savings and inventory reduction, but also:
(2) reduced capital costs through longer equipment life,
(3) higher equipment and production uptime, benefiting the bottom line as well as the customers.
(4) employee, management and stockholder (or taxpayer) satisfaction, and
(5) demonstrating that good management practices are being used on a daily basis.
Results are generally demonstrated in 6 months or less. The payoff period is generally 12-18 months.
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