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Optimization of Inventory |
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Optimization is probably the most overused word in
management today. But what is optimization? The Concise
Oxford Dictionary defines optimization as: “the most
favorable condition; the best compromise between
opposing tendencies; best or most favorable”. Before
exploring the implications of that definition let’s go
back and understand MRO inventory.
MRO inventory includes all the maintenance spares
carried for responding to both breakdowns and scheduled
maintenance, it covers all the operating supplies
carried to keep the process running, it covers all the
inventory held by OEMs (Original Equipment
Manufacturers) to service the equipment they sell, it
covers all the inventory held by suppliers that becomes
your inventory (such as bearing suppliers). It is a very
wide field. |
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For all types of inventory there are only three reasons
why you purchase and hold onto inventory:
1.To enable supply in a timely manner. This means that
when you need the part you need it faster than it can be
supplied from your suppliers. You need the part and you
need it now !
2.Project or shutdown work. With project work and
shutdowns you have the uncertainty of what might be
needed, perhaps the timing of when it might be needed
and a workforce and timelines that can’t wait. You must
hold some inventory.
3.Purchasing and manufacturing efficiencies. Sometimes it
is just not economic to buy spares on |
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a piece-by-piece basis. Therefore you buy the minimum
economic quantity and have a spares inventory investment.
But if this was all there was we would all hold only as
much inventory as we really need right? Yes, that’s
right but this is not all there is! You see sometimes we
end up holding excess inventory because there have been
changes since we last determined our appropriate holding
(yes, we may have calculated the wrong inventory level
in the first place but I’ll let that go for now.)
Some of the changes you might experience that will
change your inventory requirements include:
Improvements in reliability (note that carrying spares
doesn’t improve reliability it only reduces repair time
but improved reliability results in reduced demand for
spares). |
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Changes in the criticality of the equipment due to
market or technology changes
Changes in the capability of suppliers as they have
improved their systems
And this is where optimization comes in. Using the
definition of optimization from the Concise Oxford
Dictionary, typical optimization programs calculate the
‘compromise between the opposing tendencies of cost and
availability’. This is achieved by recalculating the
required holding and safety stock. Sometimes,
optimization is presented as identifying excess or
potentially excess holdings through a review of slow
moving stock.
Follow these Four solutions to
Optimize Your Inventory :
1.Eliminate Dead Stock
2.Perform an ABC Analysis of your Inventory
3.Arrange Stockless Buying / Systems Contracting
4.Use Vendor Managed Inventory
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The fact that optimization programs base their
calculations on ‘hard data’, such as your usage history,
makes the approach particularly appealing. With this
kind of solid input the results must be right - right?
Sorry, wrong.
There are two problems with the ‘data only’ approach.
First, historical data, no matter how accurate and
‘clean’ it is, only tells us what ‘has been’. When it
comes to your inventory investment you are more
interested in what ‘could be’. Second, the data more
often reflects the behaviours of your team rather than
the actual demand for your inventory. Who among us can
say that our team members don’t take some ‘just in case’
items that distort the usage data?
As a result you are forced to make assumptions
(sometimes implicitly) about the characteristics of both
demand and supply for your parts. These assumptions are:
that what happened in the past will happen in the
future, and that you cannot change these outcomes or the
behaviours influencing them. This approach forces you to
work within constraints that may or may not be real.
And this is why optimization doesn’t truly optimize, it
only recalculates within a set of assumed constraints,
it doesn’t challenge those constraints. |
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