UNIT 12 SPARE PARTS MANAGEMENT

Objectives
After reading this unit, you would be able to:
• define the objecties and types of spare parts management in Materials
Management;
• describe six stages of life cycle of spare parts management and importance of
each stage;
• identify some myths about spare parts management;
• describe the linkage of other systems with spare parts management systems; and
• discuss other aspects like cost control, organization and problems regarding spare
parts.
Structure
12.1 Introduction
12.2 Spare Parts Management: Connotation
12.3 Types of Spare Parts
12.4 Life Cycle of Spare Parts
12.5 Myths about Spare Parts Management Program
12.6 Spare Parts Management and Other Systems
12.7 Benefits of Spare Parts Management
12.8 Cost Control for Spare Parts-Role of Maintenance
12.9 Organising for Effective Spare Parts Management
12.10 Unique Problems of Spare Parts Management
12.11 Summary
12.12 Self Assessment Questions
12.13 References and Suggested Further Readings

12.1 INTRODUCTION
Margins are narrowing down, budgets are stretched and operational expenditures are
rising. One must find ways to maximize revenues and reduce the operating costs.
Knowing what is in your inventory is the first step. Optimal spares conditioning is a
necessity for the entire types of maintenance tasks, such as inspections, protective
maintenance, and repairs. With the exception of protective activities, spare parts for
maintenance tasks are usually required at random intervals. Thus, the rapid and safe
coordination of the demand for spare parts with the supply of spare parts at the
required time is a vital factor for the prompt execution of the maintenance process.
Missing materials are one of the most frequently cited rationales for the interruption in
completion of maintenance tasks. As spare parts for equipment are frequently of very
high quality, merely increasing warehouse stock cannot solve this problem. A
maintenance planner should know about potentially essential parts and their
accessibility. Effective maintenance management results in higher productivity, better
quality and reduced cost of operations. Spare parts play a vital role in these. You will
read about them in more details in the course MS-57: Maintenance Management.
Most of the issues discussed in this unit are taken from unit 7 of the Maintenance
Management Course.

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Inventory Policies and
12.2 SPARE
Systems PARTS MANAGEMENT: CONNOTATION
“What you visualize is usually, what you get”. You cannot plan and schedule work
effectively unless you know about the job at least 24 hours before the job has to be
started. Appropriate preparation and management of spare parts inventory is a
significant module of an effective spare parts management program. If the accurate
parts are available when needed for everyday maintenance or repairs, downtime is
prolonged. If moreover many parts are on hand, the organization incurs tremendous
costs on carrying the inventory. There exist many approaches to supervise spare
parts.

Every business such as mining, chemicals, and service providers such as call centers,
banks, and insurance corporations and hospitals use technical equipment to manage
their day-to-day work. These tools are not just significant assets in every single
company, they also require maintenance and depending on the category and scope of
these tools, this can present a real maintenance challenge. In general these tools are
denoted as spare parts. Ahead of discussing the impact, lets exemplify the term
“Spare parts” and ascertain a widespread perceptive. Spare parts mean a component
or a sub-unit or a foremost assembly, which exists in stock for replacement when
desirable. “Spare parts” refer to the part requirements for keeping equipments in well
operating situation by assembles repair and replacement needs forced by breakdown
and preventive and prognostic maintenance etc. The spare part management function
is decisive from an operational standpoint especially in asset intensive manufacturing
industry such as refineries, chemical plants, paper mills, etc as well as an organization
owning and operating costly assets such as airlines, logistics companies, etc.

12.3 TYPES OF SPARE PARTS

Spare parts, maintenance and operating supplies comprises of all variety of parts and
materials essential to uphold the production assets in acceptable operating condition so
as to accomplish desired production results in terms of quality, quantity and time.

The three basic types of spares parts are:

a) PM spares: Those replaced during preventive or opportunity maintenance
b) Repair Parts (Breakdown spares): those required to replace parts that fail
during service, and
c) Overhaul (Shutdown) Parts: Those required during planned overhaul or shut
down of the plant.
The quantity and the time of requirement cannot be predicted for the repair parts.
Only, the chance of their requirement can sometimes be predicted. Statistical
methods are needed for their inventory control.

12.4 LIFE CYCLE OF SPARE PARTS

Spare parts go through the following six stages in their life cycle.
1)Design and specifications (The right spare)
2)Determination of initial requirements (The right quantity)
3) Procurement (The right Price)
4)Storage and preservation (Minimum custodial and inventory carrying cost)
5)Issue and replenishment (Minimum downtime cost through inventory control)
6)Disposal of damaged, surplus and obsolete spares (Minimum damage and
2 maximum disposal value)
The details of each phase will be discussed below.
Stage 1: Design and Specifications
Stringent specifications, high quality of manufacture and careful operation/
maintenance of the machine reduce consumption and cost due to replacement of
spares. Ideally, spare parts from the OEM (Original Equipment Manufacturer) should
be used. Spares have a huge range - each one having several specifications, which
are not available to the user. Without actual fitting, it is not possible to tell whether a
part will fit or not. This is clearly is not practicable as spares are stocked in advance
of requirement. It will be worth paying for a certificate or warranty for the spare part
from its supplier, at least for critical and expensive parts. Only large consumers such
as railways, airlines, transport fleets, armed forces etc. can assess the life of parts by
destructive or accelerated life-testing or from the quality records of the manufacturer.
Warranties cannot compensate for the loss due short life of a part. They only
compensate for the cost of the part. Spurious, even reconditioned and defective parts
or inferior quality parts are often sold at a lower price than that of the OEM. One
should never buy from unauthorized dealers or unproved suppliers.
Stage 2: Determination of Initial Requirements
The machine supplier usually gives a ‘Recommended List of Spares’ to the user. This
list should be scrutinized for additions that are basically profit-oriented. The supplier
should be asked to give consumption rate for various spares. The maintenance
engineer can than better assess the spares to be stocked for a chosen initial period –
say, for one to two years based on his experience with similar items, number of
machines installed, age of machines, operating conditions, engineering factors and the
inventory control system in operation. Casual selection of spares at this stage will
create a large inventory of nonmoving spares. In initial stages only a few will need
replenishment.
Spare parts planning begin with the selection of the machine. At this stage, weight
must be given to the following:
• Complete range of parts serviced by the manufacturer including those from his
sub-suppliers to be available, along with illustrated catalogues for applicable
models
• Assurance of supply for the lifetime of the machine
• Supply of manufacturing drawings as needed
• Availability of observed/estimated consumption rates (not sales data) of spare
parts
• Technical data/specifications for assessing failure rate
• Warranty for quality and for life of supplied spares
• Guidance in identification, storage (for sensitive items) and preservation
• Warranty for quality and for life of supplied spares
• Guidance in identification, storage (for sensitive items) and preservation
• Warranty for quality and for life of supplied spares
• Guidance in identification, storage (for sensitive items) and preservation
Using this information and his own experience, the maintenance engineer assesses the
initial requirement for a period that will cover one lead-time or one review period (and
safety stocks) for spares for all types of maintenance, insurance items and repair pool.
This is a painstaking and time consuming task but it will reduce considerable
difficulties later. Prices of spares are usually negotiated at the time of buying the
machine but a list of prices for further procurement should be agreed upon at this
stage itself.
3
Inventory
Stage 3: Policies and
Procurement
Systems
For highly specialized equipment or for that likely go out of production, the user should
assess their availability. There is not much room for competitive procurement of
spares except at the time of buying the machine. Machines using standard
replacement parts (such as ball/roller bearings and hardware) should be preferred.
Non-standard parts are always expensive, and often difficult to get. The contract for
supply of spare parts should take care of the points made earlier.

Stage 4: Receipt, Storage and Preservation

On receipt, the spare parts are checked for correctness of quantity and quality before
storing them. The principles here is ‘a place for everything in its place’ Spares are
stocked machine-wise. Items common to more than one machine are stocked
together. The location of each spare is marked on the bin card for the spare. These
bin-cards are also the account cards, which indicate the receipt and issue (and stock
balance) and particulars (part number etc) of the spare. Mentioning details of
interchangeable of substitute spares is a great help in an emergency.

Security of spares in custody is the responsibility of the storekeeper. Small and

expensive spares can be easily pilfered. They are kept in a locker. Spares are issued
only to authorized maintenance personnel who need them for their work. Physical
stock of all items should be checked with ledger balance annually and differences
reconciled. Errors are investigated to avoid recurrence.

Different preservatives and methods are needed for different spares. Corrosion is the
greatest enemy of all spares. Ball and roller bearings are easily damaged by dust/
humidity and should be kept in original packing till needed. Heat sensitive electronic
items like transistors should be kept in cool places. Rubber and textile items should
not be exposed to direct sunlight or to come in contact with mineral oils. Rubber belts
and tubing should not have twists or sharp bends when stored. The condition of all
spares including the surplus or obsolete ones should be checked regularly such as at
the time of annual stocktaking.

Stage 5: Issue and Replenishment: The Reorder Level System of Inventory

Control
The replenishment of parts withdrawn from stock involves two basic questions,
namely, ‘How much to order?’ and ‘When to order?’ The quantity (and especially)
the time of replenishment has to be determined scientifically as they profoundly affect
the cost effectiveness of inventory management. Figure 12.1 shows the stock position
of a typical item being used up at a steady rate of 30 pieces per week. The value of
an initial stock of, say 300 pieces, each costing Rs.10 will be Rs.3000 (point A). It
will linearly fall to zero (point B) after 10 weeks. If the item can be ordered and
received instantly, we may order it only at this point. Then the stock will rise to the
original value of Rs.3000 (Point C), assuming that we ordered 300 pieces. This is
called ‘Order quantity’ or OQ, or just Q. It is expressed either in rupees or in
numbers. The average inventory during this repeating cycle of steady consumption is
obviously half the OQ i.e. 150 pieces or Rs.1500.

The inventory carrying cost consists of borrowing (or the interest lost) on the capital
tied up in inventory and that of handling damage, aging, storage, preservation and
obsolescence. These depend upon the nature of the part but can be approximated to
an annual 20% of the cost of the spare part i.e., Rs.300 per year. We can reduce this
cost by ordering less-say only 150 numbers (Rs.1500) at a time. The stock graph will
now be as shown by the lower line in Figure 12.2. The average inventory carrying
cost per year will be Rs.750, but we will have to order twice as frequently as before.
The ordering cost is for advertisement for supply, contacting and selecting the supplier,
paper work and postage involved in correspondence, receiving, inspecting, and putting
4
in bins. Local purchase from dealer’s stock may be less expensive.
 3000 (A) (C) 300

Stock
Value OQ 150
(Rs)

0 10 (B)
Weeks
i
Figure 12.1 Figure 12.2

In the present case, if ‘S’ is the cost of placing an order, say, Rs,100 per order, then
we will spend Rs.100 on ordering 300 pieces once annually, or Rs.200 if we order 150
pieces twice annually. If the annual cost of carrying inventory ‘I’ is 20%. It will be
(Q) (I) /2 for an order size of Q. If the value of annual usage of the item is Rs. N, we
will place N/Q order per year, and the annual ordering cost will be (S)(N/Q). The
annual total cost is the sum of these two opposite costs will be [(Q)(I)/2+(S)(N/Q)].
It can be shown that this cost will be minimum when Q = (2A. S/I) (2A. S/I) , this
minimum is called Economic Ordering Quantity (EOQ).

In the above case, EOQ= (2)(10)(300)/0.20 = Rs.173/300 = 0.57 piece. Since

fractional spares have no existence this will be rounded off to 1. Even with large
values of Q, the EOQ is hardly more than 2 or 3, because the high cost items usually
have very law consumption (failure) rate and the product (Unit Cost Annual
consumption) will be small. That is why EOQ is meaningful only for the high usage
(fast moving) spare parts, which are very few in range, and the monetary advantage
of EOQ is insignificant. On the other hand, the risk of obsolescence and uncertainly
of long-term availability outweighs the EOQ advantage. Finally, OQ powerfully
affects safety stock and the risk of stock-out. This consideration is far more
important than the above.
Safety stock
The second question in an inventory system is ‘When to order?’ Spares have to be
ordered ahead of the possible need as there is an ‘internal’ lea-time of several weeks
to months to process an indent, obtain quotations, select supplier and place the supply
order after arranging for funds (in case of imports). There is also an external lead-
time of several weeks to months, for the supplier to organizes dispatches,
transportation, customs clearance etc. the total lead-time (abbreviated as LT) must be
allowed for while ordering any kind of replenishment.
C
A

r
Recorder
Level

35
(E)

Safety (D) (B)

Stock
0 7 10 Weeks
Figure 12.3 5
Inventory
In FiguresPolicies
12.3, and
a replenishment time of three weeks has been set off (Point D)
Systems
backwards from the day when stock is expected to fall to Zero. On this day (D) the
stock would have fallen to 30 i.e., the expected consumption during LT.A little safety
stock, of say 5 pieces, to cater for any unexpected increase in this consumption after
the order is placed, is added. The order should be initiated when the stock falls to
30+5=35(point E). This stock level is called the Re Order Level (ROL).

The general inventory expression is, ROL = Average Consumption during LT + Safety
stock.

Notice that in a typical operation of this ROL System (Figure12.3) the safety stock
remains at full value, whereas the cycle stock i.e. the OQ, gets consumed and
replenished resulting in an average inventory of half the OQ. Hence, it can be said
that one unit of safety stock is twice as expensive to carry as one unit of cycle stock.
Minimizing safety stock, subject to some acceptable risk of stock out during the LT, is
much more important than the economic of order quantity.

Studies have established that the consumption of repair parts during any period (such
as LT) varies randomly and asymmetrically, following the Poisson probability
distribution. From this, we can calculate Safety Stock (SS) as under:

SS=(k).x ( M ), where M is the average consumption during lead-time, and K is the

safety factor, which takes the following values for different levels of assurance of
availability:

Assurance of availability: = 50% 70% 80% 85% 90% 95% 98%

Safety factor: = 0.0 0.7 0.8 1.0 1.3 1.7 2.1

Note that the safety factor ‘k’ increases rapidly with the demand for higher assurance
so that for every additional item in SS we get relatively less and less additional
assurance. At some point it may not be worth spending so much on SS inventory.
This is used in a decision matrix shown later in Figure12.5. This matrix has to be
approved by the top management as it reflects their policy of delivering different
levels of service for investment in this non-moving inventory (safety stock).
Incidentally, an assurance level of 90% does not mean that 90% of the quantity
ordered will be delivered ex-stock. It means that 90% of the orders will arrive on time,
on time, or that the risk of non-availability ex-stock was 10%.

ABC Analysis – Pareto’s Law: In 1948, the Chief Materials Manager of General
Electric Co. in USA listed the annual consumption value of each and every material
that the company used in decreasing order of magnitude. He noticed that the top
15 to 20 percent of the whole range of items contributed to almost 80% of the total
cost contributed by all items. He designated them as A items (Figure 12.4). The next
30 to 35% of the range of items contributed to 15 to 20% of the total cost (B items).
Finally, the last 50%of the range of items contributed to barely 5 to 10% of the total
cost (C items). ABC analysis suggests that we should control ‘A’ items tightly, ’B’
items carefully and “c” items loosely i.e. concentrate on preventive and corrective
action only for a few, worthwhile items. For spare parts we should give generous
safely stock for C items (we can afford it), adequate for B items and minimum for A
items – in short, allot high, medium and low value of ‘k’, respectively.

The Italian economist Wilfred Pareto, after whom it is named, first discovered this
pattern eighty year ago. He had shown that that every natural phenomenon seems to
concentrate in a few points or stages. Typical examples are city traffic on a few
roads, failures concentrating in a few components of a machine; most cost of spare
parts contributed by only a few spares.

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Annual consumption value
___________________________________
___________________________ A items (20% range; 80% value)
______________________
.........................................................................
______________
________
_____ B items (30% range; 15% value)

___
.........................................................................
__

__ C items (50% range; 5% value)

__
__
Figure 12.4: ABC Analysis

Activity 1
List out the spare parts inventory consumption of an organization and carry out ABC
analysis.
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Criticality Analysis (V-E-D Analysis): While ABC analysis controls the cost of
having the inventory when not immediately required; VED analysis controls the huge
cost of not having a part in stock (safety stock) when it is needed. SS reduces the risk
of non-availability. For repair parts, the maintenance engineer must define items
whose non-availability will cost heavily to the organization (such as due to machine
downtime, risk of accidents and loss of opportunity of sale) as very critical or vital (V)
items. The moderately critical items are defined as essential (E) items, and the rest
are desirable (D) items. Figures 12.5 shows atypical decision matrix for the joint
ABC/VED classifications for repair parts along with values of K.
‘A’ITEMS ‘B’ ITEMS ‘C’ ITEMS

VITAL ‘V’ 90% (k=1.30) 95% (k=1.70) 99% (k=2.30)

ESSENTIAL ‘E’ 80% (k=1.00) 90% (k=1.30) 95% (k=1.70)

DESIRABLE ‘D’ 75% (k=0.70) 80% (k=1.00) 90% (k=1.30)

Figure 12.5: A typical Decision Matrix for ABS/ VED

Example: A gate value is used at a rate of (m=0.56) per month. The LT is 3 months,
so that M, the consumption during LT is (o.56x3) = 1.68. The B/V item for which
k= 1.7 (from figure 12.5). Hence, ROL= 168+(1.7) = 1.68 1.68 +2.20=3.88,
7
Inventory Policies
rounded off to 4.and
If this were a V item the SS would be 1.68 and the ROL would be
Systems
3.36 rounded off to 3.
We can define the service level in terms of ‘period to stock out’ or ‘ number of stock
outs in a given period, such as one year’. The former is a more meaningful measure
to a maintenance engineer. Note that the assurance of availability is for one inventory
cycle. If the demand for replenishment is once a year we will be exposed to the risk
of stock out only once annually. If order is once in six months the exposure will be
doubled. Thus, suppose that the tolerable ‘period to stock out’= T years. (i.e., 1 stock
out in T years). With an order Quantity Q, and annual consumption rate A, we will
have A/Q replenishment orders per year and (A) (T)/(Q) in T years. Of these, (A)
(T) (r)/Q will be at risk, where is the risk of stock out per order cycle. Since one stock
out in T years is acceptable, we can put (A)(T) (r)/Q=1, from which we get the
assurance level of (1-r) i.e. 1- [(Q)/(A) (T)]. This figure is to be used to calculate
SS. A decision matrix can now be drawn for various periods to stock out and related
levels of assurance (with corresponding values of k. A and Q can be expressed in
numbers or in Rupees.
The following example will show the calculations using different value of A and T:
A A=Rs.2,000 Rs.20,000 Rs.50,000
Q Rs 4000, common for all cases for illustrative purposes
T 1yr 5 yr 10 yr 1yr 5 yr 10 yr 1yr 5 yr 10 yr
1-{(Q)/(A)(T) 0.00* 0.60 0.80 0.80 0.96 0.98 0.92 0.98 0.99

* In this case, the assurance level becomes negative. Negative or Zero assurance
means that no safety stock is needed (k = 0). The high OQ itself gives the
protection against stock out.
The appropriate values of k, the safety factor to be used to calculate safety stock can
now be read off from a table of Poisson probabilities. Typically, if A=Rs.20,000 and
Q = Rs.4,000 then for T=1 year, the assurance level works out to 80% for which the
value of k ( from Poisson tables) is 0.80. For T = 10 years, k will be 2.1. As will be
seen, the value of k (and the safety stock associated with it) rises as the ‘stock out-
free’ period increases from1 year to 10 years.

In the Reorder Level (ROL) system, the ROL and Q are fixed but the time for
replenishment varies inversely with consumption. The ROL is like the ‘reserve’ in the
fuel tank of a motorcycle. Replenishment quantity is always the same i.e. full tank, but
the time for replenishment will very.

Periodic Review System: In the periodic review system, replenishment is at fixed

intervals but the OQ changes. Figures 12.6 shows an ordering cycle with a Review
Period (RP) of six month i.e., interval between points A, B, and C. On the day of
review (Point A) the physical stock in hand plus ‘dues in’ i.e. order placed earlier but
not received yet, are noted as ‘Assets’. Forecast consumption during (LT+RP) plus
(SS) is calculated as ‘Liability’. Excess of Liability over Assets is the order quantity.

Order is placed at A, B, C etc; stock is received at D, E, F, etc after Lead Time (LT),
and Quantity on order = Liability – Assets

= [Consumption during (AB+BE)+SS}]-[Stock on hand &

on order]

= [Consumption during AE] + [AH+0], (assuming that no

order was pending)

= HG
8
 G

Stock
Level H

LT LT

0 A D B E
Weeks
Figure 12.6: An ordering cycle with a review period of six months

In the above example, stock On Order = 0 because the LT is small compared to the
Review Period. If the LT exceeds the Review Period, some earlier orders would still
be pending and will have to be included in the ‘assets’. In this system, the forecast
has to cover both the LT and the Review Period. Safety stock caters for both LT and
review period. Typically, if the consumption rate (M) of an item is 5 per month, the
LT is 4 months, and the review period is 6 months, then, Liability= (5)(4+6) +SS for
(4+6) months.

SS is calculated as for the ROL system using the appropriate safety factor, k. Thus, if
the consumption during Review Period Plus LT was 50, the SS was 10, the stock in
hand was 20 and the stock on order (also called ‘dues in’) was 12, the OQ can be
calculated as under:
OQ = Liability – Assets = (50+10) – (20 +12) = 60 – 32 = 28
Theoretically, this system requires higher safety stock than the ROL system but in
both systems, for most spare parts the error caused by rounding off fractional order
quantity overshadows the precision of other calculations and this disadvantage can be
ignored. The review cycle can be matched to the supplier’s production cycle so as to
get stable, predictable lead times for supply- especially for the parts that are not
normally sold off the shelf through a dealer network. All spares from the same
suppliers can be packed and transported together cheaply, unlike the piecemeal – and
hence expensive- deliveries for the ROL system. Therefore, large transport
companies who deal directly with their suppliers prefer this system. Those having
distributed stocks of spares (users or dealers), obviously have to use this system. It
does not need the excessive amount of documentation of the ROL system. An
‘Economic Review Period’ can also be calculated for this system. However, for the
same reasons mentioned earlier for the ROL system, other factors (such as matching
with supplier’s production cycle etc) neutralize the economic advantage.

Slow Moving Items: The consumption rates for fact moving items can be assessed
fairly accurately even without any consumption data. Later, data accumulates quickly
and the rates can be updated fast. The relative period-to-period variation in
consumption increases as the mean value of a Poisson distribution goes down. For
items having low consumption rates, consumption data over moderate period does not
give a reliable average; an average based on short periods is extremely unreliable.
Most spares fall into this category.

The variation of consumption from period to period is so great that any moving
average that we may use will have large error. Basing the SS on the ‘higher-than- 9
Inventory Policies
true-average’ and
will further inflate safety stock. Hence, we have to apply the statistical
Systems
approach of ‘Prediction Intervals’ in which the ROL is calculated from the following
formula:

ROL = C (T2/T1) + z C(T2/T1)(T 1 + T2)

Here, T1 is the base period during which the consumption was C. The lead-time is T2,
and Z (Similar to the safety factor ‘k’) takes the value of 0.65 and 1.65 for 75% and
90% levels of assurance respectively, fractions are to be rounded off as in case of the
fast moving spare parts. For the periodic Review System, T2 includes Review Period,
besides Lead Time.

Example: C=3; T1 = 2 years. For an assurance level of 90% (z=1.65), and forecast
base of T2 = 0.5yr, ROL =3(0.50) / 2+1.65 3 (0.50/2) (2 + 0.5) = 3.12, i.e. 3
numbers of spares. Ordinarily, we would have calculated the ROL as 3(0.50/2)+1.3
3(0.50/2) = 1.87,i.e. 2. It is conceivable that in the particular two years of our
observation, the consumption happened to be on the low side and our estimate of the
average was understated. It could also have been over stated, as the variation from
period to period is quite high in the Poisson distribution. The method of prediction
intervals is a via media. It gives safety against underestimates but without increasing
safety stock too much.

Activity 2
In a University library, randomly select 1000 books. Verify the frequency of issue of
these books to readers. Categorize the books as fast, slow and non-moving types (a
typical FSN analysis). What management decisions you are taking for slow and non-
moving items?
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Insurance Spares
When M, the consumption during LT is only a small fraction, the rounding off error is
large, as can be seen from the following examples. (k is kept at 2.1 for all values of
M, for easy comparison).
M 1 0.5 0.1 0.01
SS 2.1 1.47 0.7 0.21
ROL=M+SS 3.1 1.97 0.8 0.22
Rounded off to 3 1 or 2 0 or 1 0 or 1
The rounding off error in the last two cases is (-100% to + 40% ) and (-100% to +
350). This will increase further for still lower consumption rates (i.e. for very long life
items). The safety stock given is already large, since k=2.1 (98% assurance).
Rounding off adds still more to safety stock. If these spares are extremely critical
(and expensive) both the options i.e., of stocking zero or 1 are wrong, have a large
margin of error, and extremely expensive. Such spares are called ‘insurance spares’.
They are indeed in the nature of insurance as both the options have a large order of
10
error.
The maintenance engineer naturally prefers to stock these items (which eventually
become the non-moving items) whereas the high cost of stocking makes the
management question the wisdom of stocking them. This decision has to be made on
the basis of risk/cost relationship. Thus, if C1 = Cost of the spare (as quoted by the
supplier at the time of buying the machine), say Rs.1 lakh, C2 is the expected loss due
to non-functioning of the machine during later period of its life, say Rs.20 lakh, then
the ratio (C1/C2) = 1/20=5% can be used as a ‘break even point’ for making this
decision. The maintenance engineer makes his best judgment as to whether the
probability of requiring the spare part during the lifetime of the machine would exceed
this figure, if it is likely to, then the spare is to be stocked; otherwise the decision is
postponed till more experience on the machine is available. At that point the same
question is again asked.

Rotable/Floats/Repair Pool
A repairable item or assembly is called a Rotable, float, or repair pool. It goes through
a repair cycle. That can be treated as the LT, the other calculations being the same
as for other repair parts. They, amongst the installed costly electric motors (‘A’ item)
of a particular model which is also very critical to production (‘V’ item) there are on
an average 3 failures per year. The Repair cycle time (treated as LT) is two months.
A-V items are given 85% assurance in this organization (k=1.0).

Hence, ROL =(3) (2)/12+1.0 (3920/12] = 1.2, rounded off to 1.0. This is held in
stock as a rotable, float or a repair pool. In a large airline or transport fleet, several
engines may be kept in the repair pool on this basis. A very critical, expensive and
long life repairable them can also become an insurance item for which the decision
will be to stock 1or none.
Stage 6: Disposal of Damaged, Surplus and Obsolete Spare Parts
An organization expecting good resale value for its surplus spare parts should ask
itself whether it would buy ‘second hand’ spares from another unit as any price other
than scrap value. One can never be sure as to how long the parts had been in stock
and what deterioration had set in during storage. Such spares get some value only
when they are sold along with the used machine itself. Further, it is not wise to dispose
off spare parts applicable to existing machines simply because they had not been
used. Only stock of insurance spares exceeding 1 could be sold off-but not at scrap
value. It is safer to carry the inventory. Possibilities should be explored for alternative
uses or as substitutes (Even with modifications) for the surplus/obsolete spare parts.

Activity 3
Carry out a detail study of spare parts management in an organization. Examine each
one of the six stages of spare parts life cycle and give suggestion for improvement.
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Inventory Policies and
12.5 MYTHS
Systems ABOUT SPARE PARTS MANAGEMENT
PROGRAM
There are certain misconceptions which could deviate the reader from understanding
the concepts with respect to spare parts management, the below mentioned myth can
facilitate in getting rid of it:

Table 12.1: Myths about Spares Parts Management Program

S.No. Myth Fact

1 Spare parts management Spare parts management process facilitates and

is a blockage supports real-time part selections, providing
cost-effective design decisions.

2 Spare Parts management Usage of computerized systems allows real-time

is difficult task analysis and makes available decision-support
tools for recognizing the right spare parts.

3 Spare Parts management Spare Parts management gets hold of money

is a cost driver and reduces logistics support and parts
redundancy costs.

4 Service provider logistics Service provider should administer parts to stay

support nullifies the importance competitive and develop logistics readiness.
of spare parts management

5 It restricts design flexibility An efficient program integrates system design,

and restrains the introduction and parts management personnel. Spare Parts
of new parts management facilitates with reviewing new parts
procedure.

One should clearly understand the truths about spare parts so that the real benefits of
spare parts management can be visualized.

12.6 SPARE PARTS MANAGEMENT AND OTHER

SYSTEMS
Spare parts management involves numerous business processes that require
application support and data from diverse classes of applications. A spare parts
management system needs to interact with the following systems:
• ERP Systems (Enterprise Resource Planning): systems is a broad set of
activities supported by multi-module application software that facilitate the
organization in product planning, parts purchasing, maintaining inventory,
interacting with supplier & customer, tracking order etc. The core task of this
category of system is to manage transactions such as procurement, inventory
transactions, returns, etc.
• MES Systems (Manufacturing Execution Systems): Systems that
accommodates maintenance planning and implementation, capture of service
history, etc. moreover time attendant systems, quality control systems, production
scheduling systems, etc.),
• SCM Systems (Supply Chain Management): Systems for advanced planning
and scheduling capabilities, the elements that affect your supply chain efficiency,
including inventory reduction, supplier relationships and IT strategy. Supply Chain
Management systems are an overturn of prior practices where manufacturers
supplied spare parts to customers they required them. Now customers tell
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 suppliers how and when they want their spare parts delivered. The driver behind
Supply Chain Management is to eradicate inefficiencies, excess costs and excess
inventories from the supply pipeline, which extends from the customer back all
the way through his suppliers and his suppliers’ suppliers and so on. By having
the program driven by the customer, it is anticipated that inventories, caused by
uncertainties and sluggish response, will be appreciably eliminated.
• MIS Systems (Management Information Systems): The MIS for spare
parts is similar to that for other materials and has the same aims. Typical reports
generated by the MIS are:
• Stock and consumption status report
• Pending indents report
• Pending purchase orders report
• Stock-out report (also dangerously low stock position report)
• Over-stock/ Under-stock report
• ABC analysis- separately for repair items and overhaul items
In addition, the computer should automatically adjust the inventory parameters, such
as ROL, SS, LT for routine indenting. Special’ ‘alerts’ may be build into the system to
identify deviations from expectations e.g. sudden rise/fall of consumption rates of
spares. Typically, a sudden increase in the usage rate of a component may be due to
related increase in failure rate, which in turn could be due to poor quality for latest
supplier. If the drop in consumption of a part is accompanied by sudden rise in the
consumption of the assembly into which is goes, evidently for some reason
maintenance had started replacing assemblies instead of parts.

The range of spare parts is so vast that computers have to be sued for getting replies
to the numerous queries that will arise in managing spare parts.

12.7 BENEFITS OF SPARE PARTS MANAGEMENT

Merger of economic, technological & market forces have made it critical for
companies to promote it sales service and particular service parts supply. Spare Parts
Management is a constructive way for implementing a robust in-house parts
management. The supply of spare parts have turn out to be increasingly fundamental
for companies wishing to stay ahead of competition This section defines the essential
elements of a spare parts management process, including establishing an in-house
parts management board, developing a preferred parts list or corporate parts baseline,
establishing a process for selecting and authorizing parts and establishing a process for
qualifying parts etc.:
• Condensed Acquisition Lead-Time: When preferred spare parts are used,
the government and industry keep away from the expenses and delays of
designing and developing parts and the issue of acquiring a new item with no
obtainable history or documentation. Using preferred spare parts diminishes the
time between the purchase request and the receipt of the part.
• Cost Savings: Spare Parts management facilitates save design and life-cycle
costs of equipment by encouraging the application of frequently used or
preferred parts. Standardization of parts, replacing numerous similar parts with
one universal part, results in larger part-type buys because the general parts are
used in multiple applications. Larger part-type buys permit both the contractor
and the customer to promote from the economies of scale. Part standardization
also diminishes the contractor’s cost of maintaining technical data and storing,
tracking, and distributing multiple parts.
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•Inventory PoliciesSupportability
Enlarged and and Safety of Systems and Equipment: Preferred
Systems
parts diminish risk and enhance the chances that equipment will accomplish
reliably. Preferred parts have a history of established reliability; enduring rigorous
testing and performing at stated levels. Their use decreases the number of part
failures, reducing the number of maintenance actions and potentially precluding
failures that could cause mission breakdown or loss of life.
• Improved Logistics Readiness and Interoperability: When items or
systems allocate general components, repair time is shorter because parts are
more possible to be on hand and technicians use up less time solving individual
problems. Moreover, using regular components simplifies logistics support and
augments substitutability because fewer parts are stocked. This translates to
savings in procuring, testing, warehousing, and transporting parts.

12.8 COST CONTROL FOR SPARE PARTS: ROLE OF

MAINTENANCE
Cost due to end of spare parts occurs as:
a) Cost due to non-availability when required for the machine,
b) Consumption value,
c) Inventory carrying cost, and
d) Capital cost of non-moving items.
To minimize the need for troublesome repair parts, operations must prevent failures,
and maintenance must ensure that maintenance is done on time and is of high quality.
Maintenance must give top priority to eliminate failures requiring the high cost items
that are also critical. Worn parts can often be rebuilt at a fraction of the price of new
parts. Standard parts, low LT, purchase from OEM/reliable suppliers will reduce cost.
Simple procedures, using computer for scientific analysis and updating of inventory
parameters will reduce the operating cost of the spare parts system. Maintenance
must assist in identification, preservation, and inspection of spare parts.

12.9 ORGANISING FOR EFFECTIVE SPARE PARTS

MANAGEMENT
In large organizations there should be a ‘spare parts cell’ consisting of a
representative each of maintenance, purchasing, and stores. Apart from initiating the
indents, this cell should operate the MIS and continuously look for improvement in
inventory control and cost control, introduce computers for MIS, carry out various
analyses, and in general, act as ‘internal consultants’ in the complex area of spare
parts management. They should report to a senior level in the Technical Services
Department. The members of the cell should develop expertise in this area. In a
medium size organization the spare parts cell may have part-time members. They
should report to the Chief of materials. This places the responsibility of planning and
providing spare parts squarely where it belongs. In small organizations, only those
maintenance engineers who are trained in scientific inventory control of spare parts
should be allow ed to indent spares parts. Their services should be utilized during a
period (say, every two or three years) updating of the system as a whole.

12.10 UNIQUE PROBLEMS OF SPARE PARTS

MANAGEMENT
Raw materials and consumables are primary materials, which are related to
continuous
14 functioning of the machines. Spare parts are ‘secondary’ items and are
related non-functioning of the machines. These characteristics create most of the
problems of managing spare parts inventory. These are summarized below:
1) Requirements are unpredictable in time and quantity.
2) In relation to consumption rate the safety stock is very high, resulting in idle
inventory.
3) Separate inventory control system needed for different types of spare parts
4) Detailed inspection of purchased parts is not possible. This gives rise to spurious
spares market.
5) Data is not available for estimating consumption rates for most spares.
Engineering assessment can go wrong for new type of machines.
6) Prices of spare parts are not related to cost of this production, but to other
commercial interests.
7) Changes in models, modifications create difficulties in procurement of older
parts.
8) The range of spare parts that needed is too large for effective control by manual
methods.
9) The large variety makes identification and preservation difficult and error prone.
10) Obsolescence is common. Even serviceable parts have practically no resale
value

12.11 SUMMARY
Spare parts refer to the part requirements for keeping equipment in good operating
situations and are decisive from an operational standpoint. Managing spare parts is the
biggest challenge in materials and maintenance management. With the scientific tools
available now, much improvement can be achieved, provided those tools are used. The
spare parts go through six stages in their life cycle: Design and specifications;
Determination of initial requirements; Procurement; Storage and preservation; Issue
and replenishment; Disposal and damaged, surplus and obsolete spares. Like inventory
management, ABC and VED analysis play important role in spare parts management.
For low consumption and slow moving spares, the re-order level has been computed.
MIS of spare parts management can be effectively used for preparation of reports for
stock and consumption, pending indents, purchase orders, stock-out etc. There are
certain misconceptions, which interpret spare parts management as blockage, cost
driver and restricts the introduction of new parts. However effective design decisions
and reviewing new parts procedure can change these myths. Comparison of spare
parts management with numerous business processes such as ERP systems, MES
systems, SCM systems and MIS systems can give a clear picture of diverse classes
of applications. At last spare parts management is a constructive way for
implementing a robust in-house parts management, which is increasingly giving an
edge to the organisations.

12.12 SELF ASSESSMENT QUESTIONS

1) What is the aim of spare parts inventory management? In what way does it
influence the different stages of the life cycle of spare parts?
2) What are the different types of spare parts, and when are they used?
3) What is EOQ? Why is the EOQ formula not useful for spare parts?
4) What is Pareto’s Law? In what ways is it used for spare parts?

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Inventory
5) What Policies
is VED andanalysis and how is it used?
Systems
6) Which problems are unique to spare parts that other materials do not exhibit?
Why do these problems occur?

12.13 REFERENCES AND SUGGESTED FURTHER

READINGS

Dutta A.K (1998), Materials Management: Procedures, Text and Cases, Prentice
Hall of India Pvt Ltd, New Delhi.
Gopalakrishnan, P. and Banerji A.K., Maintenance and Spare Parts Management,
Prentice Hall of India Pvt Ltd, New Delhi.
Gopalakrishnan, P. and Sundaresan, M (1998), Materials Management: An
Integrated Approach, Prentice Hall of India Pvt Ltd, New Delhi.
Lt Gen. S.S. Apte (PVSM), Spare Parts Management, Vanity Books.
Shah N. M. (1996), An Integrated Concept of Materials Management, Indian
Institute of Materials Management, Baroda Branch, Baroda.
Sharma S.C. (1997), Materials Management and Materials Handling, Khanna
Publishers, New Delhi.

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