Inventory Management and Procurement Procedures for Spare Parts

Abstract

Financial implications are what drives attention to optimizing spare parts inventories. After all, with an infinite supply of money, companies could stock as many parts as they desire. However, the modern business environment forces organizations to adjust their budgets to be as effective as possible. The truth is that spare parts cost money, regardless of how budgets are allocated. Overstocking is costly because of the additional storage space, utilities, and direct and indirect labour required to handle and maintain this excess stock. If money is spent thriftlessly on spare parts, companies tie down resources and miss opportunities to invest in revamping and expansion projects, or paying debts and dividends. Therefore, the potential for implementing revenue-generating projects and cost-saving actions is diminished through an improper management of spares.

Moreover, although several departments are concomitantly playing a role in the life-cycle of spare parts, they each have different targets and key performance indicators. This situation leads to a clash in priorities and these departments effectively end up working as functional silos ; finance and procurement press to minimize the money tied up in support parts, while maintenance and operations view it as a necessary evil, thus asking to overstock items to avoid costly downtimes.

So is the traditional inventory tension summed up. Without finding a balance between minimizing working capital and maximizing parts availability, a swing in any direction will potentially be followed by negative outcomes: stockouts, holding the wrong parts, holding excessive stock, parts obsolescence, or product spoilage. Doing more with less shows an advanced control of operations and a less wasteful business.

The aims of this thesis are to provide a systematic approach to optimizing spare parts inventories and provide readers with a better understanding of the intricacies of this inventory type. The tools and methods described in the first part are tried and tested in a case study based on actual data from an asset intensive company operating in the gas shipping industry. The results are found to be in accordance with the thesis objectives; by adopting standardized procedures in managing spare parts, cost-reductions will follow in the form of cash release, improved inventory control, and a minimization of guesswork due to favouring objective reasoning.