Spares Inventory Management and

Optimisation
E-learning course transcript

Summary
This document provides a transcript of the audio narrative for this e-learning
course.

SKF Knowledge Centre SKF

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© SKF Group 2015
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Table of contents
Table of contents ............................................................................................................... 2
Introduction ...................................................................................................................... 3
1. About this course ........................................................................................................... 3
1.1. Navigation tour ........................................................................................................ 3
1.2. iPad users ............................................................................................................... 3
1.3. Learning objectives (Interaction) ................................................................................ 3
1.4. Test and certificate ................................................................................................... 3
2. Lessons ........................................................................................................................ 3
2.1. Lesson 1 - Basic Concepts ......................................................................................... 3
2.2. Lesson 2 - Spares identification .................................................................................. 5
2.3. Lesson 3 - Spares forecasting .................................................................................... 7
2.4. Lesson 4 – Inventory assessment ............................................................................... 9
2.5. Lesson 5 – Inventory optimization ............................................................................ 12
3. Support ...................................................................................................................... 14
4. Test ........................................................................................................................... 14

Spares Inventory Management and Optimisation Page 2 of 14

© SKF Group 2015
Introduction
Welcome to this introduction to the spares
inventory management and optimisation
process. We hope that you’ll enjoy the
course, and find it useful in your daily work.
1. About this course
1.1. Navigation tour
Let’s begin by understanding how you can
work your way through this course.
This course is divided into 4 modules.
You can move from module to module by
clicking the links in the Modules menu bar.
Some modules are divided into lessons.
You can move from lesson to lesson by
clicking the links in the Lessons menu bar.
You are currently looking at the “Navigation
tour” lesson, in the “About this course”
module. Your active selections are indicated
by the blue items in the menu bars.
You can move from page to page within a
lesson by using the “PREV” and “NEXT”
buttons at bottom right of the player, and
you can return directly to the start of the
course at any time by clicking the “home”
icon at top right of the page.
At top right of the player you will see the
“resources” link. From here you can
download a selection of relevant additional
reading material, including a transcript of the
course narration.
You can use the audio controls at bottom left
of the player to adjust the volume level of
the audio soundtrack, or to pause the
playback.
There is a timer display at the top of the
player which allows you to monitor your
progress through the course.
Learning online does not have to mean
learning alone. If you have questions
regarding the course content then you are
invited to visit the “support module” where
you will find links to our discussion forum
and to our course tutors.
Spares Inventory Management and Optimisation
© SKF Group 2015
When you’re ready to continue please select
another lesson or module.
1.2. iPad users
If you’d like to access this course on an iPad
then there are some special points that you
should be aware of.
For Ipad users the course will play in the
Articulate Mobile Player app, which is
available free of charge from the app store.
The app’s library function offers the option of
downloading the course so that you can learn
whilst off-line. Remember, though, that you
need to be online to use the links on the
course’s “resources” tab, and if you want to
obtain your course completion certificate
then you’ll need to be online when you take
the end-of course-test.
1.3. Learning objectives (Interaction)
In this section you can view the learning
objectives the course.
The instruction is divided into five lessons.
Click on each lesson name to view its
learning objectives.
1.4. Test and certificate
At the end of the course you will be able to
take a test, to check your understanding of
the topics covered.
If you pass the test on-line, then you will be
able to download and print your own course
completion certificate.
You should save a copy of your certificate to
a local drive. If you don’t then you’ll need to
re-take the test if you need to print an
additional copy of the document.
2. Lessons
2.1. Lesson 1 - Basic Concepts
In this first lesson we will explore some basic
concepts.
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2.1.1. What are “spares”?
Most plants hold spare parts in inventory to
ensure that downtime is minimized. In any
industry, the cost of lost production is
greater than the cost of purchasing, storing
and maintaining spare parts. Spare parts are
the extra parts that are used to replace an
existing non- functional part in a production
asset. With millions of dollars tied up in
spare parts, it is important to ensure the cost
effectiveness of this investment.
2.1.2. What is an “asset”?
Spares are planned and prepared for assets.
An asset consists of a collection of
components which shall be replaced due to
age degradation or due to functional failure.
It can be argued, then, that assets are the
users and the owners of spares.
2.1.3. Stock and inventory
Spares can be grouped into 5 categories,
namely consumables, operational, rotatable,
overhaul and insurance. MRO stands for
Maintenance, Repair and Operation, and
“MRO stock” includes spares, but also
various other materials such as lubricants,
welding rods, wires, cables etc. “MRO
inventory” refers to MRO Stock but also
includes spares and materials, which have
been ordered, but not yet received into stock.
2.1.4. Spares inventory – why?
If a spare part is unavailable (a situation that
is referred to as “stock out”) when needed to
restore a failed asset then this typically leads
to a loss of production or service, and in
some cases may also have additional
implications in terms of safety and
environmental issues. This is why we need
spares inventory; it is a risk reduction
measure.
The primary justification for holding spares
inventory is to reduce production / service
losses that might otherwise result from asset
breakdown while waiting for spares. In
addition, the spares inventory will also
include spares and materials for planned
overhauls. It should be noted that this
course does not concern itself with planned
replacement in overhauls since this activity is
typically planned well in advance.
Spares Inventory Management and Optimisation
© SKF Group 2015
2.1.5. SIMO and asset management
Spares Inventory Management and
Optimisation (SIMO) is a sub-set of asset
management. The main role of asset
management is to maintain required
availability of the facility at optimum cost.
Therefore, the major KPIs (Key Performance
Indicators) for asset management include
• asset availability
• maintenance costs
• cost of spares inventory.
2.1.6. Impact on profit
Operating income is product sales minus
production costs.
Profit is the operating income minus the cost
of capitals.
Spares inventory is one component of the
cost of capitals. Furthermore, spares
inventory will not only impact the cost of
capitals but the also operating income
through its influence on uptime. Reducing
the spares inventory may reduce the capital
cost, but this impact on profit may be offset
by reduced production uptime due to spares
stock outs.
2.1.7. Spares Inventory Management and
Optimisation
So spares inventory is a mandatory
investment for a capital intensive
production/service organization. The role of
SIMO – Spares Inventory Management and
Optimization is to maximize the return on
investment – ROI by minimizing inventory
and maximizing spares availability for asset
MRO needs.
2.1.8. Spares Inventory – business
context
Organizations typically do strive to manage
their spares inventory, but commonly
encounter the following situations:
The need to obtain spares on an emergency
basis, with associated premium costs, as a
result of spares stock out;
Some spares items have many in stock even
though they have not been used for many
years;
Some spares become obsolete due to asset
upgrade or perhaps simply because the
item’s shelf-life has expired. Examples of this
might include rubber seals and gaskets.
Many people (technicians, engineers,
foremen, maintenance contractors, asset
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managers, purchase and warehouse staff)
still spend too much time in spares
identification, planning, reviewing, controlling,
ordering and etc. even though many
organizations have installed and used
materials management IT systems such as
ERP, EAM or CMMS.
2.1.9. Spares Inventory – the dilemma
We invest in spares inventory to minimise
risks to production. From financial point, the
investment should be minimized, but must
be sufficient to avoid emergency ordering of
spares for asset repair. This is the typical
dilemma for spares inventory.
2.1.10. SIMO for profit
So the role of spares inventory management
and optimisation is to resolve this dilemma
between the demands of finance and the
needs of production / maintenance.
SIMO objectives are
1. Minimize stock-out for production
continuation
2. Minimize spares inventory for better
ROI
3. Minimize man hours expended on
spares inventory management.
2.1.11. SIMO principle
So the principle that underpins SIMO is the
need to balance demand and supply!
2.1.12. SIMO Work process
A SIMO analysis can be divided into four
steps:
1. spares identification,
2. spares forecasting,
3. nventory assessment
4. inventory optimization.
Click on each step in the process to see the
individual tasks that must be performed.
In the following lessons we will explore each
of these steps and its associated tasks in
more detail.
2.1.13. SIMO vs ERP
Here we see the relationship between SIMO
and an ERP/CMMS/EAM system.
Systems of this type are used to record the
assets’ master data, work planning,
scheduling and execution, and work order
history.
Spares Inventory Management and Optimisation
© SKF Group 2015
SIMO is a separate software program for
data analysis and optimization.
A SIMO software is designed to interface
with such systems. The interface allows
download of the data that is needed to
support the four steps od the SIMO process
(as outlined on the previous page).
2.2. Lesson 2 - Spares identification
In this lesson we will explore the first step of
the SIMO process in more detail.
2.2.1. SIMO work process – step A
The first step of the SIMO work process is
Spares identification, and this provides the
foundation for a SIMO analysis. The objective
here is to identify what spares are needed in
order to maintain the assets so as to achieve
the required level of availability.
As you can see, there are seven tasks that
must be performed.
2.2.2. Step A (Interaction)
Let’s now explore in more detail the seven
tasks which are performed as part of the
“spares identification” step.
Click on each of the steps to learn more.
Please be sure to fully explore each step.
A1: Asset Register
An asset register is a list of the assets within
the scope of the study, and for which spares
will be needed to facilitate maintenance
during their lifetime. Each asset should have
its ID as a unique code. In addition, it should
have certain attributes and values such as
asset type, manufacturer, model, series
number, installed date, etc.
Asset register and asset attributes are
typically defined and recorded during the
engineering phase of a green-field project.
For existing sites the required information is
often available from the CMMS / EAM / ERP
system. Click on the image here to see an
example.
A2: Asset criticality
Asset criticality considers the potential risks
arising from functional failure of the asset. It
is a very important parameter for asset
management, having implications for
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development of maintenance strategy, work-
order priority and spares availability.
Asset criticality is a concept that’s widely
employed in asset management; for example
in the North Sea offshore oil and gas industry,
where asset criticality must be evaluated and
assigned and assets shall be maintained
according to their criticality. Click on the
image for to view an example.
• This example depicts a criticality matrix
used by the Norwegian offshore industry.
As can be seen, the matrix has two aspects,
i.e., consequence and probability, which is
basically a risk matrix. The consequences
are categorised according to (for example)
personal injury, environment effect,
material damage and production loss. Each
consequence is ranked according to defined
severity criteria, and the probability of
failure is also considered. From this chart
each asset is analyzed and its criticality is
established. For example, an unplanned
stop of a gas compressor may lead to
production loss between 1 – 4 million
Kroner and it may occur in 1-5 year, so it
falls into the cell “50” and its criticality will
be medium. Note that this chart is just an
example; each organisation must establish
its own criticality matrix, based on its own
business needs.
A3: Maintenance bill of materials (BOM)
Having prepared an asset register, the next
question to be answered is “what spares will
each asset be need for maintenance during
its lifetime?”. We are now dealing a “BOM”;
that’s a “Bill Of Materials”, which is a
structured list of the assemblies and spares
which make up the asset. Click on the image
for to view some examples.
• Here are some examples of BOM
datasheets. The first example is a single-
level BOM, which lists all spares for a
relatively simple asset (in this case a level
transmitter).
• In the second example, an electric motor,
some spares are “assemblies” which may
be further divided into individual spares. It
is obvious that bills of material should be
prepared by manufacturers during the
design phase of an asset.
A4: Spares cataloguing
After having identified spares for each asset,
we will also need to know detailed
specification for each spares for purchase,
maintenance, inspection, modification, failure
Spares Inventory Management and Optimisation
© SKF Group 2015
analysis and etc. This task is referred to as
“Spares Cataloguing”. Typically spares will be
categorised by type, with each with a set of
attributes, called “Attribute Standards”,
which can then be used catalogue individual
examples of the type by registering its
values against the attributes. Here is an
example for a pump, with type, attributes
and values.
Click on the table to see another example of
a spares template.
• This example shows the template of for a
ball bearing with standardized attributes
and values. This example shows how
several attribute values can be combined to
form norms such as short and long
description, which are very useful for
standardization and inventory cleansing, as
we shall see later.
A5: Spares cleansing
Each spare should have a unique code in the
inventory. However, it is quite common that
some spares are duplicated, i.e., the same
spare may have different codes, be stored in
different locations and handled as separate
items. This is one of the primary reasons for
over stock. Well established spares coding
standards and catalogue are the best
measures for minimizing this kind of
duplication. Click on the image to see a
typical example of spares duplication.
• Here we see an example of three
duplicates for the same packing, illustrating
the importance and value of accurate
spares cleansing and cataloguing.
A6: Spares interchangeability
Another issue for spares inventory is spares
interchangeability. As we know, certain
spares have international, national or
industrial standards, for example bearings.
Bearings with a same international coding
may be interchanged even though they are
from different manufacturers and will have
different prices, quality and service life. This
interchangeability may provide a temporary
solution for a spares stock out situation.
A7: Spares demand list
After the previous tasks have been
completed, we will be able to compile a
completed list of the spares needed for
maintenance of the target facility and assets.
Each spare has its standard attributes and
values as well as related to its asset(s).
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2.2.3. Spares demand identification –
summary
Lets end the lesson by summarising the
process and tasks that are involved in
identification of spares demand.
1. We start with the asset register, which
lists the assets to be considered.
2. Then we establish the asset criticality
which impacts the spares importance if
out of stock.
3. Task 3 is the maintenance bill of
materials, which lists the spares needed
to maintain each asset.
4. In the “spares cataloguing” task spares
are grouped into types, with each spare
belonging to one type with standard
attributes and having its own values
5. The catalogues is then “cleansed” to
eliminate duplicated spares with different
codes.
6. Some spares can be interchanged
between different assets. These should
be identified since they may provide
work-around solutions in some cases of
stock-out.
7. Finally, the output from this step of our
process is a complete list of the spares
required for maintaining the assets.
2.3. Lesson 3 - Spares forecasting
Now let’s take a detailed look at step B of the
four-step SIMO process: Spares forecasting.
2.3.1. SIMO work process – step B
We saw that the output from step A is a
complete list of the spares required for
maintaining the assets that are the subject
of the study.
We know that each spare has a unique code
with standard attributes and values. The next
question for SIMO is how many a spares will
likely be needed during a given time period.
In step B of our process we will analyze and
model spares consumption data to find the
answer to this question!
2.3.2. Step B (Interaction)
Let’s now explore the six tasks that are
performed as part of the “spares forecasting”
Spares Inventory Management and Optimisation
© SKF Group 2015
step. Click on each of the steps to learn more.
Please be sure to fully explore each step.
B1: Spares classification
Before we undertake spares consumption
prediction, we need to classify the spares
into (typically) three different groups:
consumables, operational and insurance.
Each group is characterised in terms of four
parameters: unit price, lead time, quantity in
use and service life. The table here depicts
typical, relative characteristics for each type.
For a specific SIMO analysis, these
parameters will need to be quantified using
standard deviation (SD) and coefficient
variation (CV) techniques.
B2: Consumption analysis
Spares consumption history is the most
reliable data on which to base spares
prediction. Workorder history is particularly
useful since it typically provides date, work-
order ID and type (planned, emergency,
corrective etc), asset ID, spares ID and
quantity.
Unfortunately, the data quality and quantity
is often less than ideal. Typical issues include:
− The consumption date given is not the
installation date, but the date of picking
up from stock.
− spares consumption is not linked to the
correct asset, or sometimes even no link
at all.
Lack of adequate and accurate consumption
data will make it difficult to mathematically
model and forecast future needs.
Click the image for more information.
• Let’s look now at a technique called “time
series analysis”. Consider the example of a
spares “S” which is installed and used by 4
separate assets, (A1, A2, A3 and A4). For
each asset we plot the usage of spare S
against time. The time interval between
two adjacent uses represents the actual
service life achieved by the spare; typically
there will be significant variation. For each
asset, we can derive the minimum,
maximum and average lifetime of the
spares “S” on that asset. We can also
consolidate the data of the spare “S” from
all of the assets and evaluate the minimum,
maximum and average lifetime of the
spares “S”. It should be noted that spares
service life is the most important
parameter for both spares management
and asset reliability management!
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B3: Insurance spares identification
Insurance spares will frequently have no
consumption history.
Some operational spares may also have no
consumption history. This can arise when the
operational spare has a relatively long
service life in comparison to the timespan
covered by the historical data.
The challenge, then, is to identify the
insurance spares within this mixture. This
must be done manually, based on study of
the spare’s unit price, lead time, and
estimated service life.
Having thus identified insurance spares no
attempt is made to forecast their future
consumption. Inventory of insurance spares
is further considered in step C of our process;
more on this later.
Click the image to see some examples.
• Here is an example of insurance spares
identified in a SIMO project for a
petrochemical plant. As you can see, the
typical characteristics of these insurance
spares are: high unit price, long lead time
(>90 days) and with only one item in use.
B4: Consumable spares forecasting
Consumable spares have characteristics
opposite to those of insurance spares, i.e.,
large number in use, low unit price, short
lifetime, high consumption and short
leadtime.
Based on the characteristics of consumable
spares, we can model consumption using
index smoothing for continuous consumed
spares and the Croston method for
intermittent consumed spares. Thereafter,
we can calculate the demand rate using
average lifetime, installed date and quantity
in use. You can view some examples of
demand prediction by clicking the image here.
Please note that a detailed discussion of
these techniques is outside the scope of this
course. If you’d like more information then
go to the SUPPORT module of this course
and use the “contact course tutor” link.
• ABC analysis is an inventory categorization
method whereby items are divided into
three categories, A, B and C: A being the
most valuable items, C being the least
valuable ones. This method helps to focus
management attention on the few, critical
few (A-items) and not on the trivial many
(C-items). Typically consumable spares will
account for 60-80% of consumption, by
quantity, but only 10-30% of consumption
by value. This is in accordance with the
Spares Inventory Management and Optimisation
© SKF Group 2015
“pareto principle”. This example of
consumable spares identified in a SIMO
project for a petrochemical plant illustrates
that point. Note also that, in comparison
with the insurance spares shown earlier (in
task B3), the typical characteristics of
these insurance spares are: low unit price,
short leadtime (<90 days) , many in use
and short lifetime.
B5:Operational spares forecasting.
The characteristics of operational spares, in
terms of quantity in use, unit price, lead-
time, service life and consumption, lie
between those of consumables and insurance
spares.
Operational spares are normally required to
support planned maintenance and overhauls
and are therefore the most important in
SIMO. Prediction and optimization of
operational spares is more complicated than
consumable and insurance spares.
The “bathtub curve” is a often used to depict
the “typical” service life of a component.
However, few components actually follow the
classic “bathtub” pattern. This can be
illustrated in a practical way by considering
(for example) bearings installed in a
roughing mill. Three situations may arise.
1. If the bearing is not installed correctly, or
properly lubricated, then it will suffer
early failure (Infant mortality).
2. If the bearing is properly installed, but
relubrication is in some way inadequate
then it will not suffer “infant mortality,
but will exhibit an early “wear-out”
pattern.
3. Only if the bearing is properly installed,
centered, balanced, sealed, lubricated
and re-lubricated will it achieve its
designed service life.
Click on the image to view an example of
operational spares demand forecasting.
• Here is an example of operational spares -
Seal: Its attributes:
− unit price – 745 USD, lead time – 4.5
months
− Installed quantity: 2
− Lifetime from consumption analysis: 40
months
− We use Weibull distribution for prediction
and the failure probability is 0.2
− The spares needs for the coming year
are: 2 at 4% chance, 1 at 32%
chance and none at 64% chance,
respectively.
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B6: Forecast results
As was mentioned earlier, spares service life
is the most important parameter. It carries
implications not only for spares inventory
optimization but also for asset reliability
analysis, benchmarking, and spares lifetime
extension.
The table offered here depicts a set of the
prediction results from a petrochemical plant.
Click to zoom the image.
• The results are the predicted spares
consumption in the coming year and the
relevant probability that the spare will be
required. In addition, it also shows the
spares lifetime as an intermediate result.
From the actual lifetime, we can calculate
minimum, maximum and average lifetime.
2.3.3. Spares forecasting summary
So here’s a summary of the six tasks that
make up step B of our SIMO process.
4. We begin by classifying spares into
three group by considering the
parameters of unit price, lead time,
quantity in use and service life.
5. We saw that spares consumption
history is the most reliable data on
which to base spares predictio;
workorder history is particularly
useful.
6. We learned that insurance spares arte
identified by strudying the spare’s
unit price, lead time, and estimated
service life; We do not attempt to
forecast insurance spares
consumption.
7. We learned that consubmable spares
typically have low unit price, short
lifetime, high consumption and short
leadtime. We can use a variety of
statistical techniques to forecast
future consumption.
8. We learned that operational spares
are the most important is SIMO, and
considered the various failure rate
patterns that these might exhibit.
9. The final output of Step B of our SIMO
process is a list of required spares
each with forecasted future
consumption, and also typically
including information on service life
and probability of need.
When you feel ready to move on select
another lesson.
Spares Inventory Management and Optimisation
© SKF Group 2015
2.4. Lesson 4 – Inventory assessment
Step C of the SIMO process focuses on
inventory assessment.
2.4.1. Step C
In step A of our process, we identified the
spares needed for maintenance of a facility.
In step B we classified the spares into three
types, and estimated the future consumption
of consumable and operational spares.
In this step we will consider how best to
manage our inventory to ensure that parts
are available when needed without over-
stocking. This lesson will introduce some
semi-quantitative approaches for inventory
assessment.
2.4.2. Task C1: Operational spares
criticality
To assess operational spares inventory, we
need to introduce a necessary parameter –
spares criticality, which will determine the
service levels of operational spares.
“Spares criticality” is obviously closely
related to asset criticality, (which we
discussed in the “basic concepts” lesson) and
also considers the impact of the spare on the
asset’s ability to fulfil its functions.
It should be noted that there are no fixed
standards here, and each organisation must
discuss and agree it’s own criteria for
establishing asset criticality.
2.4.3. Task C2: Calculation of consumable
spares inventory.
We learned earlier that consumable spares
are typically large in quantity, but small in
value. The most used method for inventory
assessment is EOQ model, which stands for
Economic Order Quantity. The EOQ principle
is to balance the holding cost with ordering
cost.
There are four main parameters in EOQ
model, i.e., demand rate, lead time, ordering
cost and holding cost.
The diagram illustrates the EOQ model where
the demand rate is constant, i.e.,
consumption does not change with time. For
example, a workshop consumes 50 pieces of
an item (e.g. an O-ring) monthly and 600
yearly. Of course, this is an very ideal case
for explanation. When the inventory reaches
the reorder point, we shall order ROQ (Re-
Page 9 of 14
order Quantity) pieces. The period between
the time when the order is issued and the
time when the parts are received is called
“Lead time”. The parts continue to be
consumed, further reducing the inventory
during this the lead time. When the ordered
parts arrive, the number of the parts
remaining in stock is called “Safety Stock”,
which is set to minimize the losses if extra
consumption occurs during the lead time.
Here the re-order point ROP is minimum
inventory, which is the sum of the safety
stock and the average consumption during
the lead time. The maximum inventory is the
sum of the safety stock and the ROQ.
2.4.4. Consumable spare part: example
This example considers a consumable spare
– a conical washer.
Its unit price is 34 USD, the leadtime is 3
months, there are 71 pieces installed and the
part has an actual service life of around 20
months.
We can calculate its demand rate to be 3.5
pieces / month.
And using EOQ model, we can determine
that the reorder point and reorder quantity
should be 11 and 157. In simple terms we
should issue the purchase order when the
stock level falls to 11 pieces, and order 157
pieces.
2.4.5. Task C3: Operational spares
modeling
Modelling operational spares is much more
complex than consumable spares.
Here we introduce a concept known as
"Service level", which can be thought of as
the expected probability of not hitting a
stock-out. which is a function of the spare's
criticality, and of its unit price.
We saw earlier in this lesson (step C1) that
the spare's criticality is a function of the
asset criticality, and of the importance of the
spare to the asset. (For a further discussion
of asset criticality please refer back to the
lesson on "spares identification").
Here we can see a matrix which might be
used to establish spares criticality. Again,it
should be remembered that there are no set
standards here: each facility must determine
its own criticality criteria.
To understand the "service level" concept
better, let’s look at an example.
Spares Inventory Management and Optimisation
© SKF Group 2015
2.4.6. Example: Part 1 -Spares criticality
In this example we have a seal which is used
on an asset which is highly critical. However,
the importance of the seal for the asset is
evaluated as Low. So from the matrix, we
assess the spare’s criticality is Low.
2.4.7. Service level matrix
Spares unit price impacts also on the
required service level. We use a qualitative
approach to categorize the spares into three
groups (High, medium low) according to
their unit price. Note that the price
thresholds for these groups are not fixed:
each project must establish it’s own
threshold values.
In this example a part costing more that five
thousand US dollars is deemed to be “High
price”. Spares having a unit price between
fifty and five thousand dollars are considered
“medium price”, and spares costing less than
$50 are considered “low price.
Here is a service level matrix, which consists
of spares price level and spares criticality. As
can be seen, both service levels and spares
prices are categorized as High, Medium and
Low.
The service level matrix offered here shows
how the spare’s criticality combines with it’s
unit price to determine the required service
level.
We see that, when the spares criticality is
high and the spares price is low, then the
service level is high; which means that low-
cost but important spares should have a high
availability. Conversely, when the spares
criticality is low and the spares price is high,
then the required service level is low, i.e., we
should have a lower availability.
Each project or enterprise must quantify the
service levels according to the inventory
budget. In this example the service levels
are defined as 98%, 95% and 90% for the
high, medium and low categories,
respectively.
2.4.8. Example: Part 2 – Required service
level
Let’s take our previous example a little
further.
You’ll remember that we were considering a
seal. Its criticality is low and the price is
medium, so the required service level from
the matrix is Low. This means that the
required inventory availability is 90%.
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2.4.9. Example: Part 2(ctd) – Required
service level
Just to finalise this example, let’s consider
now the likelihood that our spare will be
needed.
Let’s assume that the “operational spares
analysis” conducted at step B of our project
determined that the failure probability for
this spare, in the coming year is 0.2.
We know that there are two of these items in
use.
0 inventory can meet 64% of the demand.
1 inventory can meet 96% of the demand,
which is greater than the required service
level 90%. So we need to have 1 seal in the
stock.
2.4.10. Task C4: Insurance spares
assessment
Now we turn our attention to insurance
spares.
Insurance spares are typically items with
only one item in use, having a very low
failure probability, but significant
consequences in the event of a stock-out. It
is not feasible to do complex modelling for
this situation.
Instead, we use the principle ‘Return On
Investment’ (ROI, where the ‘Investment’ is
the unit price of the spares, and the ‘Return’
is the potential consequences for stock out.
The aim for insurance spares is not to
determine ROP and ROQ like consumable
and operational spares, but to decide if we
should have an expensive insurance spares
in our stock.
For insurance spares assessment a key issue
is evaluation of the potential consequences
of a stock out. In previous areas of this
course we have already discussed asset
criticality ans spares importance. Need to
consider now any asset redundancy (i.e.
standby machines).
The table here shows how these factors were
quantified in a real project for a
petrochemical company.
We use a term “Priority Index” (PI) to
represent the ROI for insurance spares
assessment.
The potential stock out consequences of each
insurance spare is assessed, and the PI is
then calculated by dividing with the spares
unit prices.
Insurance spares are then prioritised by
sorting in descending order according to their
PI. The spares’ unit prices are then
Spares Inventory Management and Optimisation
© SKF Group 2015
accumulated in order of priority, until the
total value reaches the limit of the inventory
budget for the insurance spares. The PI
value of the last insurance spares is the
threshold value (PIT) used in the decision
process shown here.
2.4.11. A real example
This example uses real data from an
insurance spares assessment from the
petrochemical industry.
The subject of the assessment was a large
gear. Its attributes (high unit price, long
leadtime, long service life and low number
installed) are typical of an insurance spare.
From the spares assessment, its asset
criticality is high, spares importance is high,
asset redundancy is none, and potential
production loss was estimated at $30
millions per day.
The potential consequence of stock-out was
determined (as shown here) to be is $3.60
billions.
The spare’s Priority Index (PI) is therefore
($3,600M / $362,393) = 9,934.
This facility’s budget for insurance spares
inventory was $5 million. From the overall
assessment results PIT was determined to be
3,000.
So for this spare PI>PIT and so the decision
to stock one piece is justified.
2.4.12. Task
C5: Inventory budget
assessment
Up to now, we have assessed inventory for
all of the three types of spares using a
variety of approaches.
Now we can compare our recommended
strategy with the inventory budget to see if it
is affordable.
If the cost of the proposed strategy is
significantly higher the budget, we might
address the problem in a number of ways:
Re-assess the operational spares inventory
using lower service levels, i.e., from 98, 95
and 90% to 95, 92 and 87%, respectively.
Consider increasing the threshold value (PIT)
value for the insurance spares.
Note that consumable spares inventory is not
usually re-assessed since this typically offers
little potential for change.
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2.4.13. Task C6: Evaluation of current
inventory
It is important to compare the cost of the
proposed inventory strategy with the existing
strategy.
In principle our new assessment should be
better aligned to the needs of the business,
having been derived using systematic
approaches, methods and processes.
However, whilst these methods have
(hopefully) been based on good data, both in
terms of quality and quantity, it’s typical that
some assumptions will have been made. It’s
logical, then, that where this comparison
reveals major differences in cost then these
should be investigated on a case-by-case
basis to ensure the quality of the result.
2.4.14. Evaluation of proposed inventory
strategy
After the inventory assessment is completed
we can proceed to see what impact the new
strategy has on the current stock.
By comparison of the finalized assessment
results with the current stock, we can
identify spares which are under-stocked or
over-stocked, and then make appropriate
plans to balance demand and availability.
The lower left table shows a comparison
between the assessed inventory and the
current stock. The lower right table shows a
comparison between the recommended
inventory with the existing one.
2.4.15. Lesson summary
Let’s end this lesson by summarising the
tasks that are involved the inventory
assessment step of the process.
1. The first task is to determine the criticality
of the spare. This is related to the
criticality of its parent asset, and to the
impact that the spare has on asset
performance. We saw that there are no
fixed standards here, and that each plant
must establish its own criticality criteria.
2. We saw that the most widely used tool for
assessment of consumable spares
inventory is the EOQ model. We looked at
an example of its application to determine
the reorder point and reorder quantity for
a conical washer.
Spares Inventory Management and Optimisation
© SKF Group 2015
3. Modeling operational spares is more
complex than modelling consumable
spares. We learned about the “service
level” concept which can be thought of as
the expected probability of not hitting a
stock-out. We saw that this is a function
of spares criticality and of unit price.
4. In task 4 the focus shifts to insurance
spares. We saw that it is not feasible to do
complex modeling in this situation.
Instead the “Return on investment” is
considered, where the “investment” is the
unit price of the spare, and the “return” is
the potential consequences arising from a
stock out. We saw that this ROI is
expressed in terms of a spare’s “Priority
Index”, which is used later in the decision
process.
5. Having assessed inventory requirements
for all three spares types, in task 5 we see
if the proposed strategy is affordable. If
the cost of the proposed strategy is
significantly higher than the budget then
we might re-assess operational spares
inventory using lower service levels, or
reconsider insurance spares by adjusting
the threshold (PIT) value.
6. The sixth task is to compare the cost of
the proposed strategy with the cost of the
current strategy. Major differences should
be investigated case-by-case to confirm
the validity of any assumptions that may
have been made, and ensure the quality
of the end result.
7. The final task in the inventory assessment
step of our process is to identify spares
which are currently understocked or
overstocked, and to make plans to better
balance demand and availability.
That concludes this lesson. Select another
lesson or module to continue.
2.5. Lesson 5 – Inventory optimization
The final lesson of the course explores the
inventory optimisation step of the process.
2.5.1. Step D: Inventory optimisation
Here we see the tasks required to complete
this step of the process. At first sight there
appears some overlap with the tasks that we
just undertook in step C of our process.
So what is the difference between inventory
“assessment” and inventory “optimization”?
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2.5.2. Inventory assessment vs inventory into fixed and variable costs. The fixed cost
optimisation can be expressed as a cost per item per
year. The variable element is usually
The inventory assessment process aims to
expressed as a percentage of the unit price
establish the minimum inventory for all
times average stock quantity, i.e., X% *
spares types that must be held in order to
Unit Price * Average Inventory / per year.
meet the required service levels.
• Stock out consequences: can be handled
In the inventory optimisation process the
similarly to the potential consequence of
focus shifts to operational spares, with the
insurance spares, described earlier in task
aim of further optimising the inventory in
C4 – Insurance Spares Assessment. Refer
order to minimise total cost of ownership
back to the “inventory assessment” lesson
(TCO).
for more details.
Inventory assessment is typically carried out
using qualitative data (for example
2.5.4. Task D2: Optimisation of
classifying asset and spares criticality as
simply high / medium / low). The inventory operational spares
optimization is a simulation process for which We then use a software program like SKF
all of the relevant parameters need to be SIMO to find the optimum inventory to
qualntified in hard financial terms (for minimize the total cost of ownership.
example expressing asset criticality in terms The TCO is the sum of the capital cost,
of $potential losses per day). ordering cost, holding cost and potential
consequences, which are in turn functions of
2.5.3. TaskD1: Parameters setting ROP and ROQ. The optimization method is to
(interaction) try different combinations of ROP and ROQ
and find one set of ROP and ROQ to make
Before we can do simulation to optimize the
the TCO minimal.
inventory, we need to prepare the required
Let’s take this seal as an example.
quantitative data.
The inventory assessment process suggested
Click on each of the parameters in the list
ROP = 1 and ROQ = 1, with a resultant
here for more information.
inventory cost of 665 USD per year.
• “Capital interest” represents the cost
The optimisation model suggests ROP = 0
incurred when capital during the period
and ROQ = 2, with a resultant inventory cost
when cash is tied up in inventory. It is
of 509 USD per year.
normally expressed as a percentage rate
So the optimized solution would reduce the
per annum.
annual cost by 156 USD, or 23.5%.
• The “ordering cost” represents the
expenses associated with processing a
2.5.5. Task D3: Cost analysis of optimal
purchase order. It includes all aspects of
purchase order processing including inventory
request, plan, approval, ordering and The table here shows a real example of the
receiving until ready to use in a stock. It is calculated costs based on the optimised
typically expressed as a fixed cost per inventory strategy.
purchase order. For each spare, it lists item ID, description,
• The demand per unit time for a spare is the unit price, quantity in use, ROP and ROQ,
forecasted demand rate for a spare, as and the calculated results of Capital, Holding,
determined in step B of our process. Please Ordering, Potential costs as well as the total
refer back to the “Spares forecasting” cost (TCO) per year.
lesson for more information.
• Failure rate of some parts exhibits a 2.5.6. Task D4: Cost analysis of current
random distribution. strategy
• Statistical modelling techniques can be
This slide shows an example of the calculated
employed to analyse demand for these
costs based on the present inventory
spares.
strategy, listing the same information as the
• Holding cost is related to the costs incurred
previous page.
in running and maintaining the warehouse.
Next we will compare the two strategies.
It may include location, electricity, air
conditioning, inspection, maintenance,
labor , etc. Holding costs are normally split

Spares Inventory Management and Optimisation Page 13 of 14

© SKF Group 2015
2.5.7. Task D5: Comparison of strategies
This slide summarizes the TCO comparison
between the optimized and present inventory
strategy.
In this example, optimization offers the
potential to reduce the total cost of
ownership by 69%.
We can see that the capital and holding costs
change little, but the potential consequence
of spares stock out is reduced by 94%. This
means that the optimized inventory would
require roughly the same inventory budget
as the present one, but would minimize the
chances of stock out and the relevant
potential losses.
As the main conclusion, the inventory
optimization can better use inventory budget
to minimize TCO.
2.5.8. Task D6: Determination of
optimised inventory
Inventory optimisation offers the opportunity
to make significant savings in terms of total
cost of ownership.
In principle the optimised strategy should be
well aligned to the needs of the business,
having a sound technical and commercial It
is important, though, that the major
differences revealed by the strategy
comparison should be investigated on a
case-by-case basis to avoid exposing the
facility to undue risk, and to ensure the
quality of the result.
6. We thus determine the optimised
inventory, remembering to investigate any
major differences on a case by case basis
in order to ensure a good quality result.
That concludes this lesson. Please select
another lesson or module to continue.
3. Support
Learning online doesn’t have to mean
learning alone.
If you have questions regarding the course
content then you can post them in our
discussion forum. In this way you will receive
responses not only from SKF subject
specialists, but also from a global community
of maintenance practitioners.
Alternatively you may wish to engage in a
one-on-one email discussion with one of our
course tutors.
4. Test
If you feel ready then you can now take a
test to check your understanding of the
topics covered in this course.
If you pass the test on-line, then you will be
able to download and print your own course
completion certificate.
You should save a copy of your certificate to
a local drive. If you don’t then you’ll need to
re-take the test if you need to print an
additional copy of the document.

2.5.9. Lesson summary

Let’s end this lesson by summarising the
tasks that are involved in the final process
step: Inventory optimisation.
1. We saw that this is a quantitative
approach, and so we must begin by
defining the various measurement
parameters in hard financial terms.
2. Then we can use a software package such
as SKFs SIMO package to try different
combinations of reorder point and reorder
quantity to minimise the total cost of
ownership for the Spares.
3. Then we can compile a cost analysis of the
proposed optimal inventory…..
4. And on the same basis we can prepare a
cost analysis of the current inventory
strategy.
5. The proposed inventory strategy can then
be compared with the current strategy.

Spares Inventory Management and Optimisation Page 14 of 14

© SKF Group 2015