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6 – Spares and Repairables
Management
In the management of spare part inventories, a balance is sought between the costs of stocking the
parts and the costs and risks of not having them when they are needed.
Spares management includes (Lawrenson, 1996):
• Forecasting requirements
• Deciding what to stock and provisioning appropriately
• Identifying what is stocked and where it is held
• Arranging safe handling and storage for receipts and issues
• Recording movements in and out, and stock balances
• Accounting for stock and usage
• Controlling misuse, misappropriation and theft
• Minimising deterioration, obsolescence and waste.
This module looks at basic theory surrounding spare parts decisions: how many to stock, when to
order them and where to stock them.
After completing this module you should be able to:
• Appreciate the cost of carrying spares inventory in the mining industry
• Be familiar with the principal indices used to measure inventory effectiveness and efficiency
• Understand the criteria behind priority spares classification
• Calculate economic order quantities and order points for high rotation spares
• Apply probability modelling to high value low rotation spares decisions
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6.1 Spares and Repairables Costs
Organisations keep spare parts to be able to replace worn out or defective parts in machinery and
equipment. Typically mining companies hold spare parts inventories that run into tens of millions of
dollars. A large mine in Chile with which the author is familiar maintains spares inventory worth US$
50 million. It does so because many equipment suppliers are located overseas. Long “lead” times are
required to order, dispatch and transport spares from abroad. The failure of a critical component in
service at the mine may result in an unacceptable downtime cost should a spare not be available on
site (known as a “stock‐out” cost).
In the management of spare parts inventories, a balance is sought between the costs of holding
spare parts inventory with the costs and risks of not having them when they are needed. Holding
inventory involves tying up funds that could be usefully employed in other activities. The
opportunity cost of stockholding is the difference between the best alternative investment and the
return from the spares holding (Lawrenson, 1996). Simply speaking, the aim of spare parts
management is to minimize the total cost of:
• Acquisition (or “Ordering”) costs
• Inventory holding costs, and
• Stock‐out costs
However, spares are not always kept for purely economic reasons. There may also be safety and
environmental or strategic reasons for carrying spares. Defence applications, where it is necessary to
maintain a given level of deterrent capability, are justifiable examples for carrying strategic spares.
Compare technical
offers
Receive
Received in good
Quality control order
Compare invoice
with quote Invoice
Figure 6.1 The Acquisition Process
Figure 6.1 illustrate a simplified process for acquiring spares. The process requires interaction
between operations, maintenance, and procurement departments and suppliers. The decision to
purchase inventory is triggered when the level of spares or consumable falls below a certain point
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known as the “Economic Order Point” (see Section 6.3). In some cases where suppliers have
previously submitted to a pre‐qualification process, a Purchase Order might be automatically issued.
If the spare is available from OEM and alternative sources, a request for quotation will be issued to
the competing vendors. Offers will firstly be compared on the basis of satisfying fitness for duty
criteria and safety and environmental compliance. The supplier with the winning tender is formally
notified, and a PO issued. The spare is dispatched, and received and inspected by warehouse
personnel upon arrival to site prior to admission to the warehouse. As can be seen from Figure 6.1,
this can be a labour intensive process. Despite the fact that the process includes multiple steps,
spare parts literature often refers to the associated process costs as the “Ordering” cost.
Average %
Capital cost 15 - 19%
Cost of obsolesence 8.5%
Operating costs
Labour 3.5%
Depreciation 1.5%
Insurance 1.2%
Database administration 1.5%
Material movements 1.8%
Stock reduction 3.5 - 10%
Warehouse and services 1.5%
TOTAL Operating costs 14.5 - 21%
Table 6.1 Spares holding costs expressed as a percentage of capital cost (Marshall Institute, 1996)
Spares holding costs are frequently expressed as a percentage of the capital cost of inventory. They
include:
• The annual stockholding cost. Less expensive spares are purchased using operating cash
flow. High value items are usually capitalized, enabling them to be depreciated for tax
purposes. The repayments on this capital (comprising both interest and amortization) form
part of the annual stockholding cost. Table 6.1 estimates the annual stockholding cost at
between 15 and 19% of inventory value.
• The cost of obsolescence. This takes into account the decline in market value of spares due
to new and improved components entering the market. It is analogous to the decline in the
resale value of a car once a new model is introduced. On high value items, the depreciation
rate can be used to estimate the cost of obsolescence. Table 6.1 estimates the cost of
obsolescence at 8.5%.
• Warehouse operating costs. These include labour, insurance, database administration and
warehouse services. Some components have associated warehouse inspection and
maintenance costs – for example, large electric motor shafts should be rotated on a periodic
basis to avoid flattening of roller and ball bearing elements. Table 6.1 estimates total
operating costs at between 14.5 and 21%.
When these cost estimates are combined, spares holding costs can be estimated at between 38 and
48.5% of the capital value of spares. This implies significant operating costs for maintaining high
dollar value inventories.
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Stock‐out costs are associated with loss of product or quality or with a liability incurred as a result of
loss of service due to not having spares available when needed. Product and quality losses are
incurred through losses in Overall Equipment Effectiveness (see Module 1), either via availability
losses, throughput limitations or declining yields in mineral processing plants. The economic costs of
downtime and loss of service is a complex topic. Readers are directed to an article written by Knights
et al (2006).
6.1.1 Common Inventory Performance Measures:
Inventory value: Inventory value is the dollar value of all spares and repairables that are maintained
in inventory and currently on order. This value will fluctuate from month to month, so an average
annual inventory value is usually calculated.
Stock turnover ratio: the turnover ratio (also known as stock rotation) is the value of stock issues per
time period expressed as a percentage of average inventory value. This is a measure of how actively
stocks are being used to support maintenance (Lawrenson, 1996). For instance, if a mining company
uses $22 million of spares annually from an average inventory value of US$ 50 million, the stock
turnover ratio is 44%. This implies that the presence of some slow moving spares that may be able to
be rationalised.
Service level: The service level is the average probability of meeting clients’ requests from existing
stock. The starting point for managing spares is to define the required service level. For example:
“for defined critical spares, a service level of 99% will apply”.
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6.2 Spares Classification
Spare parts can be classified as either repairable or non‐repairable items.
Spare parts
inventory systems
Non‐repairable Repairable
components components
High rotation Low rotation
items items
Low rotation
items
Figure 6.2; Spare parts classification
Non‐repairable items are discarded following completion of a single usage cycle. It is not economic
to transport and/or repair or recondition these components. Examples of non repairable
components include: oil filters, light bulbs and ground engaging tools such as shovel dipper teeth.
Haul truck tyres used to be treated as non‐repairable items. Each tyre has a 4m diameter and weighs
over one tonne: the high cost of transporting tyres back to urban centres made re‐treading and
patching uneconomic. The current shortage of large earthmoving tyres has forced companies to re‐
evaluate the economics of tyre repair (for instance, Rio Tinto Iron Ore recently announced the
opening of a tyre repair centre in Perth).
Depot
Replenishment
Depot
repair
Base
repair
Figure 6.3 Multi‐echelon repair system (Louit, 2007)
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Repairable items, such as diesel engines or wheel motors, are also referred to as “rotables”. They
undergo successive cycles of usage and repair. Often, repairs are conducted off‐site due to the
specialised nature of skills required. Repairable items are made up of sub assemblies of components.
Components fail in different ways, by wear‐out, fatigue, random failure or infant mortality (see
Module 3 – Maintenance Tactics). If components fail be wear, they will experience different wear
rates. It is clearly uneconomic to repair of replace all components of each subassembly.
Fundamental questions to ask during repair include “which sub assemblies and components need
replacement or repair?” Clearly there is an economic imperative to minimize repair costs subject to
the risk of the component failing prior to warranty when it is returned to service. Repairs can
sometime be carried out on site or at a centralised depot. Such systems are called multi‐echelon
systems (see Figure 6.3).
Both non‐repairable and repairable spares can be further classified as high or low rotation spares,
depending on their cumulative annual dollar usage to stock ratio. Non repairable items can have
varying unit value. Low rotation repairable spares are generally of high unit value. These are items
such as motors, transmissions, and final drive wheel groups. The approaches used to define re‐order
quantities and re‐order points vary according to the rotation, dollar value and “criticality” of the
spare.
The most well‐known and commonly used classification methodology is Pareto analysis which uses a
single criterion for assessment of criticality (Huiskonen, 2001). ABC analysis is a variant of Pareto
analysis, whereby parts are grouped A, B and C classes based on an 80:15:5 rule (80% cumulative
usage come from type A items, 15% from B items and 5% from C items). As the diversity of the stock
increases several authors coincide in that single‐criterion Pareto classification is limited and is not
the best choice for conducting inventory item prioritization. To this purpose, multi‐criteria
classification methods are typically used to assess part criticality.
A major copper mining company in Peru uses three criteria to determine parts criticality (see table
6.3). These are:
• Impact of stock shortages on operations
• Lead time to obtain spares to obtain spares
• Cumulative dollar value of spares relative to the total spares budget
The lead time to obtain parts is the time that it takes from placing an order until warehouse receipt
of a spare. It is a criterion that usually favours local manufacturers, as the lead time to manufacture,
transport and import foreign parts is measured in months. The impact of shortage to operations is
measured as a result of the safety, environmental or economic consequences of part shortages.
Table 6.2 shows the distribution of parts inventory for a copper mine. An ABC analysis is conducted
for each of the criteria, resulting in nine possible spares classifications (AAA, through to CCC).
Different spares provisioning tactics can be established for each class of spares.
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Criticality No. items Inventory Stock Service Automatic Recommended
Value US$ Rotation level reorder reorder tactics
AAA 46 1,497,499 10 100% no Manual control of
inventory levels,
AAB 25 157,988 8 100% no tracking of
AAC 38 101,889 6 100% no purchases and
frequent checks.
ABA 58 1,516,906 10 100% no Strict coordination
ABB 93 356,651 8 100% no with maintenance.
Investigate
ABC 272 394,934 6 100% no
alternative transport
ACA 13 185,167 10 100% no means to reduce
ACB 30 65,345 8 100% no lead time.
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Figure 6.4 Simple Spares Partitioning Model (Louit et al, 2006)
Louit, Knights and Jardine (2006) propose a simple spares classification methodology based on three
criteria:
• spares price (including order and purchase costs, but not holding costs)
• spares demand rate, (number of spares of a particular type requisitioned per year) and
• shortage consequence (a measure of spares stock‐out cost or criticality to safety or
environmental integrity).
A simple “spares partitioning model” (SPM) is proposed in order to divide spares into eight
classifications (see Figure 6.4). The limit values which divide the model into the eight partitions are
determined by average spare price, demand rate and shortage consequence.
Three spare provisioning tactics (sometime called policies) are determined. These are: the (S, S‐1)
tactic (purchase an additional item to restore the number in stock to S as soon as the stock level falls
to S‐1 i.e. one item is drawn from stock); the EOQ or similar tactic (Economic Order Quantity model);
or the decision not to stock a part. Figure 6.5 shows a decision chart that can be used to classify
spares into one of 5 categories which enable selection of the appropriate spares provisioning tactic.
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Figure 6.5 Spares Provisioning Tactics Selection (Louit et al, 2006)
Example: DOFASCO Steel, Ontario, Canada.
Demand rates, unit prices, lead times, mean times to repair and cost of lost production due to lack of
spares were available for a sample of 86 components in a production line at DOFASCO Steel’s main
facility in Hamilton, Ontario, Canada (only 2 of the 86 stock codes analysed are non‐repairable). Data
consisted of engineering estimations based on the operation of similar equipment in other areas of
the mill and manufacturer’s recommendations, since the production line in question was recently
commissioned.
The consequences of shortage were calculated as the expected cost of lost production per unit time
due to a stock‐out of the spare part of interest, multiplied by the average lead time (in the case of
non‐repairable parts) or the mean time to repair (in the case of repairable parts). The sample of 86
components consisted of parts that had been pre‐classified as “critical” (lack of any of them would
imply a stoppage of the operation). Faced with a limited budget for sparing the line, a ranking of the
spare components based on criticality constitutes valuable information for the engineers in charge
of the purchasing decision.
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Criticality Ranking SPM Dollar‐usage ABC analysis
1 I 35 A
2 II 81 A
3 II 83 B
4 II 54 B
5 II 47 B
6 II 33 B
7 II 37 B
8 II 43 B
9 II 84 B
10 II 51 C
11 III 82 B
12 III 80 B
13 III 28 C
14 III 79 B
15 III 74 C
16 III 56 B
17 III 32 B
18 III 76 C
19 III 86 C
20 III 78 C
Table 6.4: Top 20 stock items resulting from SPM and Pareto Analysis (Louit, 2007)
As a result of the application of the SPM criticality assessment, the top 20 stock items are listed
according to their criticality in Table 6.4. For confidentiality reasons, only stock codes are provided,
not part descriptions. The results obtained by using a single‐criteria ABC analysis are also provided,
using the dollar‐usage value as criteria and an 80‐15‐5 rule. Results show that using single‐criteria
classification schemes can lead to disregarding items that are indeed critical to the company.
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6.3 High Rotation Spares
The problem of spares supply and stores management can be summarised as (Lawrenson, 1986):
• how much to order,
• how much to allow for delivery
• organisation of people
• organisation of procedures
• where to order from, and
• where to store the parts.
We will examine the first pair of questions – namely order quantity and lead time ‐ for cases of
constant and variable spares demand, and variable lead time. The following discussion draws heavily
from Lawrenson (1986).
6.3.1 Constant demand, zero lead time
Stock
Q
Average =
2
time
Figure 6.6 Stock variations over time (Lawrenson, 1986)
Figure 6.6 shows a simple model of the variation of stock over time for an individual stock item. The
model assumes constant demand and instantaneous reprovisioning (i.e. zero lead time to obtain
spares). It can be seen that, if the warehouse orders batches of Q parts, and reorders when the parts
are exhausted, the average number of components held in stock is Q/2. The annual stockholding
cost is therefore:
2
Where P is the price of the component and I is the holding factor associated with the holding costs
of the components (expressed as a percentage). Thus it can be seen that the cost is proportional to
Q.
If the annual demand for components is D, then the number of orders made per year will be D/Q. If
we assume that there is a constant cost, C, associated with placing an order, then the order costs are
inversely proportional to the order quantity, Q, and we can write:
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Total cost
Stockholding
cost
Cost ($/unit)
Ordering cost
EOQ Order Quantity
Figure 6.7 Total stockholding and ordering costs (Plossl, 1985)
The total cost associated with ordering and holding spares is given by summing the two previous
equations (see Figure 6.7). The minimum cost is given by differentiating the equation. It can be
shown that this is the equivalent of finding the point of intersection of the two cost component
curves, thus:
2
By rearrangement we find that the optimum batch size, Q, or “Economic Order Quantity” (EOQ) is
given by:
2
Where:
• D = demand (items per year)
• C = cost of ordering a line item
• P = item price
• I = stockholding rate (per annum percentage)
This is known as Wilson’s formula.
Example:
• D = 120 items per year
• C = $20 per order
• P = $100 each, and
• I = 20% per year, then:
15.49 Or 15 spares, when rounded.
.
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Variations of Wilson’s model have been formulated over the years by considering non constant
demand for spares and non‐zero lead times. However, invariably, EOQ is directly proportional to the
square root of the demand.
Note that demand is inversely proportional to MTBF. As such, when equipment reliability is
increased, there is an associated reduction in spares inventory costs.
6.3.2 Constant demand, constant lead time
In the case that the lead time necessary to reorder spares is constant, we can define a trigger point,
as the minimum re‐order level.
This re‐order level, R, can be calculated by:
Where:
• D is the monthly demand, and
• TL is the lead time (in months)
Stock
Q
Average =
2
R
time
TL TL
Figure 6.8 Stock levels accounting for constant lead times
6.3.3 Variable demand, constant lead time
Probability of demand
T x SD
demand
Mean demand D
Approx 6 x SD
Figure 6.9 Normally distributed demand curve (Lawrenson, 1986)
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Demand for spares is rarely constant. If we suppose that demand follows a normal distribution
(Figure 6.9), then the mean demand can be represented by and the spread of demand is
determined by the standard deviation SD. With a mean demand of = 50 items per month, and a
standard deviation SD = 5 items per month, we can be 99.9% certain that demand will lie between
plus of minus three standard deviations, or 50 +/‐ 15 items. Thus we could define a safety stock of 15
items.
If we suppose that there is a 2 month lead time to obtain spares, then the demand for spare may be
high in month one and low in month two. We would therefore not define the number of safety
spares as 2 x 15 = 30 components. In general, the rule is to increase the proportion by the square
root of the lead time. Thus an adequate number of safety stock is 2 x 15 = 21.2, say 21 spares.
In general, the Economic Order Point (EOP) is given by:
Where k is a safety stock factor determined by the required service level for the component.
Required service level Safety stock factor (k)
80% 0.84
85% 1.28
90% 1.65
99% 2.33
99.9% 3.0
Table 6.5 Service level and safety stock factors (Lawrenson, 1986)
Example: Suppose that the demand for oil filters varies between 36 and 54 per month, and that the
lead time between ordering and receiving new oil filters is 2 months. If we assume that the demand
is normally distributed, then the average demand is (36+54)/2 = 45 units, and 3 x SD = 9, therefore SD
= 3 units. For a 99% service level, the Economic Order Point should be: 45 x 2 + 2.33 x 3 x 21/2 = 99.9
or 100 units.
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6.4 Low Rotation Critical Spares
In this section we are primarily interested in low rotation, expensive items. Because of their expense,
such components are generally repairable items.
Figure 6.10 Sea water cooling pumps at an LNG refinery.
Example: Figure 6.10 shows a bank of four sea water pumps used to cool the gas liquefaction trains
of an LNG refinery in Qatar. At any one stage, three out of the four pumps are required to be
operational. The refinery scheduled one of the pumps to take out of operation for a routine service.
A risk analysis was performed to evaluate the risk of failure of one or more of the remaining pumps
during the required service period. The service was completed, and, as the pump was being
manoeuvred back into position, a weld in the overhead crane failed. The newly reconditioned pump
crashed to the ground, incurring extensive damage. A subsequent accident investigation found that
beyond regular lubrication, no preventive maintenance was specified for or being carried out on the
overhead crane.
Discussion: What lessons can be drawn from this example?
Wong et al (1996) present a case study of decisions to determine the optimal number of spares that
should be carried to service electric motors at Syncrude’s oil sands operations in Canada. Syncrude
has approximately 25 km of conveyors. The company has 68 1250 HP electric motors for these
conveyor services. Each motor costs around Cn$100,000. 60 motors are in service at any one time,
with 8 designated as spares. The average repair time for the motors is 108 days. Mean life for the
motors is around 2800 days.
Due to planned plant expansion, over the next three years an additional 4 of these 8 spare motors
will be required for service. The mine would like to determine how many additional motors it should
purchase as safety spares.
Because we are dealing with repairable items, the number of safety stocks is determined not only by
the average demand for the component but also by the extent of the period required to dispatch,
service and return a component to site. The average spares requirement, S, can be written as:
S=
(N × μ × T )
R
L
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Where:
• N is the number of units in service
• μ is the average effective utilization of the components
• TR is the door‐to‐door repair time for the component, (days) and
• is the average service life of the component until retirement (days)
Thus, in the case that there are 64 motors in service, running at 98% effective utilization,
S = (64 x 0.98 x 108)/2800 = 2.4
We can now use the Poisson distribution to probability of running out of spares. The probability that,
in one month, the number of motors failures (and corresponding spares required) is x is given by:
!
Therefore, the probability of a stock‐out occurring given that we have y spares in the warehouse is
defined by:
⎛ y e− S × S x ⎞
1 − P( X ≤ y ) = 1 − ⎜⎜ ∑ ⎟
⎝ x =0 x! ⎟⎠
If we require a 99% service level for motor spares, then the permissible stock‐out probability is 1%.
No. spares Stock‐out
(y) probability
0 0.909
1 0.692
2 0.430
3 0.221
4 0.095
5 0.036
6 0.012
7 0.003
8 0.001
Table 6.6 Probability of stock‐out vs. No. of spares
The probability of incurring a stock‐out has been calculated in Table 6.6. It can be seen that, to
achieve a service level of just under 99%, six spares are required. Thus the mine should purchase two
additional 1250 HP motors.
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References
Huiskonen, J., 2001. Maintenance spare part logistics: special characteristics and strategic
choices. International Journal of Production Economics 71, 125‐133.
Kennedy, W.J.; Patterson, J.W. and Fredendall, L.D., 2002. An overview of recent
literature on spare parts inventories. International Journal of Production Economics 76,
201‐215.
Knights, P.F., Jullian, F. & Jofre, L. “Building Business Cases for Maintenance Improvement Projects”
AusIMM Bulletin, pp.30‐35, No.6, Nov‐Dec. 2006.
Lawrenson, J, “Effective Spares Management” Int. Journal of Physical Distribution and Materials
Management, Vol.16, No.5, MCB University Press, England, 1996.
Louit, D.M. “Optimization of Critical Spare Part Inventories: A Reliability Perspective”, Unpublished
PhD Thesis, University of Toronto, Oct. 2006.
Louit, D., Knights, P.F., & Jardine, A.K.S. “A Simple Graphical Multiple‐Criteria Procedure for the
Prioritization of Spare Parts”, submitted to International Journal of Production Economics for review,
June 2006.
Marshall Institute, “Maintenance planning and scheduling”, course notes, 1996.
Plossl, G.W. “Production and Inventory Control: Principles and Techniques”, 2nd Edn, Prentice Hall,
443 pp., 1985
Wong, J.; Chung, D.; Ngai, D.; Banjevic, D. & Jardine, A. “Evaluation of Spares Requirements Using
Statistical and Probability Analysis Techniques”, ICOMS 96, paper 33, 1996.
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