The True Cost of Spare Parts Inventory:
The Calculations May Surprise You
By: Jim Clifford, Director of MRO Services
In every industry, from manufacturing to pharma, spare parts are crucial to equipment reliability. That sometimes leads purchasing managers to overstock items that are frequently used, especially when a vendor is running a sale on them or the price per piece is lower in bulk. This approach is OK (if not great) if it is part of a cohesive inventory management plan to use those parts efficiently, but most of the time, it is not.
The purchasing manager’s logic usually goes like this: “We got a good deal on them [or we’ll use them quickly; we’re a bit under budget this month and can afford them now, etc.], so this makes sense.” Once the parts have been purchased and paid for, the purchasing manager may consider them to have no associated costs.
In reality, there are substantial expenses related to holding spare parts, in the storeroom, on the facility floor and on the books. Following are a few examples:
- Most firms are not self-insured, so they pay an insurance company premiums on their inventory. Often, these costs are five percent (or more) of total inventory value. While a few extra parts may not appear to make much of a difference in that value, unchecked over time, the added expense is compounded. For states with an inventory tax on total value, the cost is even higher.
- The administrative and physical overhead of excess parts can be substantial. These include the cost of building space and utilities, salaries of the individuals who manage inventory and/or perform recordkeeping, and more.
- Spare parts, like all materials, deteriorate over time – gather dust, lose internal lubrication, and/or acquire corrosion or rust. (The latter is especially likely if the storeroom isn’t 100% climate-controlled and shielded from moisture, and many are not.)
- Parts may become obsolete over time and need to be replaced with newer versions. This can happen if manufacturers introduce new maintenance specifications. It is also common when equipment breaks downs and engineers rebuild or replace an engine or other complex piece of machinery. The carrying cost on obsolete parts is especially high because they have lost all their original value.
- Too many excess parts makes it hard to keep the storeroom organized, which also increases the manpower load for parts retrieval.
- Overstocking will produce situations where moving materials around becomes commonplace. This expends labor unnecessarily and adds to the general confusion in the storeroom.
- As space becomes less available, the ability to rationally keep parts together diminishes over time. Therefore spare parts for a specific piece of equipment may be located in several non-logical areas. This is often referred to as an “Easter egg hunt”.
- In extreme cases, excess spare parts can leave a storeroom so overstocked that there isn’t enough room to maintain enough on-hand supply of other spare parts.
Individually, these costs may seem minor, but they are incremental and add up. In the days before proactive facility management, storeroom managers often thought they didn’t have to worry about extra or obsolete parts. Their logic was, “We might use them someday and they aren’t costing us money just sitting there.” With spare parts inventory, nothing could be further from the truth.
In a modern, well-run facility, there simply is no room for excess spare parts. To learn more about spare parts management — and how your firm can calculate their overhead — give us a call at 770-717-2737 or send an email to email@example.com with the subject line “spare parts inventory question.”