Dan Floen, President, Professional Materials Management (PM2) www.pm2online.com
Gaining increased knowledge and tighter control of your spare parts inventory results in significant cost savings. In order to measure this, ideally, we would want to start by conducting a total cost baseline analysis of your entire inventory management process, to include purchasing and processing costs. Short of this, however, we can give you some very common findings and savings results that we encounter daily. From these, you can insert your relevant numbers and extrapolate what the cost savings might look like for your company.
Here are the three main areas where your company will realize cost savings by effectively managing your spare parts inventory operations:
1. Spend reduction through inventory optimization
2. Reduced item search times
3. Streamlined item issue process
Reduced Purchasing Expenditures
One area that PM2 often explores when conducting a financial baseline for a company is inventory turns per year. It is not at all uncommon (in fact it is more common than not) to find that half of a company’s parts inventory turns less than once per year. While that may not seem important at first glance, let’s look at an example of how increasing inventory turns can significantly impact your bottom line.
Example: If a company owns $500,000 of inventory and half of it turned less than one time per year, that means that half of the inventory is “dead” and the other half is “active” (moving more than one time per year). If this company could increase the overall annual turns to just 2, they would realize a savings of approximately $125,000 in the first year. The fastest way to realize these savings is to know what you own, where to find it, and to eliminate “buying around the inventory.” In other words, require a stock check prior to purchase to make sure you are using the spare parts you already own.
Reduced Item Search Times
In uncontrolled or manually managed parts inventory environments, we often see item search times ranging from 10-30 minutes per item. For critical spare parts, search times often exceed 1 hour. In contrast, search times in an efficient inventory environment are usually 5 minutes or less.
Example: If a company has a maintenance staff of 15 technicians, making an average of $40 per hour (including benefits), a 20 minute average search time per spare part would equate to $13.33 per technician in process cost. If an average of 100 items is issued per day, total item search time per day would equal $1,333. Annualized (for a 24/7 operation), this means the company spends $486,545 per year searching for parts. Given this scenario, it would not be unusual to see process cost savings of 50-75%. Conservatively, if search times in this scenario could be reduced by even 25%, the company would realize a process cost savings of $121,636.
Streamlined Item Issue Process
Most of the companies that engage PM2 services have historically completed hand written forms to initiate an item issue and charge the items to a work order. This can be a slow process in itself, but in addition, each of these forms then need to be keyed into the financial system, one by one, to complete the inventory transaction. Barcode labeling and scanning of items, coupled with an integrated software system to manage work orders, can significantly reduce process time for these transactions. Depending on the level of systems integration and automation achieved, issue transaction processing time can realistically be reduced by 50% or more.
Example: If a company has a maintenance staff of 15 technicians, making and average of $40 per hour (including benefits), a 5 minute average time to fill-out a work order equates to $3.33 per form. If technicians complete 75 work orders per day, daily process cost would equal $249.75. Now, add 5 minutes per form for an administrative person to key them into the system ($125 per day). Annualized (for a 24/7 operation), this equals an annual processing cost of $136,784 to process manual work orders. Automating this process can easily cut this time and cost in half.