That car you wanted in red is only available in black, thanks to chip shortages. Your favorite cupboard staple marinara sauce hasn’t been around in weeks. And that couch you ordered last summer? Still no sign of it.
What started in March 2020 with toilet paper hoarding, resulting in empty shelves in mega stores was a harbinger of the nightmare supply chain logistics and shortages that we’re still experiencing today.
Major newspapers like The New York Times are adding a logistics beat to their newsroom for the first time, and teachers in high schools and business schools are now adding supply chain logistics, shortages and just in time manufacturing to their curricula.
The pandemic has disrupted facets of life that normally operate below the surface – ones that most of us once ignored. Just as the average citizen has a new appreciation for the complexity of our bodies’ antibodies and Memory T-cells, consumers are now acutely aware of the complicated supply chain that ends with Amazon Prime packages at our doors.
The truth is that what seemed to operate simply just two years ago, was never simple.
Why are we still seeing supply chain disruptions and shortages?
Most experts attribute one major cause for today’s supply chain disruptions to a lean inventory strategy with just-in-time (JIT) delivery. This strategy worked well in the last 10 to 20 years with predictable delivery system requirements (especially in manufacturing environments).
However, this approach no longer works in a pandemic where supply chain disruptions have become the norm. Factories temporarily closed and are still operating with staffing shortages, while transportation employees, like shipping dockhands and truck drivers, are often quarantined. China shipped supplies to places like West Africa and South Asia that don’t normally ship items in those same shipping containers back. And companies overcompensated by ordering more supplies, which only complicated matters by causing more shortages.
The JIT approach that used to make sense for the sake of huge savings with less storage, became a disaster in a time of supply chain disruption.
Old approach to holding spares vs new approach and new, new approach
When it comes to the assets every organization keeps on site, there are two approaches. The traditional approach was one where organizations stocked a bunch of supplies. This meant unused inventory often sat on shelves for years and even decades. This is expensive, thanks to storage costs as well as taxes on assets.
The lean approach is one that depends on just in time inventory. This resulted in huge savings for organizations and minimal storage needs.
The pandemic highlighted the constant battle between the supply chain goal to minimize spare holdings with the reliability goal to reduce the consequences of failure with adequate spare holdings. The amount of spares that once proved to be enough to have on hand is now insufficient in this time of supply chain disruptions. Overstocking spares had been considered an inefficient use of capital. In the past 21 months, it’s become essential.
To understand the perspective of the minimalist accounting team vs. the maintenance team when it comes to spare parts, consider what it’s like for a professional organizer to help a married couple clean out the garage. One party wants to get rid of the stuff the other hasn’t touched in two years. The owner of the clutter insists on keeping it “just in case.”
This is a losing battle, unless you mediate with Risk Centered Spares. RCS allows you to quantify the benefit of having the spare with the consequence of not having it.
What’s changed in the pandemic is not this equation, but the risk level of not having the spare parts.
RCS helps organizations optimize inventory and spare parts
Modern engineering stores hold a wide range of parts, from cheap consumables used in thousands annually to critical spares costing tens or hundreds of thousands of dollars which may never be used over the entire lifetime of the plant.
Up to 50 percent of inventory value may consist of spare parts that are used at the rate of one per year or less. Between 10-30 percent of the inventory can sit on the shelves for the complete plant lifetime. Taking a financial view, perhaps these parts should never have been purchased. On the other hand, if they were not available when they were needed, the business could suffer severe downtime consequences.
The Aladon RCS process, an extension to and derived directly from Reliability Centered Maintenance, addresses specific criteria for all inventory, whether consumables or slow-moving parts. This helps organizations achieve substantial savings by applying the RCS method to expensive, slow-moving, critical parts. RCS determines the level of spare parts inventories based not on manufacturer’s recommendations, nor on a subjective judgment of service level, but on the requirements of the equipment and maintenance operation that the inventory supports.
The same risk-based principles that served organizations before the pandemic still apply now with a Risk Centered Spares approach
At Aladon, we’re using the same risk-based principles that applied prior to the pandemic to evaluate how organizations should approach spares now.
Our Risk Centered Spares (RCS) methodology allows organizations to determine the supply chain strategies they need to account for both fast-moving, relatively inexpensive spares and slower moving expensive spares with higher operational consequences. The goal remains to use a risk-based approach to optimize spares holding when considering the minimization of costs and maximization of equipment availability for both “repairable” and “non-repairable” spares.
The difference now that we’ve had unprecedented disruption, is identifying the new risks involved and factoring them into each organization’s RCS approach. The lean supply chain that relied on just in time delivery of parts and spares currently doesn’t apply to many assets.
How organizations can responsibly approach spares during an unpredictable time
With Risk Centered Spares, organizations stay operational by determining those parts that are critical to operation or are hard to access based upon the risk to the organization.
This minimizes the effect of a “stock out” on the business by considering its potential impact on downtime, loss of production, secondary costs as well as safety.
Just as before the pandemic, Aladon continues to help organizations optimize their spares based on risk, cost and availability. This methodology helps organizations balance savings with risk so that they stay operational and cost conscious.
The simple understanding is that we approach all inventory decisions with two important questions:
- What’s the impact of not having that spare?
- What’s the probability of not being able to access it?
Ensuring organizations can access spares critical to staying operational reduces risk and downtime in a time of reliable supply chain operation, as well as one of disruption.
Following are 7 questions to determine the criticality ranking of spare parts
- How often do you use that part?
- What’s the probability of it breaking?
- How common is the part across the plant?
- How hard is it to get?
- How many do you have?
- What’s the lead time on getting it?
- Is it made anymore?
Once an organization completes an RCS analysis, they can determine what spares are necessary. Otherwise the spare on an aging report is a candidate for removal if the team doesn’t analyze and understand the business risk associated with a stockout.
Practically speaking, this means that just because an organization hasn’t used a spare part in a year, doesn’t mean they don’t need to keep it in stock. Sometimes, the hoarder wins.
RCS is an integral part of an organization’s overall maintenance strategy
An organization can benefit from an Risk Centered Spares (RCS) analysis in isolation. However, it’s even more effective when it’s an integral part of a risk management strategy – with risk-based Reliability Centered Maintenance (RCM3™).
At its core RCS is based on the same structured principles as RCM. Spare recommendations are part of the risk-based strategy when maintenance is optimized.
Like RCM (which focuses on the risk associated with equipment failures), RCS focuses on stockout effects and associated risks they pose for the organization.
After lessons learned in the pandemic, it’s more obvious than ever that every organization should stock critical parts to avoid supply chain disruption. Determining which parts are critical is why RCS is essential.
And once the supply chain inevitably returns back to more predictable patterns, organizations will need to use these same principals to again reevaluate the risks of stockouts.
Contact us to learn more about RCM or RCS for your organization.