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How to calculate optimal inventory levels

5 May 2022 by Add Energy

At the heart of every inventory management strategy is accurate and reliable data. It is critical to have access to this data and information at your fingertips to make informed decisions around setting optimal inventory levels.  Paul Mitchell_Headshot

Add Energy’s Materials Specialist, Paul Mitchell has shared his expertise from over 5 years of working on inventory projects across multiple sectors and has collated his top tips and a step-by-step process to ensure you are managing spare parts in an efficient and cost-effective manner.

The impact poor inventory levels can have on a warehouse

“Poor data surrounding your spares and inventory holding can create a knock-on effect and cause many challenges, not just within the warehouse but throughout the organization as a whole. The top four most common issues that we have seen in companies are: 

  • Money wasted by purchasing the wrong spares 
  • Difficulties understanding how to rationalize extremely high inventory costs  
  • Little to no visibility on what you hold vs what you need to stock 
  • Spare parts not being preserved correctly, inducing premature failure post installation.”

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The benefits of achieving optimal inventory levels  

“Applying the upcoming steps to your inventory management is proven to unlock significant benefits including: 

  • Better inventory planning and scheduling, avoiding overstocking and tying capital up in unnecessary spares 
  • Assuring immediate access to critical spare parts to avoid downtime and maintenance backlog resulting in increased efficiency
  • Reducing rental costs and warehouse footprint, if fewer spares are required 
  • Minimizing the need for direct purchasing and last minute orders, which saves costs 
  • The ability to negotiate better prices by having better foresight on annual quantities 
  • Minimizing admin time through automated and controlled reordering 
  • Identifying obsolete items and unnecessary stock to dispose of and sell off to gain capital back into your business.” 

The essential steps to calculating optimal inventory levels  

1. Collect nameplate data  

“Start at the beginning by identifying the right equipment with the right specifications - e.g. make, model, manufacture and serial number data, etc. It is critical to have this information accurately logged in order to build correct BoMs and make informed decisions on min/max levels later on in the process. 

“You can enhance this process by using software such as ePAVTM , which helps to efficiently collect and verify your field data and capture images of the equipment and its location. This can also help prevent time-consuming and laborious data collection and incomplete or duplicate datasets which could hinder the following steps.“ 


2. Build bill of materials (BoMs)  

“Once you have accurately identified your equipment, you can build BoMs that tie to your repair and replace strategy with complete and up-to-date data. This reliable list of spares ultimately becomes the foundation for smooth, efficient operations, with significant benefits felt throughout inventory, maintenance and procurement teams. 

“From our experience of delivering hundreds of thousands of BoMs, we have developed highly effective, efficient and collaborative processes to deliver these 5 key stages: 

  1. Validation and prioritization 
  2. Build and enhance 
  3. QA and approvals 
  4. Standardization 
  5. Export and load.

“You can learn more about this process by clicking here.” 

3. Cleanse the data  

“Now that you have collated a list of spares, you have to cleanse the data to remove duplicates or obsolete parts. You should now have a consolidated list of spare parts needed for your assets.  

“After cleansing the data, you can ensure it stays organized by implementing a master data optimization software such as EffioTM to build and update inventory data to ensure your equipment and maintenance tasks are associated with the correct parts with the correct information to avoid delays in maintenance, cut costs and avoid downtime.

"Watch how you can identify and capture the asset register data you need to manage your plant effectively using Effio™."

4. Set min/max levels

“With the equipment clearly identified, BoMs built and the data cleansed, you can start setting min/max levels to manage your spare parts. This is a highly efficient and cost-effective method for controlling inventory of critical equipment, high consumption items or items that may have long lead times.

"We recommend that you set your min/max levels based on: 

  • Demand rates: to determine how often that spare is needed across the plant 
  • Lead time: to determine the time taken between part ordering and delivery 
  • Shelf life: to determine how long it can be held in stores to assure it is fit for use when called upon 
  • Cost: to determine the cost of the spare part vs loss production cost 
  • Historical consumption: Determine how frequently this equipment requires corrective maintenance and how regularly it fails over a specified  timeframe. 

“To find out more about the key considerations for setting min/max stock levels, click here.

5. Use software to streamline this process  

“An asset management strategy deployment engine such as EffioTM is a great tool to use at any stage of this inventory process to help you:  

  • Digitalize key equipment data by utilizing electronic tag extraction functionalities to build or update your asset register directly from your engineering drawings 
  • Set algorithms and rule sets to your specific requirements 
  • Build BoMs and identify duplicate spare parts 
  • View work as it’s being done with the live, collaborative functionality  
  • Gain assurance that you’re meeting standards and expectations  
  • Cloud-baseded collaboration and built-in reporting lead to efficiencies.”

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People working on effio

How to unlock the potential of your inventory management 

At Add Energy, our experienced materials team can implement this strategy on your behalf, or we can advise a recommended process for implementing the strategy in-house effectively. 

If you are keen to unlock the benefits listed below, please fill in the form at the bottom of this page and we will be in touch to help you: 

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Looking for more information?

To speak to one of our team members about inventory data enrichment, please fill in this form and we will be in touch with you directly.