Key considerations for setting optimal min/max inventory stock levels to assure productivity and profitability

10 May, 2021 by Add Energy

Efficient inventory and spare part management is a fundamental requirement for achieving business performance goals and mitigating risk.

And unfortunately for us, a crystal ball for pinpointing exactly when you will need a spare part does not exist for helping to decide which spares should be kept in stock, how many you should hold and where they should be located. But what we can do to help inform stocking decisions is assess the factors that are directly linked to accessing the spare part you need. This should include data and information relating to the risk profile, lead times, storage costs, costs of loss and demand rates.

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Applying a “min/max stock level approach” to managing spare parts 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.

In this blog, Add Energy’s Materials Specialist, Paul Mitchell discusses how this approach can help companies work more efficiently, common challenges associated with getting it right and offers advice to implementing this strategy effectively.

How it works

Setting minimum and maximum stock levels in your computerized maintenance management system (CMMS) or inventory management database can help assure you always have immediate access to critical parts or items with long lead times, as well as providing the means to control the risk of overstocking and wasted expenditure.

The philosophy behind this approach means that when the stock level drops below its “min” value, this will trigger a requirement to reorder, and on the flip side, having the “max” value defined will allow stock to be replenished to a set value, and no more. 

The benefits

Applying this approach to inventory management is proven to unlock significant benefits for companies operating across multiple industries. These benefits include, but are not limited to:

  • Assuring immediate access to critical spare parts to avoid downtime and maintenance backlog resulting in increased efficiency
  • Better inventory planning and scheduling, avoiding overstocking and tying capital up in unnecessary spares
  • The ability to negotiate better prices by having better foresight on annual quantities
  • Minimizing admin time through automated and controlled reordering

Challenges faced when trying to implement this approach

Accurate and reliable sits at the heart of effective inventory management, and to set this strategy up for success, it is critical to have access to this data and information at your fingertips to make informed decisions on min/max stock level settings.

Common challenges associated with getting this right therefore often resides in the completeness and accuracy of the following data and information:

  • Name plate data: to assure you are setting min/man levels for the right equipment with the right specifications
  • 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

The impact it can have when this strategy is applied incorrectly

Our materials team at Add Energy recently conducted an initial review of a plants inventory data, the findings listed below showcase the impact a poorly implemented min/max level strategy can cause for a business:

  • Overstocking of $10,180,804.00 due to poor BoM data and lack of quality min/max level settings
  • Over $1,1011,370.00 of stock on order that was already in stock
  • 9765 items valued at $1,008,169.00 on order that was marked as “Do Not Order”

How to effectively set min/max stock levels  

When embarking on a min/max level setting indicative, it is important to consider the following advice:

Item Lead Time

For the stock levelling to work efficiently, the Lead Time should be calculated as Total Lead Time and not just what the item supplier derives as their ‘ex-works’. An example of this is where a supplier has an ‘ex-works’ lead time of 2 months, if for example it takes the business 2 weeks to process the request before sending the PO to the supplier and a further 4 weeks for shipping and warehouse receipt activities, what was a 2-month lead time, now becomes 3 ½ months. If the minimum/maximum levels are not calculated correctly, this could result in stock outs.

Consumption Rate

The Consumption Rate should be based on historical data by working out the usage of an item over a 12-month period. This should be monitored on a regular basis as the older items become, the more regular they tend to fail.

Equipment commonality across the plant could also be determined using the SPIR (Spare Part Interchangeability Record) as this will influence your demand/consumption rate. For example, if a seal type A is required on pump 1, 2 and 3 the demand rate should be calculated based on usage across all 3 pumps over a 12-month period (how often it needs changed across all 3), so if this seal is changed out 5 times over the year on each pump, the demand rate for seal type A will be 15.

Cost

The Cost of an item should also be considered due to local regulations and contracts as this could result in over stocking an item if the maximum level is set too high and the item subsequently becomes obsolete. If the minimum level is set too low and the stock falls to 0, if the item is required urgently, it may result in the supplier increasing the price to fit the demand requirements.

Reactive/breakdown maintenance

Minimum and maximum settings should be based on corrective/breakdown maintenance requirements, and not on planned or scheduled maintenance. Any items required for planned or scheduled maintenance should be able to be ordered in sufficient time for the maintenance to be carried out. Minimum stock levels can also be classed as safety stock. This is the level at which an item replenishment should be made to take the stock holding figure back to the maximum level and therefore reduce the risk of the stock level becoming 0.

How we can help

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:

  • Reduce the risk of critical and high consumption items being out of stock, to assure you have access to the right spare at the right time
  • Minimize excess inventory holdings and costs
  • Reduce maintenance backlog and equipment outage

Learn More About Our Inventory Management Solutions

Topics: Maintenance Optimization, Inventory Management Optimization, CMMS Data Building

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To speak to one of our experts to discuss implementing an effective min/max stock level strategy within your business, please fill in this form and we will be in touch