A recent article in the Sep/Oct issue of APICS Magazine authored by Randall Schaefer, CPIM, brings us an inventory management lesson of importance to companies who make repair parts for their customers. From their example, we learn why and how to distinguish between making a part for production and making that same part so it’s available for service, warranty or repair.
As Schaefer points out, the simple approach is to say… “Let’s build enough to support production with some safety stock for repair-related sales.” This often results in either too much or not enough inventory to consistently satisfy both requirements. Components for production are dependent demand items, and the same components when sold as repair parts are independent demand items.
The point is, the two should be held in separate inventories. Most ERP systems can accommodate the same part number being in different locations (or warehouses) to keep production and repair separate. Here’s why that’s important: Even if repair parts is a small contributor to the bottom line, it is arguably more important to your reputation than sales of that item. That’s because a repair part order is likely to come from a customer who is down, or losing production, and thus money. The item’s out of commission and your reputation is on the line. Providing a repair part quickly can work wonders for goodwill – not to mention reinforce the likelihood of future sales.
Schaefer tells of a personal experience years ago working for a company where repair part sales were profitable. Short leads times maintained excellent customer responsiveness. But when a new VP started using repair parts inventory to cover the factory’s failure to complete components on time, things went downhill quickly. The factory became so dependent on the new process that the manager of repair parts was told to increase inventory. This led to huge safety stocks and a loss of discipline over internal production, not to mention the hit to customer responsiveness.
When a new VP took over later, fortunately, he reversed the trend. The firm broke the production team’s dependency on “stealing” from repair parts, and the parts manager was told not to supply them to production unless he had excess. And then if he did, he had to sell the parts to production at full price. The cost was booked as a variance against the supervisors’ budgets, “which quickly put the attention back on supply management and the factory schedule, right where it belonged,” notes Schaefer.
The simple but critical lesson above, and many more like them, is why we’re big fans of APICS training – and why we think you should be too. Those interested in learning more about this fine (non-profit, international) organization should drop a line in our Comments section. We’ll connect you with people who can help your team get the inventory, production and manufacturing training they need. Meanwhile, you can go here to learn more.