Presentation on theme: "SPARE PARTS INVENTORY MANAGEMENT"— Presentation transcript:
1SPARE PARTS INVENTORY MANAGEMENT An – Najah National UniversityFaculty of Engineering Industrial Engineering DepartmentSPARE PARTS INVENTORY MANAGEMENTProject Group Members:Aya Abu zantHaneen Saymeh Hisham Jaber Mahdi AttiehSupervised by:Dr. Yahya Saleh
2Agenda Introduction Inventory Management Spare Parts Spare Parts ManagementLiterature ReviewProblem StatementProposed SolutionMethodologyABC ClassificationDemand ForecastingInventory CostsInventory Management ModelsModel FormationResults and discussionConclusionRecommendationLimitation
3Introduction Inventory Inventory Types (accounting perspective) 1- Raw materials - materials and components scheduled for use in making a product.2- Work in process, WIP - materials and components that have begun their transformation to finished goods.3- Finished goods - goods ready for sale to customers.4- Goods for resale - returned goods that are salable.5- Spare Parts.
4Inventory ManagementInventory management is primarily concerned about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply chain network to protect the regular and planned course of production against the random disturbance of running out of materials or goods.The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting.
5Spare Parts Spare Parts Why we use Spare Parts ? This category includes those products, which are complimentary to the main products produced for the purpose of sale.Why we use Spare Parts ?Spare parts are kept in stock to support maintenance operations and to protect against equipment failures.Although this function is well understood by maintenance managers, many companies face the challenge of keeping in stock large inventories of spares with excessive associated holding and obsolescence costs.Thus, effective cost analysis can be an important tool to evaluate the effects of stock control decisions related to spare parts.
6Spare Parts Management Spare Parts Inventory ManagementService parts management is the main component of a complete Strategic Service Management process that companies use to ensure that right spare parts and resources are at the right place (where the broken part is) at the right time.Spare parts Management plays an important role in achieving the desired plant availability at an optimum cost. Presently, the industries are going for capital intensive, mass production oriented and sophisticated technology. The downtime for such plant and machinery is prohibitively expensive.
7Literature ReviewMost studies began in the last decade on the spare parts inventory management.Although theoretical models for slow-moving items are abundant in inventory literature since 1965.All these studies were concentrated on the mathematical optimization of the inventory.Most of the empirical studies in spare parts literature are focused on testing forecasting methods for demand of slow-moving items rather than on implementing inventory models.
8Literature Review (Partial List) ResearchAuthorDateAbout(S - 1, S) modelFeeney and Sherbrooke1966A particular case of (s , S) models, with an underlying Poisson demand distribution.It’s well studied and suitable for slow-moving items, this type of policy requires continuous review of the inventory system.Moreover, the Poisson distribution assumes randomness of demandCompound-Poisson modelsWilliams et al ,Silver et al1971,1984This distribution needs no information of demand other than the average demand, which is the sole parameter of the demand distribution.However, these models are more difficult to apply in practice because they need an assumption on the compounding distribution.
9Literature Review (cont…) ResearchAuthorDateAboutInventory models to control slow and fast moving items.Gelders and van Looy1978Which were clustered in classes using ABC analysis together with criticality and value considerations.Forecasting methods for the management of spare parts .Ghobbar and Friend2003They present a comparative study of 13 different forecasting methods for the management of spare parts in the aviation industry. (No inventory models are included)Bootstrap method to forecast intermittent demand of service parts.Willemain2004They used it to forecast intermittent demand of service parts, and they implement the method on a large industrial data set.(Also no inventory models are included)
10Problem StatementIn this Project we present a case study in inventory management of spare parts at Al Sarawi for Mercedes Spare Parts; a local Palestinian company.The company’s core business is selling spare parts for Mercedes Cars to consumers. The company does not give adequate importance to inventory management.As a result, there is an inefficient deployment of inventory.This study focuses on the inventory management of spare parts for a specific model of Mercedes Cars which is 416.It is important for the company has a well-planned inventory management process for spare parts to control cost and service customer needs.
11Proposed SolutionWe need to minimize the total costs of the inventory in the company through developing and optimizing various inventory management models of the company’s various spare parts1. Building Inventory Models and Ordering Policy for the spare parts being considered in our study2. Conducting a trade-off analysis via comparing the characteristics of the current and the new inventory models at the company
12Methodology The Project consists of many phases Phase 1 Determine and classify the spare part items by using ABC analysis.Phase 2Forecasting the demand by analyzing the historical sales data availablePhase 3Collecting Relevant Cost Data ( Holding Cost , Ordering Cost, Transportation cost, Backordering cost ).Phase 4 Building Inventory Models for each category of the classified spare parts ( A , B , C )Phase 5Evaluate the previous conditions and compare them empirically with the new results based on our inventory models.
14ABC Inventory Classification The Italian economist Pareto ( ) observed in 19th century Italy that 20% of the population owned 80% of the usable land (Pareto 1935). Pareto found the same distribution in other economical and natural processes
15Advantages of ABC Classification: This kind of categorization of inventory helps one manage the entire volume and assign relative priority to the right category.(A) category items: Helps one identify these stocks as high value items and ensure tight control in terms of process control, physical security as well as audit frequency. It helps managers and inventory planners to maintain accurate records and draw management’s attention to the issue on hand to facilitate instant decision-making.B category items: These can be given second priority with lesser frequency of review and less tightly controls with adequate documentation, audit controls in place.C category items: Can be managed with basic and simple records. Inventory quantities can be larger with very few periodic reviews.
16Cont…A items : these are the 20% of the items that tie up 80% of the total inventory moneyB items : these are the 30% of the items the tie up 15% of the total inventory moneyC items : these are 50% of the items that tie up 5% of the total inventory money
17Cont…. Sample of A items Sample of B items Sample of C items ID Demand CumValue/UnitUsage Value100%Category1101.1765600.0066000A402.3531,315.0052600Sample of A itemsIDDemandCumValue/UnitUsage Value100%Category2721.177250.006750B12055.006600Sample of B itemsIDDemandCumValue/UnitUsage Value100%CategoryF3047.0675.002250CE21100.002100Sample of C items
19Cont.. Description Total number of parts Percentage of items in the inventoryCumulative usage valuePercentage of annual sales valueCumulative of annual sales valueA1720%70%B2126%46%90%C4554%100%10%Total
21Demand ForecastingDemand forecasting is often the first critical step in any planning activity especially inventory planningThe purpose of demand forecasting is for companies to determine the required quantity of parts that need to be ordered.We have 2 years data of demand divided in to 4 intervals for each 6 months, for 85 items
23Simple moving average Sample of A items Sample of B items # ID ABC D forcast1-6\2011D forecast 6-12\2011D forecast 1-6\20121A40302035252FNS00007651209093105Sample of B items#IDABCD 1-6\2010D 6-12\2010D 1-6\2011D 6-12\2011D F 1-6\2011D F 6-12\2011D F 1-6\20121SB3756291018814
24A weighted moving average Sample of A items#IDABCD 1-6\2010D 6-12\2010D 1-6\2011D 6-12\2011Forecast D1-6\2011Forecast D 6-12\2011Forecast D 1-6\20121A40302034242FNS00007651209098102Sample of B items#IDABCD 1-6\2010D 6-12\2010D 1-6\2011D 6-12\2011Forecast D1-6\2011Forecast D 6-12\2011Forecast D 1-6\20121SB3756291018815
25Criteria for choosing time series methods Mean absolute deviation (MAD)Mean absolute percent error (MAPE)
26Forecasting error for moving average method Sample of A items#IDABCerror1-6\2010error6-12\2010error1-6\2011error6-12\2011Sum ErrorMAD avgMAPE1A0.00-5.00-10.0015.003.7516.672FNS0000727.00-30.0057.0014.2513.96Sample of B items#IDABCerror1-6\2010error6-12\2010error1-6\2011error6-12\2011Sum ErrorMAD avgMAPE1SB0.0022.009.0011.002.7517.50Sample of C items#IDABCerror1-6\2010error6-12\2010error1-6\2011error6-12\2011Sum ErrorMAD avgMAPE1C0.005.001.256.582F9.002.2518.75
27Forecasting error for weighted average method Sample of A items#IDABCError1-6\2010Error6-12\2010Error1-6\2011Error6-12\2011sum errorMAD W.AvgMAPE1A0.00-4.00-10.0014.003.5015.832FNS0000722.00-30.0052.0013.0012.92Sample of B items#IDABCError1-6\2010Error6-12\2010Error1-6\2011Error6-12\2011sum errorMAD W.AvgMAPE1SB0.00-1.001.000.255.0022.009.0011.002.7517.50Sample of C items#IDABCError1-6\2010Error6-12\2010Error1-6\2011Error6-12\2011sum errorMAD W.AvgMAPE1C0.005.001.256.582F9.00-1.0010.002.5021.88
28Forecasting accuracy for demand Item ClassesBest Forecasting MethodAccuracy MeasuresForecasting Method AccuracyPercentage of the totalitemsA items17 itemsWeighted moving average and simple average methodMAD MAPEE: 3 itemsA: 11 itemsW: 15 itemsN: 0 itemsE:17.6%A:29.4%W:64.7%N: 0%B items21 itemsWeighted moving average and simple average method.E: 2 itemsA: 13 itemsE:9.5%A:61.9%W:71.4%C items45 itemsE: 10 itemsA: 26 itemsW: 32 itemsE: 22.2%A:57.7%W:71.1%Total Items85 itemsE:ExponentiaSmoothing MethodW: Weighted moving averageA: simple average method N: Naïve Method
30Inventory CostsCalculating cost of holding inventory and ordering cost and the measurement of various management practices.Inventory cost is generally regarded by the company in terms of annual cost.The general elements that make up the cost of holding inventory can be classified as non capital and capital. This cost is an annual estimate and should be carefully identified.
31Cont…Cost of Holding items in the inventory : 1- Capital Costs: “the opportunity cost of all capital invested in an enterprise “.which comprises the cost of equity and after-tax cost of debt.In our case study we don’t need to calculate WACC, because Sarrawi Company not an equity company and it doesn’t have debt, it’s a family business owned by Al Sarrawi family so it will not be necessary in calculation.
32Cont… For this case study, the non capital costs are: Logistics costs Cost of Holding items in the inventory : 1- Non Capital Costs: The non capital cost of inventories varies from business to business. Generally non-capital cost is identified as:Warehousing rentalTransportationObsolescencePilferage/theftDamageInsuranceTax and dutyAdministration cost (accounting, management)For this case study, the non capital costs are:Logistics costsTax and utility human resource for the warehouse.Administrative and human resource for the warehouse
33Cont..The costs of logistics were obtained by the cost of every shipments contains 6-10 pallets every order ,so we conclude in average the total cost of logistics is 1600 N.I.S every order.Taxes and rental of human resource for warehouse also were taken.Administrative and human resources were used to calculate the non capital costs.
34Cont…Total Inventory Holding Cost: Combining non-capital and capital costs gives the total inventory holding cost. Non-capital costs are stated on before-tax basis.Non Capital CostCapital CostInventory Holding Cost29%
36Inventory Management Models Good management of inventory is required to manage the supply of product, its spares or consumables and satisfy the customer’s needs. The inventory management is to meet the customer’s demands and requirements at a minimum cost to the supplier.For the Sarrawi Company, the number of items offered and the volume of the car parts sold has increased over the years and this has in turn created a need for extensive service commitments and more spare parts to be held. However, because inventory is expensive, the company does not want to hold excessive amounts of stock unnecessarily. Thus, to establish balance it becomes essential to strike a proper trade off between the company’s cost considerations and customer service requirements.
37Inventory Management Models There are two basic types of inventory system that we used:I. Continuous reviewII. Periodic reviewIn our project we will be using the continuous and the periodic review systems on the A B and C items to insure that we find the most optimal feasible solution.
38Model FormationFinding The Optimal ordering quantity : The EOQ formula was used to determine the optimal Q to be ordered.Where:Q = order quantityEOQ = optimal order quantityD = annual demand quantityS = fixed cost per orderH = annual holding cost per unit
39Model Formation for EOQ Sample of A items#IDABCUnit ValueD Forecasted multiplied by 2EOQ 2012Q CurrentSafety StockSetup Cost1A180.0048551001016002FNS0000765.0020418720020Sample of B items#IDABCUnit ValueD Forecasted multiplied by 2EOQ 2012Q CurrentSafety StockSetup Cost1SB600.0012151021600320.00215Sample of C items#IDABCUnit ValueD Forecasted multiplied by 2EOQ 2012Q CurrentSafety StockSetup Cost1C45.003492601516002F240.002031305
40Model Formation Continuous Review System 1-Reorder point = Average demand during lead time + Safety Stock.2-Choosing an Appropriate Service -Level Policy (z)3-Finding the Safety Stock assuming the demand is normally distributedWhere:σt= standard deviation of daily demand.L = Lead time.
41Model Formation Periodic Review System 1-Reorder point = Average demand during lead time and the protection period + Safety Stock.Where: P = Protection period , L= Lead time.2-Finding the Safety StockWhere:σt= standard deviation of daily demand.σp+L= Standard deviation for daily demand + Protection time3- Time between order (TBO) =
42Model FormationCalculating the total costs for the new ordering quantity and current one for the two systems.Total Cost = Annual holding cost + Setup Cost + Safety stock holding cost.WhereC = Total cost per year.Q = Lot size, in units for the new and current quantity.H = cost of holding one unit is inventory for a year.D = Annual demand, in units per year.S = Cost of ordering or setting up one lot.
43Model FormationDaily demand, Service level, and the lead time for A items#IDABCLead time(L)Average daily demandz (service level)d.LσL1A30.1601.650.4800.0942FNS000070.6802.0400.307Sample of A items#IDABCLead time(L)Average daily demandz (service level)d.LσL1SB30.0401.650.1200.02020.056Sample of B items
44Model FormationContinuous Review System for first a sample of A and B items#IDABCSafety stockReorder pointQ newQ/2 * HD/Q * SCostSS currentQ currentD/Q*S CurrentQ/2* H CurrentCost Current1A2551436139628841010076826103900FNS000074187176217453527202001632188538943F1519581920413955760652.56934.54942634114855110080174015300#IDABCSafety stockReorder pointQ newQ/2 * HD/Q * SCostSS currentQ currentD/Q*S CurrentQ/2* H CurrentCost Current1SB2151305128027591019208703138219749141981538402324536
45Model Formation Periodic Review System for a sample of 5 C items # ID ABCldzpбp+lSSTarget InventoryCurrent SSQ/2 * HD/Q * SCost New1C30.1131.658.6051510860059113872F0.0672.12943651079103223890.0872.253401218118926850.68026.866454023092492220810.30014.84525208207927911800
47Results and Discussion Results for class A The results clearly show that the chosen continuous review system model has marked improvement over the existing method; the inventory cost savings are 97,640 NIS with percentage of %, but also it shows how the periodic review system is saving money for the A items but due to the high amount of inventory and the long period to restock, so it’s clearly that is not applicable in this company.Old currentNew Inventory model (Continuous Review System)New inventory model (Periodic Review System)Total Parts17Inventory cost per year, NIS180,97883,28484,963Percentage improvement“_”12.21%12%
48Results and Discussion Results for class B The inventory cost savings for the continuous review system are 36,559 NIS with percentage 4.57 % and show a similar savings for the periodic review system with percentage of 3.05 % but as mentioned above the long periods for ordering make it not applicable in this company.Current modelNew inventory model (Continuous Review System)New inventory model (Periodic Review System)Total Parts22Inventory cost per year, NIS88,63152,07264,227Percentage improvement“_”4.57%3.05%
49Results and Discussion Results for class C The inventory cost savings are 68,445 NIS with percentage of 8.56 % but using the periodic review system it saves even more with a percentage of 9.96 % but this system is not applicable in this company due to the long periods for reordering and not ordering a huge amount of items in the inventory even for the C class items.Current modelNew inventory model (Continuous Review System)New inventory model (Periodic Review System)Total Parts46Inventory cost per year, NIS132,32763,88252,637Percentage improvement“_”8.56%9.96%
53ConclusionSpare parts supply chains are in fact very different from those of finished goods supply chain. The fundamental driving forces are balancing between having a low inventory of spare parts to decrease the cost and service fulfillment with short response time.The company in this study lacks of expertise in the area of inventory management. This has resulted in severe shortcomings in the business process of their company. After reviewing and analyzing the data collected we proposed a cost effective solution for them to manage their inventory optimally.By implementing an effective inventory management system, Al-Sarrawi Company in this study will be able to save a lot of money and keeping their services as it is to their customers.
54RecommendationApplying the inventory model successfully depends on the effective implementation of every stage of the framework of inventory management which includes ABC analysis, demand forecasting and implementation development of an inventory model. Inaccurate data going into a perfect model will give inaccurate or even misleading results. Perfect data going into an unsuitable model similarly will give inaccurate results.
55LimitationsThe limitation in this project has been the amount of data available. Clearly the data obtained does not cover a long enough time-frame to provide accurate forecast so in a more few years of stored data will give better results and accurate assumptions, and the need to the system to be continually updated or it will become invalid.