There is a saying: “What you
can’t measure, you can’t
improve”. The saying are not
necessarily always true, but it
is interesting, because a derivative of the saying is
also true: “What you measure, is
usually what you get”.
Reducing Inventory
Value
It is common for business to have
a lot of focus on reducing
inventory value. Inventory value
is one of those numbers that
acts like salt in a wound for
corporate accountants. No, it
doesn’t matter if it’s high or
low, it always hurts to look at
the number. Most of the time we
don’t know if the number is too
high or too low, we just know we
want the number to be lower.
Cost of Keeping Spare
Parts and Materials
The cost for keeping inventory
is usually an estimated number,
often called “inventory
interest” (or similar), that
varies from 10-40% depending on
company accounting rules. The
cost includes storeroom,
storeroom personnel,
depreciation, etc. If you have a
spare parts and materials
inventory value of 10 Million,
it costs the company 1-4
$Million (10-40%) a year to keep
that spare parts and materials
inventory.
The Problem
Since it is common that
inventory value is the only
number the accountant really
cares about, it tends to get reduced. But, anyone can reduce
inventory value very easily, if it’s the
only thing that matters. You can scrap all spare
parts right now bringing your
spare parts and materials
inventory to zero. But the
consequences will be devastating
to productivity since you won’t
have any spare parts.
Measure a
“Counterweight”
Spare parts inventory value is
important, but to effectively
reduce spare parts inventory
value, the “counterweight” has
to be measured as well. The
counterweight to inventory value
can be “stock-outs” for example
(times we get the spare part
needed divided by total request
for spare parts). When stock
outs go over around 4-5%, you
will start seeing signs of
people not trusting the store
room. These signs are spare
parts kept in supervisors office,
satellite stores, spare parts in
tradesman's toolboxes etc.
Other Indicators
Other indicators that may be
valuable for store room control
are:
· IRA – Inventory Record
Accuracy
· Turnover rate by Part
· Number of Returned Parts to
Stores
· Service Level (inverse of
stock out)
· Critical Spares stock out
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