Service parts inventory is at the heart of every successful aftermarket parts and service operation and if your business is carrying too much excess and obsolete service parts inventory, then this is not the kind of problem that happens overnight.
So if you’re struggling to understand what is causing your inventory problems and/or struggling to reduce excess and obsolete inventory fast enough, the chances are that it is caused by a combination of factors and symptoms.
There are many more causes of excess and obsolete inventory in an aftermarket service parts operation than you will find in a manufacturing operation, so we can’t promise to list them all here.
In this article, I’ll just explore the top 12, but at the end of the article I explain how you can access more information if you need it.
Firstly, let’s explore the demand side of the equation…
1. Poor Demand Forecasting
In an aftermarket business, demand is driven by a combination of product factors, process factors and behavioural factors that cannot be predicted precisely in advance.
Hence forecasting service parts demand is much more complex than planning demand for a manufacturing operation.
Special skills, systems, algorithms and processes are therefore required that are optimised for a service parts environment.
Off-the-shelf systems intended for retailing environments or manufacturing environments are insufficient and will result in too much or too little inventory.
SEE ALSO: Service Parts Planning
2. Slow Moving Parts
Aftermarket service parts environments are also characterised by a “long grey tail” of slow moving service parts.
Some industry environments are worse than others.
Many businesses make the mistake of trying to forecast the demand of very slow moving items when the demand pattern is unforecastable.
Often it is better to manage the inventory of slow moving parts in a completely different way and forget trying to forecast their demand altogether.
3. Same Stocking Policy For Everything
Of course, aftermarket service parts environments don’t just contain slow moving parts – they contain fast moving and medium moving parts too.
Faster moving parts are easier to forecast than slow moving parts, are easier to obtain from suppliers and can have many other characteristic differences.
It therefore follows that they should have a different stocking policy to slow moving items.
Similarly, high cost parts should have a different stocking policy to low cost parts and large bulky parts should have a different stocking policy to small parts.
Whilst this may seem obvious, it is perhaps surprising how many businesses don’t do this, usually because they don’t have the know-how, skills, processes or systems to cope with the large volume of service parts and associated data that the business has.
4. Poor Stocking Range Management
Not all the parts and components used in manufacturing should become service parts offered for sale as replacement spares.
Experience and product knowledge, as well as previous service parts history, should inform you of which parts tend to wear out or fail and are demanded for replacement.
Even then, it is a commercial decision as to whether a higher level assembly should be offered as a replacement service part or the components that make up the assembly.
For example, should you offer a complete headlamp assembly or the bulb, lens, casing, sockets, wires, etc. separately?
5. Bad Campaign Management
Asking your sales and marketing team to run a campaign to sell off excess or obsolete stock can be a very useful way of liquidating problem inventory.
Unfortunately, too many businesses run sales campaigns purely to increase sales and without giving a moment’s thought to the inventory consequences.
Hence, sales teams buy more inventory than normal to stock up in advance of their campaign and then fail to sell as much as they wanted due to over-optimistic campaign planning.
Even worse than this is when the business then confuses the extraordinary campaign demand with normal demand instead of stripping it out.
The result is that the planning system orders too much stock in future as it tries to maintain sufficient stock to meet what it thinks is the normal historical demand.
This might be the correct approach if the campaign is run exactly the same, every year, on the same range of parts, but that’s unlikely to be the case in most instances.
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Now let’s explore the supply side of the equation…
6. Bad Supplier Schedule Adherence
This one might be a bit counter-intuitive since late supplier delivery will result in stock shortages rather than overstocking.
However, over a period of time, if service parts availability is to be maintained despite poor supplier schedule adherence, your business will only be able to achieve this by increasing its stockholding by, for example, holding a number of weeks of buffer stock just in case supplier deliveries are late.
Habitually bad suppliers are also likely to have a number of malpractices of their own that cause delays, inaccuracies, etc. and these are often hidden from your view until you start getting closer to your problem suppliers and managing them more strongly.
SEE ALSO: Service Parts Logistics
7. Sloppy Purchasing
Economic Order Quantity (EOQ) formulae were all the rage in the 1970s and still have a place today when used appropriately.
However, purchasing a job lot of service parts just because the unit parts price is cheaper can be counter-productive.
Just like a good EOQ formula takes account of other factors, buyers and the systems they use need to consider the wider impact of their decisions including demand rates, financial investment, storage space utilisation, potential obsolescence, etc.
8. Minimum Order Quantities
A corollary of the previous cause is the Minimum Order Quantity (MOQ) that is often imposed by suppliers when parts are no longer used in manufacturing and become aftermarket service parts only.
At this point, businesses usually want to buy fewer parts each month whereas suppliers want to manufacture in larger batch sizes, which are more economical for them.
Ultimately, it is a trade off between the parts unit price and the minimum order quantity, which should be negotiated assertively by the buyer.
When done properly, dramatic results can be achieved that reduces excess and obsolete inventory.
9. Expediting But Not De-expediting
Many purchasing and procurement departments recognise the need to expedite parts that are in shorter supply than expected or out of stock.
Surprisingly though, they fail to apply the same rigour to parts that are in greater supply than expected and end up taking delivery earlier than they need with a resultant higher inventory than necessary.
Often this is because the buyer or expeditor is all too happy to receive parts early because it improves their schedule adherence statistics and saves them a job.
However, it’s not usually the right answer for the business as it increases storage costs, increases working capital as the supplier gets paid early and sends the message to the supplier that they are the one in control around here.
Lastly, this article would not be complete without exploring a few general causes…
10. Inaccurate Lead Times
Inventory optimisation relies on accurate lead times for all processes that are part of the replenishment cycle.
However, in practice, most businesses don’t have a means of measuring these accurately.
Assumptions and rules of thumb are used instead and are applied across complete ranges of service parts including many for which they don’t apply.
When did you last negotiate lead times with your suppliers or measure their performance against them?
Are your suppliers adding a few extra days or weeks to the lead times they quote to increase their chances of hitting them…only to deliver late anyway?
SEE ALSO: Parts Data Management
11. Too Many Engineering Changes
There’s nothing that engineers enjoy better than improving their products.
Unfortunately this means that the equipment you manufacture and the parts you buy in from your suppliers are constantly changing.
Whilst this might sound like a good thing, improving things too much just because you can isn’t necessarily the best thing for your business or your customers!
What about the inventory that you have in stock that you now can’t use or sell?
If you don’t take this into account when making your engineering change decisions, then it will quickly become obsolete with the knock-on effect of reducing your profits and/or increasing selling prices for your customers, some of whom will switch to buying from your competitors instead!
12. Weak Supersession Management
Even when engineering changes are restricted to just the commercially viable ones, excess and obsolete inventory can occur if the parts supersession process is not managed properly.
Unless the reason for parts supersession is a safety issue, inventory of the superseded parts should always be consumed before the superseding parts are made available for sale.
There are also a number of other supersession rules that can be observed depending on the reason for the engineering change and part supersession.
Hence, your aftermarket business needs a high degree of integration between the engineering and aftermarket service parts management areas of your business to avoid technical obsolescence.
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How To Reduce Excess and Obsolete Service Parts Inventory
As I said earlier, this is not an exhaustive list but if you are looking to understand the causes of your own excess and obsolete service parts inventory, I’d expect you to have found some of your causes within the top 12 above.
That said, every aftermarket business is different and flushing out your own causes is only the first step.
The next step requires the even more difficult job of fixing your problems and making them go away for good!
That requires specialist aftermarket service parts expertise, skills and resources.
We have been solving service parts inventory problems and developing inventory management solutions for almost three decades and for a variety of manufacturing sectors including automotive, aerospace, defence, electronics, industrial, marine and appliances.
If you’d like some help with reducing your excess and obsolete service parts inventory, contact us today.
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