I want you to imagine a collection of spare parts for a manufacturing facility. In this facility, spare parts have been traditionally purchased new or refurbished and then becomes the facility’s responsibility to manage. The spares are intended to be readily available to maintain the capabilities, dependability, and the facility's capacities over its life. Examples of spares would be motors, gearboxes, PLCs, drives, belts, or cylinders just to name a few. We keep these extra pieces to replace their faulted twins.
In most manufacturing facilities, these spares are inventoried, managed, and recognized with a value that is on the books. From an auditing perspective, companies are obligated to recognize this value and GAAP specifically calls out practices to accomplish this. From an operating standpoint, when these spares are requested to replace a replicated version of themselves we want them available quickly. Typically, we then withdraw them from inventory and expense the applicable department an operating cost with a matching principle. As the inventory is withdrawn, a new spare is either purchased or the part removed is refurbished. When these are received, the next version of the spare goes back into inventory. This circle of life continues for the life of the operating unit.
There are many references to this cycle to ensure you are setting up your inventories correctly and complying with any laws or general accounting practices. However, these laws and accounting practices are written as if perfection happens every time in a production facility. Let's remember that most of the time team members on the production unit are solely focused on getting the production unit safely up and running. Additionally, when a part gets pulled from the shelf for a planned or unplanned job, it is not always immediately installed. Instead, the team is waiting for the next window of opportunity (WOOs).
Combining the variability of executing the original plan and the frequency of unplanned events, this withdrawn inventory could be forgotten. Consider the following scenarios. What happens to the inventory accuracy when the spare sits in a staging area waiting for the facility to go down for replacement? Where do we show the inventory value of all the spares tucked away in personal lockers or other creative storage locations? After multiple years of the facility running and this maintenance life-cycle occurring, the value and visibility of this type of inventory can become lost because local knowledge is now required for it to be used. To me, this is just like purchasing or receiving a gift card.
The holiday season has ended, and it is safe to assume that most of us either bought or received gift cards. We may have received a gift card from Starbucks as a stocking stuffer, or we may have received a Lowe’s gift card from a parent indicating that the next purchase is on them. To obtain this gift card, a transaction occurred to purchase the gift card with an honoring value and intent to consume. The owner of the gift card doesn’t show its value on any available funds and does not create visibility of exactly when it is used. Instead as the owner of the gift card, we must remember to use it when the opportunity arises.
Now imagine yourself on the right side of town and needing to swing by Lowe’s. I am going to assume that we typically remember too late that there is a gift card in your kitchen's junk drawer. But, what happens? We still swing into Lowe's to buy what we are there for and tell ourselves next time we will remember the gift card. In this example, we did not leverage our finances optimally and instead had to purchase with our available funds. So now we must wait for the next visit to Lowe's while the value of the gift card remains the same. However, what can be purchased with the gift card continues to become more expensive. And there are a lot of gift cards out there that aren't being used, just like spares that are not visible in managed inventories.
A new survey from CreditCards.com found nearly half (47%) of Americans have one unused gift card, voucher, or store credit, totaling $21 billion nationwide. - Jordan Mendoza, USAToday.com
The purchasing of gift cards is like taking spares from inventory, expensing your maintenance budgets, and not installing the spare. It then goes into the junk drawer with all of the other gift cards to now rely upon memory and departmental disciplines to consume.
To get there, let’s get moving on finding and using your available gift cards. To start this gift card quest, the next time you are walking around your facility, canvas the locations where you may have these gift cards. Don’t focus on your vendor-managed inventories like bolts, fasteners, and fittings. These are consumables, and I do not want them to scope-creep this definition of a gift card. Instead, survey your surroundings and talk to your team about where they store their "emergency spares." Let’s go for a walk.
Next to your production unit, you may find two of something that you know you also have two in your controlled inventory. Then you realize that you will most likely use two in the next twenty years. You will also come across plenty of local cubbyholes and personal lockers packed for selfish emergencies. You might find something equivalent to “Uncle Timmy’s hidden liquor cabinet” that stores a wide assortment of hydraulic valves and solenoids because the midnight crew believes keeping them close to the production unit makes their job easier.
Break these habits by coaching and training on how the inventory-controlled spares are maintained. With accurately managed inventories you will ensure that the right part, is in the right condition, and available at the right time. Look back on a previous blog on optimizing these inventory levels if needed. But with these gift cards, you need to sell, scrap, or place them back into inventory at zero value because they have already been expensed. Regardless, find ways to capture the immediate value of the gift card because if you do not make it visible to everyone, it may never be used.
These are your gift cards. These are purchases or inventory withdraws that someone has made, thrown into a drawer, and carelessly forgotten about over time. As these gift cards are scattered throughout your facility, your internal auditors should be on a mission to find them. These gift cards typically do not follow any 5S practices and often are not in optimum condition when installed. They most likely incur no proactive maintenance or warehouse best practices. You also can not establish algorithmic strategies on your spare inventory to improve your ability to manage inventory value. I can go on and on about why you have to avoid having gift cards.
Your mission here is to burn through all of your gift cards strategically and quickly, then improve your spare inventory strategies by eliminating the purchasing of gift cards. Build your visible inventory with quantities that are managed by lead times, cycling, and accepted risk. Avoid buying gift cards and you will be setting yourself up for optimum inventory success.