The impact on revenue as stock out improves

Within manufacturing, uptime is revenue, and unplanned downtime is a loss. If the utilization of the asset is high, the unplanned downtime could be a revenue loss that will never be recaptured. If the utilization of the asset is low, the value of the unplanned downtime will always be more expensive than the value of the downtime being planned. As anyone in manufacturing knows, the length of unplanned downtime can be directly impacted by the availability of spares. 

To measure the availability of spares, the metric commonly referenced is SMRP 5.5.33 - Stock Outs. The metric measures the percentage of time that you do not have the applicable spare(s) readily available to get your assets back up and running. It is the percentage of time you get your rear chewing is compounded for not having the spare and being down.

SMRP 5.5.33 Stock Outage - This metric is the measure of the frequency a customer goes to the storeroom inventory system and cannot immediately obtain the part needed. SMRP Best Practices 6th addition

When you don’t have the spare readily available, you inevitably have to either just give up or procure externally. Assuming that you are driven to procure externally, you are at the mercy of the market's price, supply chain, and availability. I have seen delays that last hours due to not having a spare, and I have also seen these delays extend into months. These delays directly impact revenue, profitability, and ability to supply the internal or external customer due to the asset's extended delay length. 

Arguably, you may have heard a maintenance employee scream this is why I need more spares. The same maintenance employee also says this is why I need to have a spare for the spare. Reacting to these emotions, you could build endless redundancy of spares and a spare designated as the spare’s spare, but when is enough enough? It begs the question, how do you measure the impact on revenue as you incrementally improve your stock out, and when is it good enough?

We’ll use the following variables:

• S = % Stock Out Rate (e.g., 10%)

• ΔS = % Reduction in Stock Out Rate (e.g., 20% improvement → ΔS = 0.20)

• D = Downtime impacted by stock out per year due to missing spare parts (e.g., 100 hours)

• DSO = Downtime per % of Stock Out (e.g., 10 hrs per 1%)

• R = Revenue per Hour of Production (e.g., $15,000)

• N = Number of assets (or production lines) impacted by a stock out (e.g., 10)

• Cinv = Annualize cost of additional MRO inventory to improve ΔS (e.g., $10,000)

Incremental Revenue = (ΔS×S×Dso×R×N) - Cinv

Incremental Revenue = (.10×.2×10×$15,000×10) - $10,000 = $20,000/year

This example shows $20,000 in revenue from a 20% improvement of a 10% stock-out rate (going from 10% to 8%). In most cases, going from 10% to 8% is the right thing to do and is supported by SMRP referencing a Best-In-Class below 2%. In a lot of cases, improving from 5% to 2% makes financial sense for an organization. But at some point, there is a factor of diminishing return from going from good to great on stock-out performance. And in many cases, it becomes more costly than it is worth. 

The economic sweet spot lies in balancing the availability of spares with the inventory investment. Too much inventory can get you into a situation where you begin carrying more slow-moving or rarely used parts. Too much inventory will significantly decrease the inventory turns, increase storage costs, and increase obsolescence. This risk of losing revenue decreases as the downtime of not having a spare shrink. The incremental improvements in reducing stock outs become a classic case of the diminishing return curve. 

Let’s look at the same example above but improving 20% in stock out on a best-in-class 2% with an additional $10,000 in MRO. 

Incremental Revenue = (ΔS×S×Dso×R×N) - Cinv

Incremental Revenue = (.02×.2×10×$15,000×10) - $10,000 = -$4000/year

Yes, stock outs cost money—but so does chasing perfection. The goal isn’t zero—it’s predictable reliability at optimal cost. We should all track and strive to improve SMRP 5.5.33 Stock Outs wisely. And stop when the curve flattens, and cost overtakes return.