Let’s be real here: classic inventory management theory does not provide realistic answers for determining the Reorder Point (ROP) and Reorder Quantity (ROQ) for spare parts inventory.
Nor does it really help you to manage your stock out risk.
Life would be easier if it did, but it doesn’t.
To effectively manage spare parts inventory, it is important to adopt a decision-making process that is suitable for the type of inventory that you hold. And the classic theory doesn't work with spare parts inventory.
So, what do you do instead of applying the classic theory?
Try breaking down the decision-making by thinking about process control.
This approach significantly simplifies the entire process.
For example, when working out the reorder point, you need to consider is how many units might be needed during the lead time for restocking that part (I call this cycle stock).
But that’s not where you manage risk.
All risk is management through assessing safety stock.
These are two different decisions.
Combined, the cycle stock and safety stock give you the reorder point.
This approach makes the stock level decision-making completely transparent.
No ‘black box’ algorithms or confusing statistics.
Plus, in my experience, once you know how to do this properly, you will reduce your overall inventory holdings without any increase in risk.
And who doesn’t want that?
