Criticality and risk of a service part.
Managing your inventory requires an understanding of its behaviour so that sufficient is on-hand to provide availability for customers. This series of blogs has looked at categorising finished goods SKUs using the Coefficient of Variation Management (CoVM) approach, developed by Tom Rafferty, so that effective management can be achieved.
A similar approach can be used for managing service parts. These are either sold to customers as part of the business, such as in automotive, defence and industrial equipment companies, or they are used to support the company’s own equipment.
There are two ‘drivers’ that describe the behaviour of a service part and these are placed in a matrix. On the ‘x’ axis is Criticality; that is, ‘how critical is the service part to our customer’s or our own business’. Criticality can be identified within four groups:
- Group A: catastrophic failure – lack of the part could result in deaths or affect viability of the business
- Group B: Operational failure – lack of the part will severely affect the service provision or affect the company’s business
- Group C: Operational impairment – out of stock will reduce the effective and efficient performance of support or maintenance staff
- Group D: Non-critical item – out of stock will not cause significant problems
The second driver, on the ‘y’ axis is supply risk. For each service part, risk has three components:
- Lead time and its variability for the service part and whether it has single of multiple suppliers
- category a: LT> 90 days, single supplier
- category b: LT> 30 days, single supplier
- category c: LT< 30 days, single supplier
- category d: LT < 30 days, multiple suppliers
- category e: LT < 7 days, single or multiple suppliers
- CoV calculation accounts for variation in demand
- Mean time between failure (MTBF) calculated by the technical staff, to identify the probability (risk) of failure for parts in Groups A and B.
Having structured the behaviour pattern for each finished goods SKU and service part, you now have confidence to plan the amount of inventory that will provide availability. This is a critical step given the potential balance sheet value of inventory; for example, an imported items with variable lead times may carry safety stock at least equal to its demand.