Equipment Executive: Three Decisions for Parts Management

By Andy Agoos, Contributing Editor | May 18, 2011

The companies that seriously manage their spare parts are likely to be the ones that survive in the long run. Parts costs for most construction equipment, especially dirt fleets, run about two-thirds (yes, 67 percent) of all repair costs. That’s way too important to mismanage or manage casually. All the equipment supervision and managers in the company should be on the same page for these three parts questions:

1. Do we use OEM-supplied or aftermarket parts?

2. At what levels should the organization stock parts?

3. Will we use remanufactured parts?

Some dealer salesmen like to refer to non-OEM as “spurious” or “will fit parts,” but these are negative descriptions that I don’t accept. Non-OEM or aftermarket parts have a real place in any fleet that closely manages its operating costs. Aftermarket parts generally run anywhere from 25 to 50 percent less than OEM parts. This is even more important for fleets than run equipment to its full economic life because those fleets will use more parts.

I believe a fleet should use OEM parts for anything that directly affects safety. For example, on aerial work platforms, that would include things such as instruments and controls. For all other parts, use OEM parts for all items inside any oil-wetted housing. That would include such things as engine components, transmission components, differentials, and most final drives. These are parts that generally cannot be visually inspected.

All other parts are candidates for aftermarket manufacturers. These would include all wear parts and ground engaging tools, undercarriage, most hoses, bearings, most electrical components, batteries, etc. Since aftermarket parts may vary widely in quality and availability, evaluate them carefully, but the cost savings benefits are worth the effort.

For stocking levels, I favor stocking as little as possible to avoid pilferage, damage, obsolescence, and the cost of investing in and managing an inventory. A company’s tradeoff cost to stocking is the increased need for parts delivery and the cost of a delay to retrieve those parts. A typical North American construction equipment dealer might turn his inventory five times. A contractor should be able to turn his inventory 15 to 20 times. Some things, such as batteries or fasteners, may be consigned (owned, stocked and managed by a dealer or manufacturer at the fleet’s facility) to lower stocking costs. I required my OEM parts suppliers to stock levels that met or exceeded the following parameters:

• Must supply parts to my fleet so that at least 85 percent of my demands are met from their servicing branch stock inventory.

• For the remaining 15 percent, 98 percent of those backordered parts must be delivered by 10 a.m. the next working day.

• Dealer freight or special-delivery transportation costs cannot exceed 1 percent of the year-to-date parts cost from any supplier.

My dealers reported to me monthly on these three parameters by brand. Once we gained some experience with the process, every dealer we used was able to exceed these 85/98/1 parameters. Obviously, if a company standardizes on a limited number of brands and models, parts stocking is simplified.

The use of remanufactured parts is a win-win process for the OEM/dealer and the contractor. The end-user usually pays 40 to 50 percent less for a reman piece and the OEM/dealer makes a good profit margin on the sale as he has less invested in the reman piece than a comparable new piece. If you assume that most reman parts will be purchased in the second half of a machine’s life, then most reman parts will last to or well beyond the expected end of the machine’s full economic life.

So think through your parts needs and parts practices. Decide what approach works for you, write it down, and communicate it to all of your key people. Involve your dealers in your decision. Your operating cost per hour will go down.

Think about it.