Equipment Type

Have the Right Parts on Hand

Parts management is a matter of balance: balancing parts inventory with shop needs, and balancing the need to reduce inventory costs with vehicle availability, for instance. As vehicle availability increases, inventory costs rise sharply. On the other hand, if large inventory is aimed at a high vehicle-availability rate, there won't be any cost reduction.

February 01, 2007

John Benton, who is with the parts department at Alyeska Pipeline Service, Fairbanks, uses computerized tracking to check inventory levels.

A Different Way to Reduce Costs

About a year and a half ago, David Greenlee, CEM, fleet manager for Alyeska Pipeline Services, commissioned a consultant to review his parts operation.

He told Greenlee, among other things, to obtain a vending machine: not for snacks and sandwiches, but for parts, mostly consumables such as batteries.

"Vending machines have been around a long time," Greenlee says, "but this one goes beyond the typical dispenser, although it works on the same principle."

Greenlee placed the machine, manufactured by AutoCrib, in the middle of the shop floor for easy access by technicians. When a tech needs a part, he goes to the machine, uses an identification badge, makes a selection, and takes the part out. This saves time by eliminating trips to the parts department. Also, if a mechanic is working overtime and the parts department is closed, he still has access to parts.

The vending machine has a scanner that reads the ID badge. It also has a laptop, a keyboard and a screen. After identifying the user, the machine opens and the technician can either type the part he needs on the keyboard or push an icon on the screen.

"There is a section of circular trays divided into pie shapes, depending on the size of the item," says Greenlee. "It turns around to the particular item, the door pops open, and you grab what you want and close the door. We also use a series of lockers for larger items. The lockers run off the same control system. The system will open the locker door and allow you to get the item out."

Where the machine differs from a typical vending unit is in its ability to automatically deduct the item from the parts inventory. People in the parts area can see what has been issued either by personnel or by individual item and the date.

Another plus, according to Greenlee, is that stocked items are on consignment; he doesn't have to pay for the part until it is issued. "We use several different vendors to stock the machine," he says. "When the machine reaches a minimum reorder point, it sends an e-mail to the vendor. Otherwise, a vendor can go in and look at his own inventory level and see what parts are moving and which ones aren't."

Major planning sessions were held with the vending-machine manufacturer to size the machine for parts Greenlee needed in the shop. There are several elements involved, such as control reporting, automatic vendor notification, and the ability to identify parts that are not moving and replace them with something that is being used.

"We wanted to have some flexibility, so we set it up to have 60 percent of the machine full," he says. "That gives us room for expansion, adding new items or stocking larger quantities of an item."

The vending machine also saves Greenlee on transaction costs. "When you buy something with a credit card, every time you call in an order that counts as a transaction," he says. "If you can reduce those transactions, you're saving money." With the vending machine he receives an invoice every two weeks from the vendor, and that includes servicing the machine.

It also saves the parts people's time. "At first they were leery and afraid that it was a Trojan horse," Greenlee says. "But as we got into it, they began to see its benefits. Instead of wasting their time, they can concentrate more on big-ticket items or spend their time tracking something down or working out better deals on products that save us money."


The parts vending machine at Alyeska Pipeline Service Co. sits in the middle of the shop floor for easy access by technicians. The machine is equipped with a scanner, keyboard and screen.


Parts Discounts

Sometimes even the most seasoned fleet manager doesn't know what parts discounts are out there:

  1. Fleet discounts: If you have a small fleet, of five or fewer vehicles, this is about as good as it gets. These types of discounts shouldn't be pursued unless your fleet is small and you don't keep inventory.
  2. Dealer discounts: This is a misleading term because prices are not much lower than fleet prices. If you have a moderate size fleet, this isn't for you.
  3. Jobber discounts: Smaller parts houses that do business in urban areas offer jobber discounts, which is the price they pay for stock. Most jobbers sell to the general public at a little less than list price, but if a fleet purchases its merchandise from a jobber, it will pay more than jobber prices. Such a fleet is better off using warehouse distributor discounts.
  4. Warehouse Distributor discounts: WD prices are paid by a warehouse operator who is authorized to buy directly from the manufacturer. Therefore, they can offer significant discounts. Fleets should evaluate warehouse distributor discounts during negotiations, but remember that some WDs may not be an authorized distributor for every piece of merchandise you use. That means less-than-jobber prices may not be available for every line. Do your homework and find out what lines the WD is authorized to sell and if he's willing to sell other items at, or below, jobber prices. Also, find out if the distributor can service your fleet adequately. One indicator of the distributor's reliability is the size of his delivery fleet. Discount parts prices are not much good if the parts are delivered late.
  5. Manufacturer discounts. Buying direct from the manufacturer often is possible, particularly if the manufacturer is a small company. Take a look at the items you use frequently, such as filters, hoses or belts. Then, consider buying those items directly from the manufacturer.

  • Cost of Inventory

    Fleet managers who are familiar with inventory costs know that the cost of carrying inventory is slightly more than 20 percent of the inventory value. If you've ever wondered how that breaks out, here's a brief overview:

    Cost of storage space, including rent or proportionate building depreciation, building maintenance and repair, utilities, janitorial and security guard pay and benefits: 3 percent.

    Cost of inventory stores and materials-handling equipment, including depreciation of shelves and bins, maintenance of materials handling equipment, fuel, use of records and forms and office equipment: 1 percent.

    Taxes, including taxes on materials-handling equipment, inventory, shelves, bins, record processing equipment and allocated portions on land and buildings: 1 percent.

    Insurance, including allocated portions on buildings, plus inventory materials handling equipment, bins, shelves, etc.: 2 percent.

    Obsolescence, including damaged or non-returnable parts, pilferage, time spent filing warranty claims and returning parts for credit: 2 percent.

    And the two biggest costs of all:

    Inventory personnel costs, including salaries and fringe benefits of full-time parts employees and allocated portions of part-time clerical or supervisory employees: 4 percent.

    Money cost, or the lack of return on inventory and control investment that might otherwise produce income: 8 percent.

    Parts management is a matter of balance: balancing parts inventory with shop needs, and balancing the need to reduce inventory costs with vehicle availability, for instance. As vehicle availability increases, inventory costs rise sharply. On the other hand, if large inventory is aimed at a high vehicle-availability rate, there won't be any cost reduction.

    As one fleet manager recently said, "It's like trying to focus on a moving target."

    Fleet-management consultant Roger Thompson, vice president, management, fleet and facilities with Bucher, Willis & Ratliff Corp., has identified certain indicators that tell him how well parts inventory is being managed.

    Among the numerous factors he considers, he has developed some generalities that can be applied to fleets across the board no matter what industry they serve.

    "Among the first things we look at is the lion's share of the parts on hand," Thompson says. "It's really the dollar value of the parts issued from stock divided by the dollar value of all parts issued in a recent year. We typically see about 50 or 60 percent, so when I go to the parts counter, I expect 50 or 60 percent of the time to have the parts there. If we don't see that happening, then something is wrong. If the percentage is too high, say 98 percent, that indicates that too many parts are in stock."

    Stock-movement rate is another indicator, he says. That is the number of stock lines with no movement for the past 12 months divided by the number of stock lines. "We expect to see less than 5 percent of that happening," Thompson says.

    And, of course, one of the biggest indicators of a well-managed parts operation is the inventory turn rate. Thompson arrives at that number by taking the value of all parts issued from stock and dividing it by the dollar amount of average annual inventory.

    Inventory should be turning at a rate of four to eight times a year, he says. "If we see one or two turns, then something is very drastically wrong with that inventory. If you have inventory that has a low turn ratio, it could be caused by very old inventory."

    And that's one of the most common problems he encounters. Fleet managers tend to let their inventory sit too long, Thompson says. "They may trade the vehicles off, but never get rid of the parts. What happens then is that the turn starts to decrease because you have all this old stuff sitting on the shelf."

    To avoid this, fleet managers should dispose of the inventory when they dispose of the vehicle. "Either purge the inventory that supported that vehicle or send it back to the vendor," Thompson says. "You may be charged a restocking fee, but that's better than letting it sit, throwing it out, giving it away, or selling it at an auction where you get less than what it's worth."

    The big mistake some municipal fleets make, he says, is when they conduct the annual physical audit, rather than determining what happened to the imbalance (what should be in stock vs. what is really in stock), they zero balance it out and never correct the imbalance. "They act as if nothing ever happened and never determine where their parts actually went," says Thompson.

    There is one exception, however, to the rule of not having inventory parts sit too long. That involves parts that vendors won't stock for you. "This is true in the municipal sector, especially when you get into snow-removal equipment, and it's true with construction companies," Thompson says. "The parts may just sit there, but when they're needed, they're needed immediately. If a high-production unit, for instance an excavator, goes down, it's going to stop the operation. It's all a real fine line of balance to keep the operation going."

    Among the most important things a fleet manager can do (and something many do not do) is track their inventory, bar code their inventory, and do annual audits to see what parts are moving and what parts aren't. "Fleet managers sort of miss that whole thing," Thompson says.

    But installing a bar-coding system or a parts-management system isn't a cure all in itself, warns Thompson. "You have to use the data produced by those systems. Otherwise, what good is it?"

    Another factor in tracking inventory is taking advantage of parts warranties. "People throw money away right and left simply because they don't track parts they install on a vehicle," Thompson says. "A mechanic may install an alternator, for instance, then six months later the part fails while it's still under warranty. That's the kind of thing you catch with a bar-coding system. When that happens, you can return the alternator to the vendor and get your money back."

    One fleet operation that practices state-of-the-art parts management and inventory control is Alyeska Pipeline Service Co. The organization is responsible for maintaining the trans-Alaska pipeline that runs 800 miles from the North Slope oil fields in Prudhoe Bay to the Valdez deep water port on Prince William Sound.

    Two major repair shops are located along the pipeline corridor, "that can do just about anything," says fleet manager David Greenlee, CEM. "We have parts inventory and parts personnel at each." In addition, there are six satellite locations where parts are stocked, without parts personnel.

    Greenlee says the dollar value of inventory five years ago was $2 million; today it's below $750,000. "And that's with the same number of facilities," he says. "We've managed that down over a period of time. As for turn rates, we estimate that by the end of 2006, we will have a turn ratio of 4.35 percent. We were at 2.84 percent in 2004, so we've been steadily improving the last couple of years."

    One way Greenlee has been able to improve his parts management is by purging non moving parts from inventory. No item is allowed to sit with no movement longer than 12 months. He also manages inventory on a system-wide basis rather than just at one location, and he "leans on" vendors to carry Alyeska inventory on their shelves wherever possible. He also closely tracks parts warranties, with a full-time staff member assigned responsibility.

    "We really work the warranty angle hard," Greenlee says. "But you have to do the work. We have to have mechanics and parts people in step and working with our parts administrator."

    The effort is worth it, he says. "By keeping up with parts warranties, we've been able to cut costs there as well."

    Greenlee increased inventory turns by using data from his fleet-management system to "have the equipment at the right time at the right place and have the right part there as well," he says.

    "This is a challenge, but if you use the data you have, you might find that a particular location has a part that isn't moving very much, but another location has a demand for that part. You transfer the part to the location where it's needed and you don't have to buy it."

    His parts management works so well that Greenlee built a new shop about a year and a half ago that has less parts space than the old shop. "We don't want a lot of money tied up in inventory," he says. "We don't want a lot of parts on the shelf here. If they are on the vendor shelves and the vendor can get them to us in a timely manner, that's what we want to do"

    To serve remote locations where no vendor is available, Alyeska has its own courier service that comes to the Fairbanks shop every day, picks up parts tagged for different locations, and hand-carries them to their destinations.

    Although the nature of his operation is somewhat different from most fleets, he says five basic principles are essential in this day and age for any fleet, regardless of where it operates.

    You must have some type of parts system. "It can be simple, but you have to have an electronic system to track everything."

    Data has to be correct. Accuracy should be a minimum of 95 percent.

    You need skilled people experienced in the parts area.

    You must have a method to obtain parts on holidays and over the weekend.

    Planning is essential. If you know you have a certain type work to do, order parts in advance and try to order off-season. It saves money, and many times, off-season shipping is less expensive. "Avoid buying parts when everybody else is buying them."

    David Anderson, fleet manager for the County of Roanoke in Virginia stocks parts at two locations: the main garage and at a satellite shop, both located in Salem, Va.

    Anderson has been able to reduce inventory costs by using Faster, management software that contains an automatic parts order system. The system enables Anderson to do obsolete reports on a regular basis. "None of my stock parts, with the exception of solid waste and off-road equipment, is over 120 days old," Anderson says. For example, he stocks 24 commonly used oil filters, and when the supply is down to six, he reorders. "We never run out of them," he says. "The system also lets us track slow-moving parts and allows us to set up certain parameters."

    Anderson also puts a lot of responsibility on vendors. "Once a year, for instance, I'll check prices on brake pads and check the performance on the brake pads we use," he says. "We go out to bid and award contracts on an annual basis. We have vendors maintain the level of parts that we need. Another prime example of that are tires. Whoever is awarded the tire contract is given a list of what inventory we've used in the past 12 months, usually by quarter. That way they are better equipped to fill our needs on time."

    Due to the county's purchasing cycle, Anderson reviews his inventory on a quarterly basis. "Once a year isn't good enough since our inventory changes quarterly," he says. "Most governments purchase in May or July when they see they have left over money. This drives what we're doing and not doing."

    On a yearly basis, he stocks about $80,000 worth of parts with tires accounting for about $35,000 of that total. With hydraulic hoses and fittings, he says, the county does its own hose fabrication. It would be even more expensive, he remarks, to outsource.

    Inventory turns depend on the parameters set by the fleet manager, Anderson says. "It's a judgment call. For instance, we would stock more parts for a police car than for a dump truck You can't have a police officer standing around waiting."

    One of the challenges involved in parts management, Anderson says, is making sure the parts you buy are of good quality. "There are a lot of different quality parts out there," he remarks, "but do you want to put a cheap part on a police car four times, or do you want a more expensive, lifetime part? "

    Parts management may be a balancing act, but Anderson says the real key to good management is, "finding out what works best for you."

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