February 2021

Supply Chain

Avoid costly stockouts through inventory sharing

Inventory sharing, per se, is not a new concept; rather, it is a popular practice in the wholesale and distribution business.

Iyer, K. R., M/s Indorama India Private Ltd. (1)

Inventory sharing, per se, is not a new concept; rather, it is a popular practice in the wholesale and distribution business. However, the collaborative arrangement of inventory sharing among manufacturing industries is a new concept and not widespread. The author was involved in a successful inventory sharing project among neighboring industries, and this article details how it can be accomplished with minimal time and effort.

Inventory sharing among group companies located in multiple geographical locations or among neighboring industries can prevent costly stockouts, improve uptime, reduce emergency purchases, prevent obsolescence and dispose of surplus inventory—truly a synergistic, win-win situation for all collaborating companies. Contrary to the common apprehension of how inventory can be shared when participating companies have different enterprise resource planning (ERP) systems, end products, manufacturing processes, technologies, etc., it is simple and once operational, requires very little or zero maintenance.

Manufacturing industries must stock various classes of spares, such as operational spare parts and generic items like pipes and pipe fittings, electrical fixtures, fuses, cables, valves, conveyor components, lubes, etc. Since line managers want to avoid stockouts at any cost, they tend to stockpile inventory; over time, 8%–10% of these get damaged, become obsolete or remain unused. Despite stocking so much inventory, costly stockouts are not uncommon. In the event of a stockout crisis, line managers and the purchasing department often struggle to acquire the required part in the least possible time to minimize the plant outage. Consider that a neighboring company may have the required spare or component and could easily share or loan it, avoiding a long unit shutdown.

Inventory is capital idling in storage and is considered a sunk cost. Despite a continuous management focus on inventory control, the inventory value keeps mounting year-on-year. Many continuous process industries are situated in industrial zones and are close to each other. Many large companies have units in more than one geographical location, often manufacturing the same product. Some equipment or machinery are common across industry, even if the product is different (e.g., a gas turbine for a captive power plant, a diesel engine set for emergency power, air compressors for plant and instrument air, fire water systems, belt conveyors).

Among generic items (valves, pipes and pipe fittings, fasteners, fuses, cables, etc.), the degree of interchangeability among industries is significant. Most urea/ammonia plants in India utilize the same technologies and have almost the same nameplate capacities for each train. For critical equipment, industry tends to focus on only one or two preferred manufacturers. However, it is advantageous in most stockout cases to consider and use substitutes.

Inventory sharing can help optimize inventory and keep critical and insurance spares at one location rather than all locations or factories stocking the same interchangeable insurance spares. By their very nature, insurance spares may not be required during the entire lifetime of equipment, yet companies must keep them—in the unfortunate event of equipment damage or failure, securing the needed insurance spare may take several months, and stockouts can drive the company out of business.

Avoiding missteps

During an inventory sharing project in Qatar in which the author participated, team members from the participating companies met weekly to decide the modalities of the project. The team realized that differences existed in the way the item master was being maintained by the companies:

  • Companies were using different ERP systems
  • Different levels of maturity existed in the upkeep of the item master
  • There were discrepancies in units of measurement when specifying sizes (e.g., in. vs. mm)
  • Some companies used ASTM designations for materials while others used BS or other standards.

The team consensus was to devise a common codification logic and instate a uniform way of describing the items. This information was then fed into a new material cataloging software to identify the commonality of spares among the companies. Drawing up the common specification for the new codification system and codifying the existing inventory took several months—the enormous time, money and resources required to recodify all stock-keeping units (SKUs) in a unified way was a big stumbling block. It also required the companies to switch to the new unified system after going live. This caused resistance from line managers as everyone had to shift from existing material code to new code, which entailed updating the item code at several places (bill of materials, purchase orders, material tagging in warehouses, etc.)

Moreover, the sizes of the participating companies varied greatly: the number of SKUs ranged from 15,000 to more than 100,000 in large companies. The idea that the project’s cost should be shared equally was vehemently opposed by smaller companies, which began questioning their participation. After almost a year of weekly meetings, the project was shelved due to failure in finding a workable solution.

In another case, a large company with multiple units in its home country and overseas had a common ERP system across the group. The company wanted all units to participate in inventory sharing. Because all units shared the ERP system, it was assumed that the only hindrance to identifying the interchangeable parts across the units was different codification systems. The task of implementing uniform material codes across all sites required significant effort. The individual units worked for several months to assign new codes and feed them into the ERP. However, the result was unsuccessful, and no inventory sharing took place.

New approach revives project

These examples of failures highlight the common misconception among many continuous process industry professionals and decision makers—even in this age of computerization and e-commerce—that common material cataloging is needed to identify the interchangeability among various units or factories.

It can be assumed that no two companies have the same ERP system. It can also be accepted that some companies may be properly maintaining the item master with complete specification, make, model, size, material of construction, manufacturer part number, etc., of the component or equipment where the component is fitted, while other companies will not have complete specification for the items. A difference exists in the number of SKUs held by companies of various sizes, as well.

The basic requirement of inventory sharing is that companies can continue to operate their day-to-day business using their existing ERP and style of codification, yet be able to quickly (in case of a stock out) access the inventory of a neighboring company, find the required exact match or substitute, and borrow or buy it.

In a second attempt, it was decided to pursue an aggregator software that would collect the item master dump (in the prescribed format) daily from the ERP systems of participating companies, and to update the same in a common aggregator software with a superior search facility. Proper data mapping was done for individual ERP systems in the aggregator software so that respective fields were populated from flat files received from various ERP systems as a part of the implementation scope.

Not only were the required efforts reduced, but the costs were also much lower than the earlier model. The companies agreed to participate and equally share the initial and yearly maintenance costs, and the project was successfully commissioned in less than 4 mos after floating the request for quotation (RFQ).

The process of extracting the item master dump from various ERP systems and updating the same in the aggregator software was automated. Initially, some companies shared only the item master details of surplus and non-moving items while withholding the sharing of SKUs that were in regular use (general category). Also, many companies did not share the unit rate information. However, seeing the versatility of inventory sharing in searching the required inventory, identifying the duplicates, generating inventory reports such as inventory value, etc., the companies later began sharing the entire material master, including pricing information. Based on the feedback and the frequency of lending and borrowing among companies of costly spares and generic items, the project was a success.

How to get started?

Once the merits of inventory sharing have been proven, the unit head of the most influential large company will normally take the lead during interactions with counterparts in other companies. Once buy-in is achieved, a point person (usually a maintenance or planning manager) is nominated from each company and the team leader is selected from among that group. The team should meet weekly to carry out the following steps:

  1. Hold a kick-off meeting and share contact details.
  2. Collect data on the number of SKUs and ERP systems of all participating companies.
  3. Review the method of maintaining the item master and completeness of basic data.
  4. Decide which fields are to be shared—the minimum information required are item code, item short and long description, manufacturer, model number, manufacturer part number, unit of measure, stock on hand, surplus or disposable stock, size, rating, material of construction, unit rate, date of last purchase/receipt, item location, etc.
  5. Decide on optional fields to be shared, such as unit price, supplier name, purchase order price, etc.
  6. Prepare an RFQ for inventory sharing aggregator software solution providers, including a provision to view the test certificates, photographs of the component, etc. Send requests through the software to all team leads. There should be various ways to narrow down the search (e.g., by make, model, size, rating, end connections, manufacturer’s part number, supplier part number) and to search by synonyms, and accept wild cards and keywords. Also, it should be able to look for alternate dimensions (e.g., if inches are specified, it should also locate equivalent sizes, such as mm).
  7. Arrange for a technical presentation by the vendors that have submitted their quotations.
  8. Negotiate and place the order to the selected vendor and decide on the cost-sharing formula for software and annual licensing fees.
  9. Customize and upload the item master dump and provide training to team leads.
  10. Go live and allow team leads to train other users of the ERP.

The exercise can be completed in 3 mos–4 mos and the payback can be less than 1 yr. The author has developed an application for inventory sharing (FIG. 1) that can—in addition to the usual search criteria available in the aggregator software—locate the item even if it is misspelled. It can look for alternate dimensional standards (in. vs. mm, hp vs. kW, etc.), display photographs of the item selected, view detailed specifications and test certificates, and more.

FIG. 1. Inventory sharing application developed by the author.

As an example, suppose company “Q-chem” is in urgent need of a bearing shoe for its compressor and searches for the part by entering the part number in the software, as illustrated in FIG. 1. The search has produced three SKUs, one held by Q-chem and two held by Company A. There are duplicate SKUs in Company A: one SKU is declared as non-moving and stock is available for disposal; whereas the second SKU of Company A shows a “general,” meaning it is in use and required to be stocked and replenished. Thus, companies can also identify multiple codes and merge the duplicate stocks. In this example, Q-chem would send a request to Company A to sell the non-moving SKU to them after verifying that the spare part is properly preserved by Company A by viewing the photo of the component. Company A will readily sell the item as it is non-moving with them. This is a win-win situation for both organizations. HP

LITERATURE CITED

  1. Iyer, K. R., “Reduce inventory by eliminating multiple parts codes,” Hydrocarbon Processing, June 2004.
  2. Iyer K. R., “Shape up your system for stocking spare parts,” Chemical Engineering, June 2004.
  3. Iyer K. R., “The secret of getting your inventory under control,” Chemical Engineering, September 2005.

The Author

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