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Spare parts standardization and its impact on purchasing leverage

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By: Ananya Pritam Gogoi
Senior Research Analyst,Capex and MRO

calender28 Feb 2018

Abstract

In any manufacturing organization, equipment parts standardization contributes toward improving operational readiness and reducing lifecycle costs. Standardization is achieved by using common, readily available, cost effective, and reliable parts across plant equipment. Another aspect of achieving benefits from parts standardization is that it contributes toward driving decisions very early during the design cycle, which helps to establish 70 percent of the product’s cost in the initial conceptual phase itself. Parts standardization replaces numerous similar parts with one common part, resulting in the purchase of common parts in large quantities because they can be used across multiple applications/equipment. This phenomenon offers benefits of economies of scale to both the buyers and suppliers by reducing the supplier’s cost of maintaining technical data and storing-tracking-distributing multiple parts along with offering cost savings to buyers.

Introduction: What is Parts Standardization?

Parts standardization across industries is defined as the process of developing, establishing, and implementing a set of guidelines that permits mass production of equipment spare parts and components, which can be easily fitted into any other part/equipment without the need for any adjustment. For any organization, spare parts standardization is an important solution for reducing long-term and excessive inventory along with simultaneously minimizing equipment maintenance costs.

Every organization across different verticals, such as, oil and gas, automobiles, pharmaceuticals, mining, and consumer packaged goods (CPG), encounters the problem of sitting on an excessive inventory, which also contains obsolete spare parts. Therefore, it has become a necessity for the Capex and MRO divisions to strategize solutions that can cut down costs on such excessive inventory. This challenge highlights the benefits of the standardization of spare parts for procurement managers who can leverage on the usage of one single part across different equipment in the plants. Such standardized parts include nuts, bolts, motors, process pumps and equipment (PPE), and fasteners. Standardization of spare parts requires implementing an effective parts management program to attain the benefits of cost savings, improve logistics support, enhance supportability, and manage obsolescence.

Why do Organizations Need Parts Standardization?

Figure 1 below depicts the need for standardization in any organization. Following a non-standardized approach for spare parts often results in confusion across an organization’s internal departments, namely, operations, purchasing, and finance. Standardization results in a lower inventory stock, cost savings, increased supportability, and safety of systems and equipment, among others, by aligning the objectives and requirements of the operations, purchasing, and finance departments of any organization.

How is Parts Standardization Done?

Figure 2 below provides a simplistic view on standardization of spare parts. In every manufacturing plant, spare parts come from different manufacturers, and hence these plants tend to have several brands of spare parts along with additional stock of critical spare parts in the in-house inventory. For instance, a company has spare parts A, B, and C in their inventory from three different manufacturers. After standardization, the company can stock a single standard part that can replace parts A, B, and C, thereby eliminating the need to source spares from three different vendors.

Fig 2: Spare Parts Standardization Outlook

Reducing maintenance costs and long-term inventory costs for equipment requires standardization of spare parts. In any organization’s manufacturing plant, the spare parts used and procured from different manufacturers tend to be stocked along with an additional stock of critical spares in the inventory. As a result, companies are driven to spend time and money to train their plant employees on the usage of parts from different vendors. Once part standardization is effective across the plant, constraints associated with training, inventory, and maintenance can be reduced to a great extent.

Savings from Parts Standardization

Supplier consolidation

Standardization of parts/components enables an organization to reduce its supply base. The major cost component that is affected by the standardization of parts/components among suppliers is the price of such products. This is because a smaller supplier base might facilitate the purchase of a higher volume of products at lower prices due to economies of scale. Additionally, having a smaller supplier base enhances relationships, which might provide other benefits to an organization, such as R&D operation and supplier performing some operative works for the buyers.

Reduced transactional costs

The reduction of transaction costs comprises an important cost-saving area for companies/buyers who opt standardization of parts/components. Since the expenses of such goods are recurring in nature, standardization entails procurement of a large volume of parts/components.. Therefore, companies place blanket orders with suppliers that contains multiple delivery dates over a period of time; these orders are often negotiated to take advantage of the predetermined pricing. Depending on the blanket order sales, invoices can be created as required until the contract is fulfilled. Placing blanket orders with the supplier allows the buyer to obtain special discounts and eliminates the need to hold large amounts of stock. As a result, buyers can avoid the costs associated with processing frequent purchase orders (POs).

Role of MRO Integrators in Spare Parts Standardization

MRO integrators play a key role in offering a solution for spare parts standardization. These companies have a strong network of manufacturers and use the expertise of manufacturers to help a company evaluate and test spare parts/components/products, thereby eliminating the need of buyers to source from multiple suppliers. MRO integrators also enable buyers to increase their leveraging position by placing large order volumes with a supplier. As a result, a buyer can obtain savings through discounts for placing large volume orders and obtain certain value-added services (VAS) in return. One of the major MRO integrators, WESCO (headquartered at the USA), contributes toward product standardization by combining spreadsheet analysis with manufacturer negotiations to standardize product nomenclature, customer’s part numbers, and usage at both manufacturer and item levels. The buyer must approve the product standardization program within its plant(s) to obtain savings across the following key areas: elimination, reduction, redesign, and redundancies in the supply chain.

Total Cost of Ownership (TCO) and Parts Management

During the purchase of any capital equipment for a plant, most organizations focus on the initial purchasing cost of equipment instead of the TCO. By reducing the large number of spare part types used in equipment designs through standardization, an organization can enhance material readiness and interoperability along with reducing the TCO. Additionally, the selection of standardized parts ensures that properly documented and reliable parts with the capability of reducing the risks associated with early equipment are used.

Fig 4: Equipment TCO for 5 years (example)

(Adapted from International Rental Magazine, April-May 2016 issue)

An example illustrated in the above figure shows an equipment piece acquired for $45,000 and sold for $18,270 after five years. During the five-year lifecycle, the equipment incurred $6,120 in parts costs and $6,750 in service costs, thereby incurring a total cost of ownership (TCO) of $39,600. In this case, both the spare parts cost and labor cost accounted for an approximate 33 percent of the TCO. Therefore, cost can be reduced only by optimizing the cost of parts and improving labor efficiencies. Hence, efficient parts management is linked to equipment service because both parts and service together represent a notable percentage of the total equipment lifecycle costs.

Benefits of parts standardization

Standardization of spare parts/components/products produce several advantages for the entire value chain of an industry. For the buyers of standardized parts/components, the benefits of standardization can be realized in the following ways:

  • Leverage purchasing power: Buyers benefit from suppliers’ economies of scale as they have the purchasing leverage to order bulk quantities of standardized spares and to obtain just-in-time support from suppliers.
  • Holding fewer inventories: Parts standardization offers reduced inventory levels because buyers can obtain the standardized parts directly from suppliers as they are identified and already listed across supplier websites/catalogues.
  • Cost reduction: Buyers can arrange for a spontaneous resupply of parts and materials from their suppliers whenever equipment downtime occurs, which results in cost reduction.

For the suppliers, benefits of standardization can be realized in the following ways:

  • Cost competitive: Suppliers can reduce their cost overheads and subsidies through the standardization of spares parts/components, thereby becoming more cost competitive.
  • Better operations and improved supplier credibility: Suppliers can function efficiently whenever any immediate request comes from a buyer; this is attributed to the fact that standardization synchronizes the internal operations with appropriate inventory updates. This improves the overall operational flexibility of the suppliers, which, in turn, ensures better delivery to buyer locations and enhances their credibility simultaneously.
  • Focus on better product quality and innovation: The suppliers witness flexibility and efficiency in operations once they take-up parts standardization. As a result, suppliers can focus on implementing better product development capabilities such as mass customization.

Cost-benefit Analysis in Parts Management

Companies can witness many intangible benefits of parts management by avoiding certain cost factors; however, an analysis of historical parts management indicates that a reduction in the number of non-standard spare parts to fewer standard parts can produce tangible benefits in any new design. The cost factors tend to vary for different organizations, depending on operational structure of a plant or program. It is very obvious that implementing part standardization during the early design cycle of a program is more rewarding. The cost of adding a new part to the inventory is derived across six different areas such as engineering and design, testing, manufacturing, purchasing, inventory, and logistics support.

*The testing cost is reduced significantly because every part added to the inventory does not require testing. However, every part needs to be evaluated by similarity, bench test, or analysis.

Fig 5: Average costs of adding a new part into a system(Source: http://www.dla.mil/)

Engineering and design of a new part incurs approximately 50 percent of the total cost; however, adding an existing and non-standard part to a system can also affect the costs significantly. While designing a system, the addition of each non-standard part can cost an average of $27,500 throughout the life of the program. An effective parts management program avoids this cost every time it excludes the unnecessary introduction of new parts to the system. Additionally, the historical analysis of parts management data has revealed that a program without parts management requirement introduces 2.5 percent more new parts into the logistics system when compared to a program with parts management requirements. Therefore, a program with 10,000 parts can achieve a lifecycle cost avoidance of $6.8 million, a very less significant amount, by using an effective parts management program.

How do Different Industries Perceive Standardization?

The general idea of standardization of machinery spare parts, with a specific reference to C-class MRO parts, such as fasteners, nuts, bolts, and valves applies to every manufacturing unit, irrespective of the industries wherein they operate. Certain product standardization programs can also contribute toward achieving better savings across different industries by standardizing products that do not demand high-level specifications. For example, mining companies can standardize PPE, and automotive companies can standardize certain parts such as motors; however, pharmaceutical companies can standardize only certain processes as it is difficult to standardize products or components. Thus, generally, standardization differs among industries. The only common parts that can be standardized include plant machinery spare parts; if these parts are standardized, they will enable every company to garner significant savings in the long run.

Example 1: Spare Parts Standardization

The following description offers a fair understanding of benefits achieved after standardizing C-class spare parts:

Issues/Problems:

A leading engine manufacturing firm approached Specialty Bolt to find a solution to reduce its supply base for spare parts. The engine manufacturing firm faced a tough time managing 50 suppliers of fasteners and C-class commodities with different part numbers.

  • The purchasing department could not provide effective quotes due to invalid information
  • Unused inventory resulted in excessive inventory costs
  • Non-standardization of parts led to an increase in per piece price
  • Service issues with related to suppliers were faced

Solution:

Specialty Bolt conducted a fastener survey finding out an active part number list and description for each part and reviewed every part to explore a possible substitution. In the final part review, they estimated fastener dimensions, annual usage of parts, plantings/coatings, and usage area, among others.

Results:

The following results were achieved by Specialty Bolt:

  • Removal of 20 percent parts discrepancy
  • Reduction in part numbers and inventory mix
  • Exceeded target pricing goals
  • Lowered Purchase Price Variance (PPV)

Hence, Specialty Bolt’s estimate shows that by eliminating a single part number, a large-scale manufacturer can save $30,000–$50,000 throughout the part lifecycle in terms of inventory control, reporting, and tracking.

Example 2: PPE Standardization

Issues/Problems:

SDI Inc. was approached by a mining industry client who wanted to reduce inventory for mining accessories. The mining company spends an average of $150,000 on PPE purchases, safety gloves, glasses, and ear protection.

  • The company’s PPE spend was divided across a large number of suppliers, brands, and plant locations
  • There was a redundant and excessive inventory
  • Prices differed for the same product that were sourced from multiple suppliers

Solution:

SDI performed the following to achieve product standardization for the client:

  • Peformed sorting by the product,  quantity, and product price for products procured from each supplier.
  • Collaborated with different plants of the client as well as with procurement teams to discuss product requirements, quality, and price, among others.
  • Consolidated the spend and finally selected a single supplier

Results:

SDI enabled the client to attain the following benefits:

  • Cost savings of up to 31 percent Reduced inventory
  • Establishment of corporate specifications
  • Setting up a supply chain
  • Annualized savings of $475,000 for the client

Conclusion

Today’s businesses experience the need to organize their parts data in terms of eliminating duplicates, standardizing parts, and removing obsolete parts. Many organizations are focusing on the key role that standardization plays in parts management. They are continuously working to create greater transparency between engineering and purchasing teams, thereby striving to gather unrivaled purchasing power. Parts standardization enables organizations to garner greater economies of scale when such standardized parts are purchased in large volumes across multiple plants or departments. It equips manufacturers with purchasing leverage by reducing the purchasing and inventory costs. Standardization of parts enables employment of a relevant and beneficial parts management technology, which ensures a reduction in the TCO in the future.

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