Are You Trading Money for Time?

Most people who are involved in materials and spare parts management have come across the situation where there is a need to justify expenditure on a specific spare part.  Typically the logic goes like this:

• Maintenance is concerned that they need the spare part – just in case (let’s assume that the part costs $1,000).
• They justify the purchase by pointing out that downtime without the part would be significant (let’s say $100,000).
• Based on those figures there is no argument about payback so they decide to order 4 – just in case – spending $4,000.
• Even based on buying 4 its seems like cheap insurance.

But this thinking misses one vital point – did we need to spend all of the $4,000 on that part?
The key here is to turn the question around and ask, ‘How much is your time worth?’

You see, often inventory stocking limits are set without enough thought on how many items are really needed.  As a result companies over stock their inventory.  The value of the overstock is what people, perhaps unwittingly, trade off against the value of their time.  By not spending more time and effort determining the most appropriate stocking quantity they are swapping money for time.  Put another way, by not spending the time, they spend the money.

Let’s say that in the example above spending a half hour reviewing the operating requirements, supply chain and maintenance plan would result in a decision to hold just two of the item.  The saving of $2,000 from just a half hour’s work equates to an hourly rate of $4,000!

The lesson here is simple: don’t fall for the old line: ‘our downtime is so expensive that inventory doesn’t matter’.  Ensure that every significant expense is justified with some supply and demand facts.