Inventory -- Control It Before It Controls You

How do you react when you hear the word, inventory? Does it send shivers down your spine when you think of all of the headaches it can cause? Does it cause excitement as you think about the vast quantities and varieties that you can hoard? Or does it cause you to shrug your shoulders and walk away? One thing is certain inventory can cause a variety of emotions, some well founded while others not. The purpose of this article is to eliminate some of the irrational emotions concerning inventory by gaining a better understanding about the subject. To gain that understanding we will examine inventory by answering the following questions:

     - Why do we have inventory?
     - What factors can influence the levels of inventory?
     - What are the costs associated with inventory?
     - What are some techniques for managing inventory?

Why do we have inventory?
Before discussing inventory and its use in aviation, let’s recognize a more basic premise. All of us deal with inventory in our everyday lives. Consider an example from home. How many of you have a supply of food stored in the refrigerator or pantry? What else could we call that supply? In essence we have chosen to stock a certain amount of inventory to match our demand or consumption and to reduce the number of trips required to the store or supplier. A fuel tank in our car is another common type of inventory. The tank allows us to travel for an extended distance and time without having to constantly stop for fuel. We get more efficient use (availability) out of our car when we don’t spend an inordinate amount of time refueling.

Aviation and its need for inventory is not different. We carry inventory to improve the efficiency (availability) of our aircraft. Using spares as an example, we carry a part in inventory to have it available when an aircraft requires it. The part is installed and the aircraft returns to service sooner. Inventory is not just limited to spare parts but can also include such items as fuel, labor, aircraft, and ramp space.

In the perfect world, a world without inventory, we would have the item available when the item is required for consumption. (In essence the just-in-time inventory concept) However, we do not live in a perfect world, as far as supply and demand goes, therefore we must have inventory. Inventory makes up for the inefficiencies that we have in the supply and demand chain. Inventory can help us have the right item at the right time but a service that comes with a cost, which we will discuss later.

What factors can influence the levels of inventory?
If stocking the right part at the right time were easy, the need for this article would not be necessary. As a matter of fact the need for an entire discipline of management that focuses on inventory and its management would not exist. If inventory and the issues that surround it are not easy, then what are the factors that can complicate the overall objective to have the right part available at the right time? The following items touch on some of those factors.

  • Probably one of the most obvious and frequently heard factors in the aviation industry is that the vendor of a part has trouble supplying the part. Stated another way the vendor has its own issues of supplying the right part at the right time. As a result you will compensate for the inefficient supply system. You will purchase the part, if able, prior to needing the part and stock the item in your inventory until required. The net effect is an increase in inventory for your organization. If there are enough parts that fit into this scenario or a few parts that have a large dollar amount, then your inventory can grow quickly.
  • A majority of the parts on an aircraft are categorized as on-condition -- parts that require replacement based upon the operating condition, not a scheduled replacement interval. Unfortunately predicting the timing of a part’s failure is difficult. Based upon this, how do you have the right part available at the right time? You carry the replacement parts as inventory. An information system could certainly help you make more informed decisions, but the bottom line is you must carry certain parts to ensure the operational availability of the aircraft.
  • If your organization has many operational locations, the effect of having the right part and at the right time has been increased by the factor of at the right place. In essence this has the effect of increasing your inventory. Instead of having one part at the central location from which aircraft depart, you may have several parts dispersed to the various locations.
  • A factor that exists in almost all organizations but one that is often overlooked is the role of inventory as viewed by the various internal departments. Quite often the departmental views do not match and normally the strongest department will prevail thus affecting inventory levels. For example the maintenance department has tremendous pressure to have aircraft available 100 percent of the time. This objective would tend to push inventory levels higher. The financial department, on the other hand, realizes that carrying inventory comes with a cost. Its philosophy is to keep inventory as low as possible which in turn reduces the organization’s financial commitment.

Other factors that could affect the inventory levels of an organization are the preparation for major modifications and refurbishments, impending bulletins and directives, fleet type changes, and changes in company philosophy (becoming a parts vendor versus meeting internal requirements only). The simple concept of having the right part at the right time becomes much more difficult when you consider the dynamics of the actual everyday factors. Adding another factor, the cost of carrying inventory, complicates the objective further.

What are the costs associated with inventory?
As discussed previously, having the right part at the right time at the right place is important because it is one of the factors that can improve the availability of an aircraft. Theoretically, having 100 percent availability could be achieved if you could stock in inventory every possible part on an aircraft. But the cost associated with that philosophy would be prohibitive. So an organization must decide what level of availability is acceptable and then determine how much inventory is necessary to accomplish that objective. Said another way, have the right part at the right time at the right place for a reasonable cost.

The most obvious cost associated with having inventory is the price that you paid for the individual items. However, there are other less obvious but significant costs that can be associated with having an inventory. These costs are often referred to as inventory carrying costs and not everyone agrees that they exist. While the amount of these costs may be open for debate, the fact that they exist is quite obvious. Discussed below are some of the more common types of carrying costs associated with inventory.

  • Storage and Handling – Examples of storage costs would include the actual space required to contain the inventory, the climate control, shelving and furniture (for the inventory personnel), and utility costs. Are the costs associated with the storage space real? Yes, because the organization pays to rent or own that space which could be used for another purpose. Facilities that are bursting at the seams certainly understand these costs better than others. Also organizations that must expand existing storage space for an expanding inventory also understand these costs. Examples of handling costs would include the personnel time associated with receiving and stocking parts, organizing the inventory room, issuing parts, and producing the paperwork for each of these tasks. How many individuals are required to accomplish these tasks? These costs may be more difficult to identify if no one is dedicated full time. However, the costs are present even if the tasks only take part of a person’s time. What else could that person be doing if not associated with handling duties?
  • Insurance and Taxes – Coverage of inventory is part of any general business insurance policy. If the inventory is significant enough in value, separate coverage may be required. Specific taxes on inventory and property taxes (yes, inventory is considered as property) can vary by state. Identifying the taxes by each state is beyond the scope of this article but do recognize that taxes do exist.
  • Obsolescence – Costs associated with obsolescence can occur for a variety of reasons but one of the more common ones is holding on to inventory for a long period of time. Our industry may seem like it moves at a snail’s pace when it comes to technology changes but be assured that change does occur. For example, service bulletins and directives can, in some cases, render an item obsolete immediately. What if you have many of those items on your shelf? What if your fleet changes? Do you still have items associated with the old aircraft, for which you can only get cents on the dollar? Avionics has changed significantly recently. Do you still have old instruments that are worth little when compared to the original purchase price? Upon closer examination, obsolescence is probably more common than first realized.
  • Theft and Damage - Rather than dwell on the unpleasant subject of theft suffice it to say that if the proper controls are not in place, an organization is exposed to the risk of theft. Damage can occur in a variety of ways – parts are not stored properly, climate control is not reliable, procedures for moving heavy parts are not clearly defined, and parts remain in inventory long periods of time.
  • Cost of Money – This is one of those categories that people may disagree with and believe that this involves less than “real” money. Rather than argue that point, recognize that an organization has limited resources and through proper management allocates those resources to efforts that will yield the greatest return on their investment. Inventory might be one of those investments. But if the money was not invested in inventory, the organization could invest its money elsewhere and make a return. A simple example is if an organization took its money and invested it conservatively in something like Certificates of Deposits, it would realize a modest return. Is that return better than investing in inventory? If the answer is yes, then the money should not be allocated to inventory.

The table below summarizes generally accepted ranges for the various categories of inventory carrying costs. Taking a conservative approach by using the lower percentages and not considering the cost of money, the annual cost of carrying a one million dollar inventory is estimated at $80,000 (8% x $1,000,000). This represents a nice amount of cash for anybody’s budget....Answering these questions is only part of the story about inventory.

 Typical Inventory Carrying Costs  
 Storage and Handling  4 - 9 %
 Insurance and Taxes  1 – 4%
 Obsolescence  2 – 5%
 Theft and Damage  1 – 4%
 Cost of Money  10 – 15%
 Total Range  18 – 37%
 Typical  27%

Answering the fourth question will lead to ideas for controlling inventory and its related costs. Part 2 of this article will answer the fourth question.

Written By: Brandon Battles April, 2004