Spare parts management is difficult. It requires maintaining a very fine balance between accessing a critical spare part exactly when you need it (to minimize machine downtime) and keeping your inventory value as low as possible (to minimize working capital).
It’s a difficult optimization because you’re working on the basis of probability. More precisely, for many critical parts: you’re working on a very small, but difficult to calculate, probability that you will need a very specific spare part for a specific machine, at any given moment. Accurately modeling what this exact probability might be, proves challenging for many companies.
To overcome this challenge, the best solution is pooling. The reason for this is that in probabilistic science, predicting when you might need a spare part is difficult with no or little data. By pooling supply and demand, you increase your access to both more data and more spare parts. This allows you to optimize spare parts management, improving your chances of predicting probability well. Compared to other systems, pooling is much more cost-effective and a fairly simple system to put into place. Yet, it’s not been implemented as widely as you might think. This is a huge missed opportunity: we’ll explore the whys and hows of pooling below.
What is spare parts pooling?
Spare parts pooling is more or less what it sounds like: providing access to a shared stock of spare parts to different interested parties. This can be done, for instance, through an online spare parts ‘marketplace’ system. Pooling is often assumed to be only internal, but there are different levels, namely:
Internal pooling - pooling all the spare parts within your company, across all your sites, in one virtual/real store room. This way, anyone who needs a spare part can access one internally at any given moment. Within internal pooling, there are three different options:
- One level internal pooling - where all the parts are stocked centrally and issued upon request.
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- Hub and spoke internal pooling - where most parts are stocked in one location, with some critical items located at various sites.
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- Network internal pooling - a pool across multiple sites, without a "main" site for stocking.
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External pooling - where you enter a pool with external parties outside your company, for example, other similar companies, suppliers of spare parts, machine manufacturers, and so on, either only as a buyer of spare parts or a seller too. This can either be:
- A cooperative pool - in this concept, participants know and agree to share resources with each other. For example, the IATP - International Airlines Technical Pool - a pool of over 100 airlines sharing aircraft recovery kits, aircraft parts and tooling, ground handling equipment, and manpower/facilities.
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- An open pool - in this pool, members request and share parts anonymously, even allowing competitors to share spare parts in need. For example, what we do here at Sparrow, allowing you to source parts from anyone nearby who has them.
Pooling: the best way to optimize your spare parts management
What are the central advantages of pooling?
1) Aggregate Demand
One of the basic advantages of pooling is that it aggregates demand (puts it all in one place). This is especially useful for spare parts because demand is probabilistic and erratic - what’s called “lumpy” in the business. This means that you almost always stock more parts than you ever need, while also never having enough for unusual situations. The following example illustrates the core of this problem:
On the one hand, you don’t know when exactly you’ll need a part, even with the best predictive models. So you may think you’ll only need a specific part on average every 2 years, and then suddenly you need 5 of them all at once. The likelihood that you’ve got 5 of this specific part in the plant(s) where the machines break is very small, leaving you vulnerable to surprises.
On the other hand, on average, you probably keep more spare parts than you need. For instance, let’s assume the probability of a motor in one of your machines failing is likely to be around 2 percent. If you have 20 machines, you can’t keep 0.4 motors, so you have to keep one instead. But this is 0.6 more motors than you actually need!
By opting for a pool-based spare parts management model, you pool the demand. So instead of 1 company keeping 1 motor (more than it needs), 2 companies keep one (exactly how much, on average, they need of this spare part). When you scale this up to all the machines in your plant(s), or in all the plants in the pool, everyone can stock fewer spare parts because, together, you will have the optimal number of parts per the number of machines covered by the pool.
2) Aggregate Supply
On the supply-side, pooling helps you cover “black swans” (very unusual occurrences). In the spare parts industry, this could be, for example, a second motor you suddenly need when you’re already waiting for one motor of the same kind to arrive (which usually takes weeks or months). The probability of this happening is very low, but it can still happen. Logically, when you have access to more spare parts quicker - via an internal or external pool - you don’t have to fear “black swans” as much. When supply is pooled, either just within your company or across several companies, spare parts management becomes more efficient across the whole supply chain. Businesses needing spare parts can access those closest to them whenever they need, and those selling them open themselves up to a greater number of customers near and far.
3) Aggregate Procurement
Pooling is an enabler for aggregated procurement. Why? Because pooling means better data, and better data means better planning.
Normally, companies buy things from the same local producers and may pay higher costs to access a spare part from the company they know best. This is often because they have to - machine downtime is very costly and they don’t easily have access to other providers.
With typical spare parts procurement, managers don’t have access to a catalog of spare parts from different providers. This means they are not able to compare prices or leverage their buying power.
In contrast, pooling gives you access to more data on spare parts availability, location, and demand, both within your entire organization and on the wider market. This makes the whole supply chain more transparent and opens up the usual providers to competition. In the end, this means that procurement is a lot easier - and cheaper - from the spare parts buying side, while suppliers enjoy access to a whole new customer base.
4) Stability of the Supply Chain Against Shocks
In 2020, COVID-19 was the supply chain’s “black swan”. When the pandemic struck at the beginning of the year, the importance of supply chain resilience really came to the fore. But this is an issue that was present long before the crisis hit. Almost every Christmas season, the supply chain suffers a mini-shock. So much so, that in 2017, US newspapers reported that shipping delays threatened to “ruin Christmas”.
Political changes, like Brexit, can (and will) have huge effects on supply chains running between countries. Moreover, in some countries (like China or Russia), where there is a history of slow and non-transparent customs and bureaucratic processes, getting mechanical parts into the country is an ongoing challenge.
How does pooling improve supply chain resilience? Well, when you have disruptions in the supply chain, as we did when coronavirus hit, having a pool in place is like having a tip-top immune system. As a spare parts buyer (machine operator), if suppliers from other places fall through, you still have a back-up chain of local supply and internal stock. Large external pools that cover whole industries (and, therefore, whole swathes of the supply chain) also make the whole chain more resilient, allowing companies to share resources and plan better to avoid worst-case scenarios. In the case of events like Brexit, and in countries where external procurement is simply difficult, having an internal country pool can mean more stability for the entire industry and economy.
5) Free up working capital
On a basic level, when you pool both supply and demand, you become tremendously efficient. Our experience and the science show that this efficiency inevitably leads to massive cost-savings. For example, a 2014 article by Karsten and Basten suggests that annual savings of 44% may be obtainable via pooling. There’s one conclusion to this: pooling is much more working-capital-effective than other spare parts management methods.
6) Reduce Waste
Commentators and policy-makers alike view a “green recovery” as a panacea for 2 global crises: climate change and the COVID-19 pandemic. As a result, waste-reduction will be central to business strategies in the coming decade - not least because of incoming EU Green Deal subsidies and regulation. Waste-reduction is a byproduct of pooling since aggregating supply and demand means stocking fewer parts and using those that are stocked more frequently. This, in turn, means that fewer parts become obsolete or get destroyed. The latter might surprise some, but we need to remember that spare parts have a shelf life. Electronics, for example, are no good after 1-2 years; conveyor belts after 5-7 years. Just by having too many spare parts on a shelf somewhere, you are burning money and resources unnecessarily. By continuously turning them, on the other hand - even if that means someone else is paying you to use them - the entire usage of spare parts across your industry ecosystem is overall reduced because less is bought and thrown away.
Pooling: a panacea for spare-parts management
Pooling is a no-brainer when it comes to spare parts management. Whether you start small, pooling internally within your company, or dive deep by opting to join a wider external pool with several supply chain actors, you will gain access to a common-sense spare parts management method that saves you both money and time, all whilst allowing you to get spare parts when and where you need them. And this doesn’t just help you individually. The science is showing us that pooling is the best option for a more optimized, resilient supply chain too. In today’s uncertain times, this is more important than ever.
Look out for our next article exploring the future of spare parts management for more science-based spare parts truths!