Today, the construction machinery market is experiencing a severe downturn, with low equipment operating rates. Many dealers have significant stockpiles of spare parts in their warehouses, some of which have been sitting there for years. Valuable capital is tied up in inventory, but no customers are buying, leading to a cash flow problem for dealers. It's like a circulatory system malfunctioning – business is inevitably tough.
Why are these spare parts unsold? Because of a mismatch between demand and inventory. In previous years, with booming sales of complete machines, dealers thought that having more inventory would increase their safety margin, so they stocked all sorts of spare parts. This initial overconfidence has resulted in today's stockpiling. Therefore, we need to understand some basic characteristics of spare parts inventory to avoid repeating the same mistakes.
What spare parts should be stored in the warehouse? What spare parts shouldn't be stored? OEMs require dealers to guarantee customer satisfaction, but don't assume that having all the spare parts a customer needs in stock guarantees customer satisfaction; otherwise, the company is on the verge of bankruptcy.
Even seemingly powerful OEMs don't have enough capital to guarantee "everything a customer needs." A 20-ton excavator has approximately 4,000 different parts. Maintenance parts and consumable parts combined number less than 100. 95% of these parts are designed for a lifespan exceeding 10,000 operating hours; in other words, the failure rate of these parts won't increase until the equipment has been running for 5 years. Keeping all these parts in a warehouse waiting for equipment failure is no different from passively waiting for a problem to arise.
Therefore, we must first understand one thing: over 80% of parts are "non-inventory parts." Although they are on the parts list and have prices, they have seen almost no demand in the past 6 to 12 months. This indicates that these parts are slow-turnover or zero-turnover parts, and the inventory strategy should be make-to-order (MTO), not inventory.
Dealers will only procure and deliver these parts when customers order them, especially for high-value parts such as engine assemblies, which customers may find difficult to obtain elsewhere and are willing to wait for delivery. Dealers need to know where to find these parts and how to shorten delivery times.
Parts availability is the primary factor in customer satisfaction, but simply having every customer's request is not enough to guarantee customer satisfaction. Storing "non-stock spare parts" inevitably leads to a large amount of stagnant inventory, tying up distributors' cash flow and creating inventory risk, making it a flawed inventory strategy.
For distributors, spare parts that haven't been sold for 12 months are considered stagnant inventory, and the chance of selling them after 24 months is extremely slim. Never believe the myth that "inventory will naturally sell if left unsold for a long time"-that's self-deception. Spare parts that cannot be guaranteed to sell within 6 months should not be put into the warehouse. Buying is easy, selling is difficult, and selling quickly is even more difficult.
Secondly, there is a type of spare parts that distributors must ensure supply to the fullest extent: commonly used, easily damaged, and consumable spare parts. These spare parts are few in number, accounting for less than 4% of SKUs, but the demand is high, making them crucial for both customers and distributors. Stockouts not only cause customer dissatisfaction but also result in lost spare parts sales. These spare parts should be stocked according to forecasts using the Make-to-Stock (MTS) system, with the goal of ensuring no stockouts.
Most distributors' inventory problems stem from a lack of inventory strategy. Blindly stocking up during periods of market prosperity leads to difficulties in quickly converting inventory into cash, while insufficient stock of fast-turnover parts frequently results in stockouts. By addressing the two points mentioned above, distributors can avoid unnecessary stagnant inventory, ensure sufficient stock of fast-turnover parts, and minimize inventory risk.
[Image: Parts Categorized by Demand Frequency]
In terms of inventory strategy, fast-turnover parts (approximately 4%) are handled using the MTS (Mean Time To Ship) strategy, slow-turnover parts (over 80%) use the MTO (Make to Availability) strategy, and medium-turnover parts are stocked using the MTA (Make to Availability) strategy. Safety stock is set based on the expected availability rate of parts, and the inventory level is calculated (see image above). Higher demand frequency requires a larger safety stock, and lower demand frequency requires a smaller safety stock.
The core of the Theory of Constraints (TOC) is focus, which simply means "doing what you should do and not doing what you shouldn't do." What you should do is ensure sufficient stock of fast-turnover parts to avoid stockouts, while simultaneously planning inventory for medium-turnover parts, finding the optimal balance between readily available and surplus stock. What you shouldn't do is store slow-turnover or zero-turnover parts. If you do this, you won't have the money or time to do what you should, leading to a mismatch in parts inventory.
Therefore, strategy is crucial for business operations, and parts inventory is no exception.
