1 Copyright 2012 by ASME

CRITICAL COMPONENTS METHOD FOR INVENTORY OPTIMIZATION

Jonathan W. Prescott
Cimarron Engineering Ltd.
Calgary, AB, Canada
jonathan_prescott@cimarron.ab.ca


James Ferguson
Cimarron Engineering Ltd.
Calgary, AB, Canada
james_ferguson@cimarron.ab.ca
Chris BIackweII
Cimarron Engineering Ltd.
Calgary, AB, Canada
chris_blackwell@cimarron.ab.ca



ABSTRACT
Undetected time-dependent hazards that lead to first time
failures of oil and gas pipeline installations result in unplanned
maintenance of the facility. The operator is usually unprepared
for this type of failure which can result in significant
downtime because long lead time components that are needed
for the repair will be unavailable. The cost of downtime is,
therefore, largely dependent on the lead time to procure these
components. Analyzing pipeline facilities for critical
components can reduce the likelihood of an extended
downtime.

Inventory levels for any system are determined by first
deciding which components to inventory, and secondly,
determining the quantity to inventory. Solutions to problems
of this nature (inventory optimization) can be achieved by
rigorous analysis of probability and statistics. The
disadvantage of this approach is that it relies on the accurate
determination of input parameters for its solution.

This simplified methodology outlines a method to
inventory components for primary process piping components
(static equipment) in pipeline installations without the need for
rigorous mathematical analysis. The simplified methodology
entails the following tasks: identifying the critical flow path
for the system using drawings; creating a bill of materials for
the system from drawings or during a field visit; specifying a
threshold permissible lead time for components in service;
applying a repair methodology created from CSA Z662 to
determine the quantity of components needed; and cross
referencing the bill of materials with a database of long lead
time components which are known from performing an
availability study.

This analysis provides a solution for pipeline operators
wanting to limit downtime due to failure of critical
components on static equipment.

INTRODUCTION
Reliability of service between markets for supply and
demand is a key metric for oil transmission pipeline operators.
Unplanned maintenance interrupts upstream and downstream
processes if lost throughput exceeds available tankage at the
upstream and downstream ends of the line.

For the specific case of unplanned maintenance due to
failure of static equipment at a pump station, key factors
contribute to the severity and duration of the resulting
reduction in throughput:

1. Criticality of individual pump stations to throughput
for the pipeline. Depending on the configuration of
the line, loss of one pump station may result in
reduction of flow by 25% to 100%.
2. Inability to effect temporary repairs. In limited cases,
it is possible to repair static equipment when
regulations, codes and corporate procedures provide
for weld repairs or the installation of pressure
containing sleeves, although application of such
temporary repairs is limited by geometry and access
Proceedings of the 2012 9th International Pipeline Conference
IPC2012
September 24-28, 2012, Calgary, Alberta, Canada
IPC2012-90500

2 Copyright 2012 by ASME
3. Procurement time for components. In some cases,
time to procure long lead time components can be the
largest contributor to repair turnaround time.

Unplanned maintenance can theoretically be avoided by
identifying causes of failures and repairing damage as part of
construction and running planned maintenance; however,
practical considerations limit the successful application of this
approach.

Economic considerations favor flaw detection and
removal as part of manufacturing and construction; however,
quality controls during fabrication and construction inspection
are historical in the context of operating assets and thus, past
materials and standards used may, in many cases, have
resulted in significant flaws being placed into service.

Inspections after the facility is placed into service require
justification, such as knowledge of:

Existing flaws resulting from improper
manufacturing construction or earlier damage
mechanisms.
Excessive loads due to improper design or out of spec
construction.
Threats or the possibility of damage identified
through visual inspection, co-incidental inspection, or
a previous failure resulting from the same cause.

Since availability of such knowledge is limited, it is
generally difficult to prevent first-time failures stemming from
undetected hazards and the resulting damage. Use of available
knowledge to prevent subsequent failures is dependent on a
structured and thorough damage prevention and integrity
program.

In summary, operators are justified in expecting some
unplanned maintenance due to failure of static equipment at
pump stations, and have a reason to put measures into place to
limit downtime required to effect repairs.

STATISTICAL ANALYSIS
This section describes the statistical analysis of inventory
optimization, as well as the difficulties in performing such an
analysis and its limitations.

The minimum total cost method (MTC) is used to
perform inventory optimization quantitatively. This method
minimizes the objective function shown by equation 1 [1].

(1)

Where is the total cost, is the holding cost, and
is the shortage cost. Two assumptions are made to calculate
the shortage cost:

1. Probability of shortage of components is based on the
Poisson distribution
2. Total downtime can be approximated by lead time

The first assumption is appropriate given the availability
of oil and gas pipeline systems (occurrence of rare event
failures).

As shown in Figure 1, the second assumption assumes
that the procurement phase is the largest contributor to total
downtime and can be used in place of that variable. A typical
sequence of events following a failure is as follows:

i. Call
ii. Prepare
iii. Disassemble
iv. Procurement
v. Repair
vi. Test
vii. Replace &
viii. Report


FIGURE 1: TYPICAL EVENTS FOLLOWING A FAILURE [1]
Each of these tasks is a term (units: time) that when summed
together equal total downtime. To limit downtime it is
necessary to reduce the significant terms contributing to total
downtime. The assumption of this analysis is that procurement
is the limiting factor controlling downtime and that the other
terms have insignificant contribution to total downtime.
Reducing procurement is, therefore, the best way to limit
downtime.

The holding cost and shortage cost are calculated by
feeding equations 2 and 3 with the following inputs: is the
purchase cost of the component, is the stock percentage
value, is the mean time to failure, is the lead time
of the component, and is the cost for lack of inventory [1].

(2)

(3)












3 Copyright 2012 by ASME
Figure 2 has plotted equations 1, 2, and 3 for an arbitrary
example problem. Note that the holding costs will increase as
the number of components increases and that the probability
of having a shortage of parts decreases as more components
are held in inventory. The total cost is the summation of the
shortage and holding costs and the optimal solution is the
solution which results in the minimum total cost at a particular
inventory level. Figure 2 shows an optimal inventory level of
2 components at a minimum total cost of $1,911.00.


FIGURE 2: MINIMUM TOTAL COST METHOD [1]
Applying the MTC method using industry data shows that
oil and gas operators should hold some level of inventory to
mitigate the risks of extended downtime. Data can be taken
from OGP Report 434-1 Process Release Frequencies or API
581 Risk Based Inspection Technology for the inputs.

For example, consider the following example: A pipeline
system producing at a rate of 80,000 barrels/day, a commodity
cost of $90/barrel, a lead time of 2 weeks, a generic failure
frequency of 1e-3, a purchase cost of $1,500/component, a
stock percentage value of 1%, and an estimate of 6
components in the system. When these inputs are submitted to
the function that carries out the mathematical analysis using
the statistical software program R, the analysis outputs that the
optimal solution is to inventory a single component.


FIGURE 3: FUNCTION FOR INVENTORY OPTIMIZATION
Minimum
Total Cost,
$1,911.00
0
1000
2000
3000
4000
5000
6000
7000
0 1 2 3
C
o
s
t

(
$
)
Number of Components
Total Cost
Holding Cost
Shortage Cost
Function for Inventory Optimization [2]:
# N = Number of Components in Service (units)
# gff = Industry Generic Failure Frequencies
(failures/(units*yr))
# d = Consumption Rate (units/yr)
# T = Lead Time (days)
# R = Purchase Cost ($)
# S = Stock Percentage Value (fraction 0 to 1)
# Rh = Rate Hit due to Failure of System (barrels/day) (i.e.
Lost Production)
# Cc = Cost of Commodity ($/barrel)
# Cd = Downtime Cost ($)
# limit = stop at the specified number of components ex:
limit equals 2 analyze (0,1,2) components

Inventory.Optimization <-
function(N,gff,T,R,S,Rh,Cc,limit){
d <- N*gff
Cd <- T*Rh*Cc
T2 <- T/365
N <- seq(0,limit,1)
Ch <- numeric(length(N))
for(i in 1:length(N))
{
Ch[i] <- R*S*sum((rev(N[1:i])*dpois(N[1:i],d*T2)))
}
Cs <- Cd*d*(1-ppois(N,d*T2))
Ct <- Cs+Ch
Optimum <- min(Ct)
Number <- N[which(Ct==min(Ct))]
list <-
list(Shortage.Cost=Cs,Holding.Cost=Ch,Total.Cost=Ct,Mi
nimum.Total.Costs=Optimum,
Optimal.Number.of.Spare.Parts=Number)
return(list)
}

Usage & Inputs:
Results <- Inventory.Optimization(N=6, gff=0.001, T=7,
R=1500, S=0.01, Rh=80000, Cc=90, limit=3)

Output for [N=0, N=1, N=2, N=3]:
print(Results)
$Shortage.Cost
[34.8, 2.0e-3, 7.7e-06, 0.0]
$Holding.Cost
[0.0, 15.0, 30.0, 45.0]
$Total.Cost
[34.8, 15.0, 30.0, 45.0]
$Minimum.Total.Costs
[15.0]

$Optimal.Number.of.Spare.Parts
[1]


4 Copyright 2012 by ASME
There are several limitations of the MTC method which
are outlined below:

Knowledge of the actual failure frequencies for the
components under study will not be known, and
industry failure statistics may not be appropriate
The actual rate hit is typically unknown and is
dependent on the failure location and processing
conditions at the time.
While the analysis considers multiple components it
assumes i.i.d (independent and identically
distributed) components, thus not accounting for
multiple components on the same spool. The analysis
assumes the components are all on different spools.

All of these reasons reduce the confidence users have in
applying the mathematical approach and, as a result, the
decisions that will be based off of them.

CRITICAL COMPONENTS METHOD (CCM)
In response to the limitations discussed in the statistical
analysis section, a simplified method was developed. The
steps needed to complete this simplified study are as follows:

1. Identify Critical Flow Path
2. Specify Critical Lead Time
3. Create Bill of Materials (BOM)
4. Perform Availability Study for BOM
5. Determine Quantity based on CSA & company repair
methodology
6. Complete Summary Statistics
7. Summarize Optimal Solution

1) Critical Flow Path
The critical flow path inventory optimization begins by
specifying the critical flow path of the pipeline operator. By
definition:

Critical Flow Path: All pipe and piping components from
receipt to delivery point where a failure will result in
significant downtime leading to high consequences incurred
by the pipeline operator. Any failure outside of the critical
flow path, while potentially inconvenient, will not severely
impact the pipelines operation.

Note that static equipment have low failure probabilities
because they are designed with significant corrosion
allowances. Applying the critical flow path definition focuses
attention to high consequence areas which identify high risk
areas that require mitigation.

Spools along the critical flow path are labelled according
to which facility they appear in and by their spool number (ex:
spool 01 for Edmonton facility: E-01). A spool is the smallest
assembly of components that can be removed from the facility
by unfastening mechanical connections (typically flanged
ends).

Once the critical flow path has been identified, the next
step is to identify the risk tolerance of the operator much like
an investor would determine his risk tolerance before
investing in the market.
2) Critical Lead Time
The risk tolerance should be in agreement with the
companys operational goals and mission statement and
should reflect the companys risk tolerance. The key variable
that needs to be specified is the critical lead time ( ). By
definition:
Critical Component: Components with lead times greater
than the critical lead time ( ) are critical components.
The critical lead time is typically greater than 1 day. This is
because local distributors of oil & gas parts inventory many
components which they can deliver to site typically within 24
hours. There is no need to purchase and inventory parts that
are readily available by distributors. However, some
components may be special order which increases the lead
time beyond 24 hours and can be up to 3 months. Components
with lead times greater than 24 hours are limited availability
items as a result of low demand typically due to odd
dimensions, grade, and presence and use in oil and gas
facilities.
Table 1 on page 5 shows a typical piping specification for
an oil and gas system. The areas highlighted in bold & grey
show component size ranges, thicknesses and grades that may
not be stocked on the shelf by distributors. These areas apply
for most static equipment. Each distributor will inventory a
select portion of the components highlighted in grey but not
all of them.
3) Create Bill of Materials
Once the critical flow path is defined a bill of materials
(BOM) for the components that fall under its scope can be
created. The bill of materials can be created from a full set of
drawings (PFDs, P&IDs, and ISOs) or by executing a field
visit. The BOM should include the components needed to
pressure test individual spools. This ensures that all
components needed to effect the repair have been considered
for the study.

4) Availability Study of BOM
Once the bill of materials has been identified, an
availability study is used to populate lead times; lead times are
then cross checked versus the critical lead time specified in
step 2 to determine criticality. This identifies the components
that need to be held in inventory based on the risk tolerance of
the operator. The next step is to determine at what quantity to
inventory those critical components.



5 Copyright 2012 by ASME
TABLE 1: PIPING SPECIFICATION DENOTING LONG LEAD TIME COMPONENTS
Pipe Size PN20 (ANSI 150) PN50 (ANSI 300) PN100 (ANSI 600) PN150 (ANSI 900)
Pipe
Size
(NPS)
Pipe
OD
(mm)
Thickness
Material
Grade
Thickness
Material
Grade
Thickness
Material
Grade
Thickness
Material
Grade
mm WT mm WT mm WT mm WT
26.7 3.91
XS
241 for
Fittings and
Pipe

248 for
Flanges
3.91
XS
241 for
Fittings and
Pipe

248 for
Flanges
3.91
XS
241 for
Fittings
and Pipe

248 for
Flanges
3.91
XS
241 for
Fittings
and Pipe

248 for
Flanges
1 33.4 4.55 4.55 4.55 4.55
1 48.3 5.08 5.08 5.08 5.08
2 60.3 5.54 5.54 5.54 5.54
3 88.9 5.49
STD
5.49
STD
5.49
STD
5.49
STD
4 114.3 6.02 6.02 6.02 6.02
6 168.3 7.11 7.11 7.11 10.97
XS
8 219.1 8.18 8.18 8.18 12.7
10 273.1 9.27 9.27 9.27 12.7
XS
290
12 323.9 9.53 9.53 12.7
XS
12.7
414
14 355.6 9.53 9.53 12.7 12.7
16 406.4 9.53 9.53 12.7
XS
290 12.7
20 508 9.53 9.53 12.7 359 15.88 0.625 wt
24 610 9.53 12.7
XS
12.7
386
- - -
30 762 9.53 12.7 15.88 0.625 wt - - -
32 812.8 9.53 12.7
XS
290
15.88 0.625 wt
414
- - -
34 863.6 9.53 12.7 17.45 0.625 wt - - -
36 914.4 9.53 12.7
359
17.45 0.625 wt - - -
42 1066.8 9.53 12.7 20.63 0.625 wt - - -
1) Bolded and Grey cells denote categories with long lead times based on supplier provided information for Alberta 2011

5) Determine Quantity
To determine the quantity of critical components needed
to inventory, critical spools need to be assessed by a repair
methodology. Critical spools are spools with critical
components.

CSA Z662-11 section 10.11 is very specific as to the
acceptable permanent repair methods [3] which are:

i. Grinding Repair
ii. Replacements (Cut-Outs / Spool Replacements)
iii. Permanent Sleeves
iv. Hot Tapping
v. Welding Repair

This methodology bases the quantity of components on a
repair methodology for replacements and does not consider
the other repair methods because knowledge of failure
mechanism and failure locations are needed to assess whether
the other repair methods can be used. On the other hand,
quantities can be based on replacement philosophy. A spool
replacement strategy would lead to the following solution
shown by equation 4.

(4)

Here the quantity to inventory for critical component ( ) is
simply the maximum number of components appearing on any
critical spool.

For a cut-out strategy, the quantity to inventory is based
on the largest quantity of component appearing on all
possible cut-outs across all critical spools and is shown by
equation 5. Note that there are a limited number of possible
cut-outs because CSA controls minimum cut-out size and
there is also a minimum number of acceptable cut locations
based on geometry.

(5)

Analyzing critical spools by cut-out is not as popular as spool
replacements because performing cut-outs can be difficult and
time consuming to perform in the field; however, both
strategies are typically employed when analyzing a system.
Once type and quantity are known, summary statistics can be
carried out on facilities and a list of critical components can be
created.

6) Summary Statistics
Summary statistics can be created because critical
components are tracked by spool number and facility ID and
provide useful information such as:
i. Total number of spools along critical flow path;

6 Copyright 2012 by ASME
ii. Total number of critical flow path spools in each
facility; and
iii. Fraction of critical spools within a facility

The first statistic summarizes the percentage of critical spools
an operator has. The second statistics summarizes the
criticality between facilities by assessing the percentage of
critical spools across facilities, and the third statistic states the
percentage of critical spools within a facility.

7) Solution
The optimal solution is presented in table format with a
list of critical components and their quantities to inventory.
Table 2 list the critical components and suggested inventory
levels for an example pipeline system.

LIMITATIONS OF CCM
The critical components method does not give
consideration to component costs, failure frequencies,
downtime costs, etc for components. It is only in this
scenario, where the operator would incur very high shortage
costs for unplanned maintenance and low holding costs for
inventory, that the variables of the quantitative analysis
become unimportant. This methodology is, therefore, limited
to scenarios where the downtime costs are significantly larger
than the holding costs. For example, large diameter
transmission pipelines.

TABLE 2: CRITICAL COMPONENTS AND QUANTITIES FOR AN EXAMPLE PIPELINE SYSTEM
Critical
Component Rating Schedule WT Description Material
Spool Replacement
Quantity
Cut-Out Repair
Quantity
NPS 12 XS 12.7 PIPE DSAW CSA Z245.1 GR. 414 CAT I 0.6 1 length of pipe
NPS 16 XS 12.7 PIPE DSAW CSA Z245.1 GR. 414 CAT I 26.8 2 length of pipe
NPS 20 5.88 PIPE DSAW CSA Z245.1 GR. 414 CAT I 3.3 1 length of pipe
NPS 36 17.48 PIPE DSAW CSA Z245.1 GR. 414 CAT I 20.2 2 length of pipe
NPS 12 PN150
FLANGE RFWN (PN150 XS
BORE) CSA Z245.12 GR. 414 CAT I 2 2
NPS 14 PN150
FLANGE RFWN (PN150 XS
BORE) CSA Z245.12 GR. 414 CAT I 1 1
NPS 20 PN150
FLANGE RFWN (PN150 BORE
TO MATCH 15.88 WT) CSA Z245.12 GR. 414 CAT I 1 1
NPS 36 17.48 45 BW ELBOW CSA Z245.11 GR. 414 CAT I 1 1
NPS 12 XS 90 LR BW ELBOW CSA Z245.11 GR. 414 CAT I 1 1
NPS 20 15.88 90 LR BW ELBOW CSA Z245.11 GR. 414 CAT I 1 1
NPS 36 17.48 90 LR BW ELBOW CSA Z245.11 GR. 414 CAT I 1 1
NPS 12 x 10 XS REDUCER CONC. BW CSA Z245.11 GR. 414 CAT I 4 1
NPS 16 x 10 XS REDUCER CONC. BW CSA Z245.11 GR. 414 CAT I 1 1
NPS 20 x 16 12.7 REDUCER CONC. BW CSA Z245.11 GR. 317 CAT I 1 1
NPS 20 x 16 15.88 REDUCER CONC. BW CSA Z245.11 GR. 414 CAT I 1 1
NPS 30 x 20 15.88 REDUCER CONC. BW CSA Z245.11 GR. 386 CAT I 1 1
NPS 16 x 8 XS REDUCER EEC. BW CSA Z245.11 GR. 414 CAT I 1 1
NPS 36 x 30 17.48 REDUCER EEC. BW
CSA Z245.11 GR. 414 CAT I
(F.O.T.) 1 1
NPS 20 x 12 15.88 TEE RED. BW CSA Z245.11 GR. 414 CAT I 1 1
NPS 20 x 16 12.7 TEE RED. BW (BARRED) CSA Z245.11 GR. 359 CAT I 1 1
NPS 36 x 24 17.48 TEE RED. BW CSA Z245.11 GR. 414 CAT I 1 1
NPS 36 x 36 17.48 TEE RED. BW CSA Z245.11 GR. 414 CAT I 2 1

CONCLUSIONS
It has been shown that pipeline operators can incur
significant downtime costs due to undetected time-dependent
hazards. Operators wanting to limit downtime can do so by
performing a critical inventory study of static equipment for
pipeline systems. This method can yield the following results:

Reduce risk by reducing the variability in downtime for
spools with critical components
Avoid quantitative analysis
Base the inventory optimization on the companys
specific risk tolerance
Analyze quantity based on spool replacement strategy
Specify quantity based on CSA repair methodology
REFERENCES
[1] Riccardo Manzini et. al., Maintenance for Industrial
Systems: Chapter 11 Spare Parts Forecasting and
Management Springer Series in Reliability Engineering,
pp 409 - 426
[2] R Development Core Team (2010). R: A language and
environment for statistical computing. R Foundation for
Statistical Computing, Vienna, Austria. ISBN 3-900051-
07-0, URL http://www.R-project.org/.
[3] CSA Standards, Z662-11: Oil and Gas Pipeline Systems:
10 Operating, Maintenance, and Upgrading, February
2012