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Master student Intelligent Manufacturing, GROUP T – Leuven Engineering College, Vesaliusstraat 13, 3000 Leuven
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Master student Intelligent Mechanics, GROUP T – Leuven Engineering College, Vesaliusstraat 13, 3000 Leuven
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Continental Temic Electronics (Phils.) Inc., Ring Road 16, LISP II, Brgy. La Mesa, Calamba City, Laguna, Philippines
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Unit Management, GROUP T – Leuven Engineering College, Vesaliusstraat 13, 3000 Leuven, an.molenaers@groept.be
Abstract
In order to maintain a production line at high service inventory management is to find a balance between
levels, a large stock of various spare parts needs to be penalty and inventory costs associated with the
available to immediately replace broken components. specific item [3]. At this balance point, the optimal
Among these different spare parts, so-called slow stock level can be found.
movers will count in many cases for a significant When asked by Continental Corporation Calamba
fraction of the inventory value. Setting correct to improve spare parts cost effectiveness, this project
inventory levels is not only critical when it comes to set out to develop a cost based inventory model. An
optimizing availability of the installations, also for internal managerial initiative for cost reduction of
inventory cost minimization these levels are of utmost spare part inventory was on-going and initiated this
importance. While classical forecasting models can
project. The goal of the study was to develop a cost
give a good indication of the usage of spare parts
based inventory model for Continental Corporation
during a period in time, they can, however, not predict
Calamba. This model incorporates the costs related to
optimal stock levels. The aim of this study was to
develop an alternative decision model to optimize a spare part in a method to find the three values
spare part stock levels. To do so, the model required by the installed SAP system for each item;
incorporates the most significant costs involved with safety, minimum (reorder point) and maximum stock
spare parts. Starting from a beta-binomial demand level. Detailed historical inventory data of the
model, the risk of unavailability is calculated organization was provided and used for the
alongside downtime cost, part cost, and purchase cost. development and testing of the model.
The model described can accurately estimate the total The organization at study is a part of the
annual cost for different stock levels in order to Continental Corporation Automotive Group. The plant
determine the minimum, the maximum and the safety in Calamba manufactures electronic components for
stock levels. In conclusion, the study found that the global automotive industry. As is common in the
introducing the total cost model offers clear and easily electronics industry, Continental uses a fully
comprehensible decision criteria for spare part automated sequential production layout. This makes
management. A case study to validate the model has the line more susceptible to downtime since every link
been done at the Continental Corporation plant located in the production chain can shut down the entire line.
in Calamba, Philippines. Where parallel systems are in place, a single failure
will decrease the operation level.
Keywords: Inventory Control, Spare Parts, Stock It should be noted that there were some specific
Levels. conditions incorporated in the study. Consumables
were not taken into account as they are included in
Introduction
material required planning. These items refer to
Spare parts inventory management has a major liquids and specialized types of tooling that are
influence on the operations of a production facility [1]. consumed in the production process [4]. At the case
The function of this inventory is to keep the company, predictive maintenance was not carried out
equipment in optimum operating condition by and preventive maintenance was limited. It was
providing the maintenance crew with the required therefore assumed that all items in the study follow
replacement parts [2]. Spare parts generally have the run-to-failure policy. Once failed, these items are
sporadic and lumpy demand paired with high prices of replaced by new parts as there is no in-house or
individual parts [1]. The objective of spare parts outsourced repair of broken items. Upon repair, it
2
could be assumed that there is no set-up cost Days between Demand Distribution
associated with production start-up. The delivery lead For older spare parts, historical data is usually
times can be assumed fixed due to contractual available and the demand distribution needed by the
agreements which should be in place between the model is created using the beta-binomial distribution.
supplier and Continental. Upon delivery, each item is Where none is available, the beta-PERT distribution is
stored in a single echelon warehouse. used to estimate the demand.
The approach presented in this paper is to first find
Historical Data Analysis
the days between demand distribution of the spare
part. Using this distribution, all parameters related to The model uses data collected from the material
spare parts management are observed and expressed in movement table (MB51) in SAP R3 as installed at
terms of cost. The proposed model combines the cost Continental. This data was filtered to contain only true
formulas to give an estimation of the annual costs consumption as inter-warehouse movements were also
included in the original data. The SAP system
linked to each item. The model estimates costs for
registers a date-time value and a quantity for each
each possible purchasing policy of every stock
withdrawal.
quantity. The minimum annual cost of the purchasing Recent literature suggests using time series
policies is selected for each stock quantity. From this forecasting [5]. Forecasting by time series analysis is a
the optimum stock quantity and purchasing policy is frequently applied quantitative technique when figures
selected with the minimum annual estimated cost. concerning the future are required [6]. As spreadsheets
Using the optimum point, the safety stock level, to perform exponential smoothing techniques in time
purchase quantity and reorder point are provided to series analysis are rapidly becoming a management
the SAP system. text book standard [7-10], the techniques described in
Rasmussen [6] were used to model the data. The
methods as specified in Table1 were applied.
Method Type
Linear
Regular
Regression
Optimized smoothing
Holt’s Method
parameters
Optimized smoothing
parameters and initial values
Holt–Winter’s Optimized smoothing
Multiplicative parameters
Optimized smoothing
parameters and initial values
Normalized optimized
smoothing parameters and
initial values
Holt–Winter’s Optimized smoothing
Additive parameters and initial values
Normalized and optimized
smoothing parameters and
initial values
Figure 1. Flow of the Model In our research study, these methods failed as the
demand of spare parts is sporadic as shown in Figure
The output offers suggested stock values that can both 2. Some researchers were able to realize improved
be graphically and numerically evaluated. The major results based on the above methods by grouping
advantage of the proposed total cost model is that it similar items together [11-12]. However, classification
uses easy-to-implement numerical methods relying on of the spare parts assortment is required in order to
accessible data without further need for time form appropriate similar characteristic groups.
consuming classifications by experts. Classifying spare parts is an extremely time
consuming venture. As this project set out to create a
quick and simple method, further classification of the
spare parts was not an option. The foremost limitation
3
of the time series method is that the total analysis useful when the demand probabilities are low and
period is broken down in successive data points which have the U-shaped distribution [10].
decrease to a large extent the detail of the data due to The beta-binomial is a two-dimensional
the grouping error Using time series, it became clear multivariate Polya distribution. A variable with a beta
that there is no seasonality for the Continental case. binomial distribution is distributed as a binomial
Therefore time series forecasting was abandoned. distribution with parameter p, where p is distributed
with a beta distribution with parameters α and β [14].
For n trials, it has the following probability density
function:
This mean is used to calculate the and shape possible stock level. A clear minimum annual cost can
parameters of the Beta. be visually determined at a stock level of 15.
( )( )
(4)
( )( )
( )
(5)
( )
on the mean of the demand distribution and the lead (1%). This figure was confirmed by the accounting
time. department of the Continental plant. The holding cost
There are four possible scenarios during the lead is the product of the average stock value, item cost and
time: holding cost percentage.
I. Normal situation
II. Depleted safety stock
( ) (7)
III. Understock
IV. Overstock
Three distinct zones can be noticed in the graph. Money tied up is the cost of the money that is
Each zone corresponds to an imaginary bin. Bin 1 allocated to spare parts purchasing not available to be
allows for batch orders. Bin 2 contains the LTD. The used elsewhere in the company. The possible
LTD quantity is defined to always contain the round opportunity investment rate of this value is already
up and down value of the forecasted LTD. The order calculated in the holding cost. The money tied up cost
quantity is the sum of the quantities in bin 1 and bin 2. is the product of the average stock value and the item
Bin 3 contains the safety stock that has to support the cost price.
demand in case the allocated LTD is not sufficient
during the lead time.
( ) (8)
The cost approximation formulas are set up to use
these three bin values. For each possible integer
combination of bin values, the costs are calculated. Purchase cost is the administrative costs for an order
both for company and supplier. It is the cost directly
(6) associated with handling the purchase request. This is
multiplied with the expected number of batch
The output of the model allows to immediately purchases per year.
provide the reorder point and quantity, a minimum
and maximum stock value and a safety stock. These
values are then implemented in the SAP system that (9)
( )
bases its purchase requests on this dataset.
In order to have a complete annual cost estimation
Cost formulas for a spare part item, the usage cost is also calculated.
This simply is the average expected times the item
The inputs used for the cost formulas are data related needs to be replaced annually multiplied by its cost.
to each item such as lead time, number of operational
levels and price. General data regarding downtime
costs was received from the accounting department at (10)
Continental.
The final input needed for the cost formulas is the The sum of the average costs is:
demand during the lead time. The LTD was
determined from the mean of the data regression, (11)
which is the assumed linear demand during the lead
time. The rounded up and down value were used as
II. Risk Cost Calculation
the two possible values for bin 2 to calculate the total
The second part of the total cost model is the risk
cost.
costs. These are overstock and understock costs.
The deviations from this LTD are expressed by the
beta-binomial distribution. Using the loss of benefit
Overstock
combined with the deviation probability an expected
The first type of risk cost is the risk of overstock. This
penalty cost can be calculated. Overstock implies
is defined to account for the additional holding cost
additional holding costs. Understock results in loss of
and money tied up of extra unused stock items. It is
productivity or even downtime of the production line.
the risk of extra items in stock multiplied by the sum
of extra holding cost and additional money tied up.
I. Average Cost Formulas
The formula below is simplified as certain terms
The average cost formulas include holding cost,
cancel out. The cost is transferred from year-to-year
money tied up, purchasing cost and usage cost. It does
basis to days-per-year, after which, it is multiplied by
not take any deviations of the average into account.
the number of times an overstock may occur and the
These costs are annual estimations.
extra days it will remain in stock.
The annual cost linked to holding cost is 37% of the
original purchase price as stated in Nahmias [17]. It
includes cost of capital (28%), taxes and insurance
(2%), cost of storage (6%) and breakage/spoilage
6
∑ ( ) (12)
∑ [( ) ( )]
(18)
Where the probability of overstock is given by:
Understock ( ) (19)
Understock has been divided into a number of
operational levels. An operational level is defined as
the number of levels of productivity identifiable due to ( ) (20)
failures. For example, if there are 4 operational levels,
each failure will result in a productivity loss of 25%.
For a zero stock, the EOQ model no longer holds
If there is one operational level, a single breakdown of
and an annual cost of downtime resulting from the
the item will result in total loss of productivity. If
absence of a spare part during its lead time is added
there are two operational levels, the first broken item
for this item.
will result in a 50% reduction of production. The
second broken item will result in total loss of
productivity. It is possible to define this for an infinite ( ) (21)
number of operational levels. For items that do not
have an immediate effect on productivity, the
III. Total Cost Model
operational level is labeled as zero, resulting in a zero
To be able to evaluate both the average costs and the
risk cost. Defining operational levels is done using the
risk costs, the sum of all these costs is computed.
bill of materials, technical drawings of the machines
From this, the minimal total cost can be determined.
and knowledge of the production process.
The costs are calculated for all possible stock values
The loss of production is defined as loss of benefit.
within the following limitation: bin 2 contains the
This is the added value that would normally be
round up or down quantity of the LTD. Bin 1 and 3
generated during one shift of production.
are iteratively altered to obtain the optimal
Risk costs also include item cost and purchase cost.
combination of bin quantities.
This is because the items involved are part of the
From all of the costs calculated, the minimal total
safety stock group. This means that every single usage
cost is selected. The stock value corresponding to this
of such an item will result in a purchase request from
point is the optimal stock value. Combined with the
the SAP system.
cost linked to spare parts management, such as
purchase cost, holding cost and the cost of the money
Single Operational Level
tied up in inventory, one can find an optimal stock
value for each item.
∑ (( ) ) (14)
Results
Where the probability of all stock consumed and one To illustrate the output of the model, the result is
more item required is: shown of an item with the following movements,
prices and lead times. Usage was registered on the
( ) (15) following dates:
∑ [ ( ) ]
(16)
( ) (17)
7
Table 3. Usage of the Result Item The Beta Binomial mu is calculated as 154,6 days
between usage.
Date Items Used To analyze the sensitivity of item price parameter
1 24/04/2009 1 on the outcome of the model, the price is varied in the
2 27/10/2008 1 example. The three graphs below show a variation in
3 11/10/2008 1 item cost price from €1000 to €100 to €10 with a fixed
4 21/05/2008 1 leadtime of 21 days and operational level is set as 1.
5 14/05/2008 1 In figure 7, one clearly sees the approximately
6 29/06/2007 1 exponentially decreasing risk cost and the
7 13/06/2007 1 approximately linear increasing average costs. As the
8 14/01/2007 1 item price is lowered, the risk costs stay the same
9 28/06/2006 1 while the average costs decrease. This pushes the
optimum point further to the right.
Figure 7. Total Annual Estimated Cost per Stock Level of €1000 Part
Figure 8. Total Annual Estimated Cost per Stock Level of €100 Part
8
Figure 9. Total Annual Estimated Cost per Stock Level of €10 Part
The output of the model gives a single optimal is related to the stocking policy and will be discussed
stock value. This value has to be evaluated, and later.
possibly corrected by two management decisions. The following three graphs below show a variation
The first decision is to lower or raise the number in in item leadtime from 21 days to 14 days to 7 days
stock of an item. Usually one would decrease the with a fixed item cost price of €1000. The risk costs
number in stock of an item. The graphs show that for now lower but remain exponentially decreasing while
low cost items, this would only increase the annual the average costs remain roughly the same and linear.
cost by a fraction making it a realistic deviation from When the lead time is lowered, the model’s optimum
the true optimum. This model will also immediately stock level decreases. It is interesting to note that
show the increased cost due to this decision compared when the lead time is decreased to 7 days, the
to other models. For slow moving items with a low purchasing policy changes to a different one compared
cost, the model will probably over-estimate the needed to at 14 and 21 days. This can be seen by the dent in
stock based on the high risk costs compared to the the previously linear average costs.
item price and holding cost. The second management
Figure 10. Total Annual Estimated Cost per Stock Level with 21 Days Leadtime
9
Figure 11. Total Annual Estimated Cost per Stock Level with 14 Days Leadtime
Figure 12. Total Annual Estimated Cost per Stock Level with 7 Days Leadtime
demand was no longer reliable. There are several other influence on operations management. A correct
techniques in literature that do not require the balance between stock quantities and production
historical data to obtain a good stock value. An reliability is therefore essential for optimized costs.
example of this is the reliability approach with The output of the model as proposed in this study
classification as presented in Dekker [13]. shows an optimal stock value to minimize costs
Due to high downtime costs, the model over- related to each item. The main advantage of this
estimated the stock level for low cost items. model compared to the ones proposed in literature is
Manufacturer recommendations should be consulted that it offers clear insights in the effects a reduced
to find an acceptable stock quantity. Long lead times number in stock, reduced lead time or altered
significantly increased the optimal stock value. purchasing policy will have on the costs related to
Therefore, good communication with supplier is vital spare parts and risk of downtime.
and contractual agreements need to be in place.
The model is designed with user-friendliness with
fast implementation in mind. The visual output is Symbols
easily interpreted and analyzed as it gives numerical B loss of benefit normally generated
solutions of different stock values and policies. Unlike during one shift
many other inventory management models, the output b1 bin 1
is real integer values. The selected output is adapted to b2 bin 2
the SAP system’s required values. b3 bin 3
The costs can be calculated for all spare parts in the ca administrative cost of purchase
inventory, allowing for more dependable budget cavg total average cost
estimations. This was one of the reasons to use annual ch holding cost
cost estimation. ci item cost
Due to the modular calculation approach, the cm money tied up
formulas can easily be adjusted to fit the cp purchase cost
implementation scenario. For example, the demand cr total risk cost
distribution may also be modeled as Poisson, Weibull cro risk of overstock
or any other distribution. Also these formulas can be cru risk of understock
updated to have unlimited service levels so that large crz risk of zero stock
parallel systems can be analyzed. ct total cost
This model does not take the max amount of the cu usage cost
item taken out at one point in time into account. L lead time
Future research in the area of compound distribution P1 probability of one failure
will find a solution regarding this deficit. Recent P2 probability of 2 failures
literature supports the use of a compound Poisson pch holding cost percentage
distribution for demand estimation of intermittent and Po probability of overstock
lumpy demand for inventory control. [18] and [19]. S number of shifts per day
The compound Poisson distribution is a probability
distribution of the sum of a number of independent
Poisson distributed variables. This implies that it is
Acknowledgements
capable of including multiple variables into the
demand distribution. As there were no additional We would like to thank a number of people who
variables available, this was not incorporated into this helped form this thesis project. First of all we want to
study. thank our promoter Dirk Verhaeren for his support in
The model is a standalone application as it could this project and his guidance during our internship.
not be fully integrated with SAP. The model output We would like to thank Detlev von Ramm and the
values need to be manually copied into the system. management team of Continental Calamba for
When one of the parameters changes in the SAP allowing us to work in their midst. We would like to
system, the calculations need to be manually rerun. thank IT Continental Asia for their input in our data
Lead times are assumed fixed in this study. If this gathering process and granting us access to their
assumption is not applicable, other possible methods datacenters. A special thanks to our coworkers at
are described in literature such as Shibuya et al [20]. Continental Calamba for embracing us, helping us
with our project and introducing us to the Filipino
Conclusions culture.
Thanks to Marc Moris Head of Industrial
Considering the high price and low demand rates, it is Engineering Departement Continental Mechelen, for
not economical to keep a large stock of spare parts. the company visit and our long meeting on spare parts
However, line downtime and production loss resulting handling.
from that are both a large economical loss and baleful
12
We would like to thank our GroupT promoters An models of demand forecasting for multiple slow-
Molenaers and Geert Waeyenbergh for their input. We moving inventory items. Computers &
would also like to thank professor Van Oudheusden Operations Research, 35, 893-905.
(Professor at the “centrum voor Industrieel Beleid / 12. Dolgui, A., Pashkevich, M., 2008. Demand
Verkeer & Infrastructuur”) and the participants of the forecasting for multiple slow-moving items with
16th International Working Seminar on Production short requests history and unequal demand
Economics for their constructive feedback on our variance. International Journal of Production
paper. Economics, 112, 885-894.
Thanks to Prof. Vercammen for introducing us to 13. Dekker, R., Kleijn, M.J., de Rooij, P.J., 1998. A
Dirk Verhaeren and his support in scheduling our spare parts stocking policy based on equipment
internship. criticality. International Journal of Production
We would like to thank Mr. Goossens and InterS for Economics 56-57, 69-77.
their financial contribution. We were flattered by the 14. Weisstein, Eric W., "Beta Binomial Distribution."
interest of Mr. Persoons, and the article in the From MathWorld--A Wolfram Web Resource.
Interview magazine. http://mathworld.wolfram.com/BetaBinomialDistr
Thanks to the GroepT International Office for ibution.html Accessed 21-10-2009
helping us with the visa required to work in the 15. Vose, D., 2008. Risk Analysis: A Quantitative
Philippines. Guide. 3rd ed.; West Sussex, England; John Wiley
Finally we would like to thank our families for their and Sons Ltd, ISBN 978-0-470-51284-5
support during our expatriate experience. 16. U. S. Department of Defense, Military Handbook:
Reliability Prediction of Electronic Equipment,
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