Adding Parts to Inventory

Since we started this blog we have written on inventory management three times. Once on variable lead times, once on economic order quantities and once on the only part that matters. They have each received a lot of reads.  Thank you.

Let me introduce a fourth line of attack on managing the inventory – when do you add a part to stock. For years if not decades we have added parts on the basis on two calls in six months or three calls in a year add the part to your stocking inventory. This has been the “norm” since I entered the Industry in 1969. It hasn’t really changed at all. How about we use probability theory in determining when to add a part to stock and yes when to drop a part out of the stock inventory.

• Time Between Calls        # Calls Last 12 Months                                    Probability of 1 Call
•                                  0             1             2             3             4             5+
• 3 Mths                  2%          7%          14%        19%        20%        38%        98%
• 4 Mths                  5%          15%        22%        22%        17%        19%        95%
• 5 Mths                  9%          21%        26%        21%        13%        10%        91%
• 6 Mths                  13%        27%        27%        18%          9%          6%        87%
• 7 Mths                  18%        31%        26%        15%          6%          4%        82%
• 8 Mths                  22%        33%        25%        13%          5%          2%        78%
• 9 Mths                  26%        35%        24%        11%          4%          0%        74%
• 10 Mths                30%        36%        22%          9%          3%          0%        70%
• 11 Mths                34%        37%        20%          7%          2%          0%        66%
• 12 Mths                36%        37%        19%          6%          2%          0%        64%
• 15 Mths                44%        36%        15%          4%          1%          0%        56%
• 18 Mths                51%        34%        12%          3%          0%          0%        49%

The above table shows the probabilities of future events based on the time between the last two events.  Take the first line “3 MONTHS”. The columns as headed 0, 1, 2, 3, 4, 5+. That is the number of calls in the coming twelve months. So under 0 is 2%, 7% under 1, 14% under 3 etc. Those represent the probability of the number of calls in the coming twelve months. Si there is a 7% probability that there will be 1 sale in the coming twelve months- or a 20% probability of 4 sales in the coming twelve months.

This is quite a good barometer to use for determining when to add a part to stock. If the last two calls are three months apart there is a 98% probability that you will sell at least one part in the coming year – 87% probability of at least one sale if the last two sales were 6 months apart etc… Don’t you think you should use this type of statistical truth in establishing when you want to add a part to your inventory? The time is now.