HomeLearnCase StudiesCase Study: Achieving a 75 Percent Cost Reduction Against Vendor Recommendations Through Spare Parts Optimization

Case Study: Achieving a 75 Percent Cost Reduction Against Vendor Recommendations Through Spare Parts Optimization

Posted On:September 21, 2017 Updated On:September 26, 2023
Case Studies

Learn how we helped an offshore oil and gas project develop a spare parts strategy based on equipment criticality to optimize costs and minimize risks.

The Challenge

An offshore oil and gas project located off the coast of Southern Africa initiated the construction of a new processing facility. Expecting to produce 111,000 barrels of oil per day, the project identified the need to develop a spare parts strategy during the design phase of construction. Developing a spare parts plan based on equipment criticality, which can be done at any life cycle phase, will optimize the costs associated with stocking parts and will minimize the risk of not stocking certain parts.

An important goal for any process facility is to keep costs low, while simultaneously maintaining uptime. While meeting this goal requires the application of many asset management practices, having a spare parts plan in place is critical to effectively managing uptime and costs associated with unexpected asset replacement. Therefore, the challenge is to minimize the number of parts held in inventory (i.e., minimize costs), while ensuring the part is available when needed (i.e., minimize risk).

For this, two items must be developed: a listing of parts for each equipment in the project and the number of each unique part that should be kept in stock for this equipment. Typically, vendors make recommendations for spare parts needed for their equipment, however, their recommendations do not consider risk or probability and consequence of failure for the operating equipment. Instead, their recommendations only consider the need to repair the failed equipment. Thus, if the vendor recommendations for spare parts are accepted without being reviewed, the result will be excessive stock (i.e., too much cost). If too few parts are stocked, repair times for equipment will increase, potentially resulting in production losses, which usually far exceed the cost of the corrective work order—including labor and materials.

Pinnacle's Solution

This company engaged Pinnacle to assist with conducting a detailed spare parts analysis for the new project equipment. As part of Pinnacle’s Data-Driven Reliability framework its spare parts analysis is an Intelligence strategy that provides invaluable benefits to asset management programs because it is based on equipment criticality, the cost associated with stocking individual parts, and the risk of not stocking specific parts

1. Link Asset Hierarchy and Update Inventory System:

The first step of the analysis included the identification of all parts that can be used by each piece of equipment. This includes both parts that are stocked and parts that are not kept in inventory. Oftentimes, it is valuable to enter non-stocked parts into the inventory system so that all the information needed to order the part—if the part is needed—is readily available, and that research into equipment manuals is not required. Therefore, Pinnacle worked with the customer to ensure each part in the inventory system was associated with the various equipment that can use that part (i.e., the parts are linked to the asset hierarchy). An important intermediate step after linking the parts to the asset hierarchy was incorporating the new parts into the existing inventory system. Due to equipment standardization, some of the parts for the new equipment may have already been included in the inventory. This required extensive data cleansing of the existing inventory information to ensure current parts were correctly identified as being identical to the new parts. It is vital to confirm that the existing parts in inventory are identical to the parts identified for the new equipment. Differences in materials, ranges, sizes, etc. can result in a part being unusable when needed for a repair.

2. Complete Risk-Based Demand Model on Equipment:

Pinnacle then performed a demand model review of the project’s major equipment. The demand model identifies equipment and spare parts that can be justified by economic (quantitative), safety, environmental, or other qualitative reasons. After the parts were identified and linked to the appropriate equipment in the initial step, two decisions were made for each part: Does the part need to be stocked (i.e., part quantity > 0)? How many parts should be kept in inventory (i.e., part quantity ≥ 1)? To answer the first question, Pinnacle compared the cost of stocking the part to the cost of not having the part when needed. It may not be cost-effective to stock parts that are readily available from a vendor, or for certain non-critical equipment that does not require a high priority repair. After deciding which parts needed to be stocked, Pinnacle then determined the quantity to be stocked for each part. This decision accounted for the quantity of parts required for each repair and the lead time to obtain replacement parts. Risk was incorporated into this decision by determining the demand rate for the part (i.e., the probability that the part is needed), which accounts for failure rates of the entire population of equipment that can use the part.

3. Develop List of Recommended Operational Spare Parts:

The final step involved Pinnacle developing the list of recommended operational spare parts in customer-supplied templates. This list featured each spare part recommended for stocking, as well as the minimum recommended stocking quantity and/or recommended reorder point. On this list, the parts are identified by inventory item number, manufacturer (or vendor) part number, description, and other equipment or part details as needed (e.g., equipment serial number). Upon completion of this list, Pinnacle then held a validation meeting with the customer for review and approval. Pinnacle also provided an Equipment Spare Part Computerized Maintenance Management System (CMMS) upload template, which links all the operation’s spare parts to the equipment they support within the CMMS.

Results

Pinnacle’s facilitation of the spare parts analysis enabled the customer to achieve an optimal spares stocking strategy. This strategy enabled the facility to reduce costs associated with maintaining unnecessary inventory. Overall, the results of Pinnacle’s spare parts analysis included:

  • 8,394 stocked parts associated with the equipment that use each part.
  • 5,807 parts analyzed for minimum stocking quantity recommendations.
  • ~10 million USD value of parts recommended to hold in inventory.
  • ~30 million USD less cost (75% reduction) for parts compared to vendor recommendations.

Conclusion

The construction of a new processing facility for the customer presented the challenge of developing a spare parts strategy. Pinnacle was engaged to assist with conducting a detailed spare parts analysis that considered equipment criticality, the cost associated with stocking individual parts, and the risk of not stocking specific parts. The analysis included the identification and linking of all parts to the equipment that can use them, incorporating the new parts into the existing inventory system, and performing a demand model review of the project’s major equipment.

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