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Anil JindalDepartment of Mechanical Engineering

BITS Pilani -Pilani Campus

MAINTENANCE &

SAFETY

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BITS PilaniPilani Campus

Asset and spare parts managementLecture 7

Chapter5

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Introduction

Asset management, broadly defined, refers to any systemthat monitors and maintains things of value to an entity orgroup.

It may apply to both tangible assets such as buildings and

to intangible concepts such as intellectual property andgoodwill.

Asset and spare parts management is critical for effective

maintenance of plant and equipment. Assets include human assets, physical assets and financial

assets. The inventories stored for smooth operation also fall into

the category of assets.

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Asset Management Function in

21st Century Organizations

Before proceeding with management of spare parts foreffective maintenance to be carried out a brief outline ofhow overall asset management is carried describing thethree basic function and there seven individual elements.

First, the financial asset management is discussed.Subsequently, the human resources management andlastly the physical asset management are enumerated.

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Financial Asset Management

The role of finance department is very much a supportivein nature.

It sets the procedures that are to be followed with respectto finance by the people involved in the value addition

chain, ensures that they follow those procedures, disposalof surplus funds, and keeps the financial status up to date.

It also arranges for the acquisition of additional financialassets when required.

The finance department merely ensures that theorganization has the financial wherewithal to allow thevalue adding process to continue to function inaccordance with the mission statement established byprincipal stake holders.

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Human Asset Management

The human resources department also provides supportfunction.

Like the finance department, it also makes the policies andprocedures that are to be followed by the employees

through managers of the value chain the ensures that theyfollow those procedures, and keep the record of humanresources.

It also assists with the acquisition and deployment ofadditional human resources when required.

It usually consists of a small number of qualifiedspecialists. The human resource department ensures that the

organization has the people to allow the value additionprocess as per the mission statement.

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Physical Asset Management

These tasks are once again very much support functions. They involve themselves in setting procedures to be

followed with respect to physical assets by managers of thevalue chain.

They further ensure that the procedures are followed andkeeping overall performance records.

They include the acquisition and deployment of additionalphysical assets when required.

Given the striking similarities between these tasks and

those of the other two main value chain support functions, itmay be taken for granted by those who are not connectedwith the value chain for the physical asset managementorganization would be small, focused and tightly organized,

and equally influential.

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Physical Asset Management

In fact the physical asset management consists of thefollowing departments:

Maintenance (considered to be the prime function in physical asset

management)

Purchase or procurement

Stores management

Operations department whenever they are called upon to do daily or

autonomous maintenance functions.

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Conventional Systems of

Ordering Spare Parts and Materials

This deals with the setting and control of the level ofmaintenance spares, since spares are one of theresources in maintenance, viz., spares, equipment andlabor.

As with any other activity, normal objectives of sparescontrol is the minimization of the sum of the associatedcosts, direct and indirect.

Generally, the problem in spare parts control is to be

balance the costs of holding against the cost of runningout.

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Conventional Systems of

Ordering Spare Parts and Materials

Inventory control theories attempt to determine thoseprocedures, which will minimize the costs of: Running out of stock (Production loss due to stoppage,

cost of temporary hire etc.)

Replenishing stock (per item, and inverse function of orderquantity)

Holding stock (interest on capital, insurance, depreciationover a wide range of stock levels, wages, light, heat,

storage facilities, rent etc.)

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Economic Order Quantity

Simplest of the techniques, being followed for a number ofyears in the industry is explained hereunder.

Economic order quantity is the optimum quantity is theoptimum quantity of material that can be ordered each time

so that the total cost of ordering and holding them remainsa minimum. Mathematically, the expression for theoptimum order quantity can be derived as follows.

Underlying assumptions The demand for the item is known

The lead time is known and fixed

The receipt of the order occurs in a single instant

Quantity discounts are not calculated as part of the model

Stockouts or shortage do not occur

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The following are the variables:

Q = optimal order quantityC= cost per order event (not per unit)R = monthly demand of the productP = purchase cost per unit

F = holding cost factor, the factor of the purchase cost that isused as the holding cost (this is usually set at 10-15%, thoughcircumstances can require any setting from 0 to 1)H = holding cost per unit per month (H = PF)

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EOQ

The single item EOQ formula can be seen as the minimum point of

the following cost function:

Total cost = purchase cost + order cost + holding cost, which

corresponds to:

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The result of this differentiation is:

Taking the derivative of both the sides of the equation and setting

equal to zero, one obtains

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Solving for Q:

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Fig 1. Finding an optimum balance in ordering

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Figure 2 shows the relationship amongst the ordering costs cure,the holding costs curve, the total costs curve and the economic

ordering quantity

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Fig 3 Typical EOQ model

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On the issue of quantum of safety stocks to beretained (as mentioned in fig 3 and reorder point,managers may think of using their judgment basedon the experience of surge in demand, delays in

order processing and shipment delays. Calculation of safety stock has two dimensions: Unexpected spike in sales Delay in recording process

Shipping may cause unfulfilled problems

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Example

John sells a product for $10 and it cost $5 to produce (UVC) andhas fixed cost (FC) of $25,000 per year

How much will he need to sell to break-even?

How much will he need to sell to make $1000?

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Solution

Revenues Variable cost Fixed cost = OI

(USP x Q) (UVC x Q) FC = OI

$10Q - $5Q $25,000 = $ 0.00

$5Q = $25,000

Q = 5,000

What quantity demand will earn $1,000?

$10Q - $5Q - $25,000 = $ 1,000

$5Q = $26,000

Q = 5,200

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Graphical analysis:

Dollars70,000

60,00050,00040,00030,00020,00010,000

0

1000 2000 3000 4000 5000 6000Quantity

Total RevenueLine = USP * Q

Total Cost Line y = VC*Q + FC

BEP

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Graphical analysis: Cont.

Dollars70,000

60,00050,00040,00030,00020,00010,000 Break-even point

01000 2000 3000 4000 5000 6000

QuantityAny quantity sold in the red colored region will produce a loss, while any quantity in the green region will produce a positive cash flow

Total Cost Line

Total RevenueLine

BEP

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BITS Pilani, Pilani Campus

Item Capstan Lathe Automatic (Single Spindle)

i. Tooling Cost Rs.300 Rs.300

ii. Cost of Cams - Rs.1500

iii. Material cost per piece Rs.2.50 Rs.2.50iv. Operation labour cost Rs.5 per hour Rs.2per hour

v. Cycle time per piece 5min 1min

vi. Setting up labour cost Rs.20 per hour Rs.20 per hour

vii. Setting up time 1 hour 8 hour

viii. Machining overheads

(setting and operation)300%of (iv) 1000%of (iv)

Problem

The following information is available for two machines:

Find the break-even quality for a component which can beproduced on either the capstan lath or the single spindle

automatic.

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BITS Pilani, Pilani Campus

Solution

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BITS Pilani, Pilani Campus

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Two-Bin System of Material

Procurement

The two-bin system is quite advantageous for orderingeverything from certain product inventory items (those thathave a relatively stable usage, now and in the foreseeablefuture) to consumable supplies, including office products.

The two-bin system is exactly a system that requires twostorage containers.

Each container will hold a predetermined quantity of thesame material.

The quantities may be the same, or one bin may hold alarger quantity than the other.

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Two-bin system working

Two bins of items are created. The first bin is stacked on top of, or in front of, the second

bin. A recorder card is placed on the bottom of each bin.

Material is drawn from the first (or most accessible) binonly.

When the first bin is empty, it is exchanged with the secondbin.

The recorder card is used to replace items in the first bin. Material is then drawn from the second bin while waiting forreceipt of the material on order.

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Two-bin system working

When the new material arrives, it is placed in the emptybin, and the reorder card is returned to its proper place inthe bin.

The procedure is continued, with material being selected

from one bin until it is depleted. The material is then replenished through use of the

reordering card. As long as the quantity of the material in each bin is the

same, one bin can be first depleted and the order placedfor the replenishment amount; then material can bedepleted from the second bin, and so forth.

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Two-bin system

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Material Management Manual

Industries and maintenance organizations require todocument the policies, procedures, inventory levelsdesired, formats for purchase requisitions and otherinformation including the type of management reporting so

as to follow an uniform practices throughout theorganization.

Further, such practices will enable easy data storage and

retrieval through computer systems.

P d N A h i

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Proven and New Approaches in

Effective Asset / Spare Parts

Management Programme

Proper planning and control of spare parts inventory is acritical component of an effective asset managementprogramme.

If the right parts are not on hand when needed for routine

maintenance or repairs, downtime is prolonged. If toomany parts are on hand, the enterprise absorbs excessivecosts and the overhead of carrying the inventory.

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Item Search

It can be difficult experience for a maintenance plannerwho is not familiar with the item numbers to locate theappropriate part in a computer system. Nouns andqualifiers are a way of simplifying a search.

A noun is a simple, meaningful name for the item, forexample pump. The qualifier adds more detail, such ashydraulic.A search on this combination will bring up allhydraulic pumps in the stock item master file.

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Fig 7 Block diagram showing the relationships between

production, assets and maintenance

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ABC and XYZ Analyses

Generally accepted 80:20 rule illustrates that approximately80 percent of any storerooms volume is associated withonly 20 percent of the items in inventory.

It is important to pay extra attention to that critical 20

percent. ABC and XYZ codes are commonly used to identify those

parts. The codes are assigned based on value or quantityof stock movement, and each code will have an associated

upper limit. Highest value parts, for example those thatcost more than Rs. 2.5 lakh each, can be assigned theABC code of A, and fastest moving parts can be assignedan XYZ code of X.

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Fig 8 ABC analysis plot showing the accumulated value vs.

Item nos (not to scale) and volume

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Fig 9 Regular ABC curve

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Automatic Replenishment

Automating the process related to reorders has generatedproven savings.

Suggested reorder functionality creates requisitions basedon reorder points (ROP) and reorder quantities (ROQ) that

are stored in the inventory record. Once inventory levelsfor a part fall below the reorder point threshold, asuggested reorder is placed for the reorder quantity, whichin turn creates a requisition.

This saves time and prevents the delays and errors thatcan occur with manual purchasing processes.

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Vendor Service Levels

Capturing supplier service level data within the inventoryrecord helps bring to light the most efficient, dependable,and cost-effective vendors.

Preferred suppliers can be identified based on historicallead times, pricing, quality, number of short or over-shipments, how often goods are received damaged,frequency of back orders, and other criteria.

Preference can be given to these vendors in theprocurement process.

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Multistores Capability

A multi stores capability enables an enterprise-wide view ofspare parts inventory that is stored at more than onewarehouse or off site by a third party.

In a multi-plant environment or when maintenancedepartments are distributed, visibility into inventory at thevarious storerooms permits monitoring of parts availabilityand service-level agreements across the enterprise as awhole or on an individual basis.

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Just-in-time (JIT)

JIT replenishment is a popular but sometimes controversialconcept of storing minimal inventory in the warehouse andreplenishing it only when and as needed just in time.

Although enabling significant carrying cost-savings, there

are risks involved. The best replenishment formulas cannot predict anemergency breakdown, a vendor going out of business, acarrier going on strike, or a sudden shortage of rawmaterials.

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Just-in-time (JIT)

Being too conservative in stocking levels can result in theinability to repair equipment in a timely manner or to keepthe production line running

In asset management, the criticality of a part determines

whether it is a candidate for JIT. A criticality code in the EAM inventory record can be used

to identify these items.

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Lean Manufacturing

This is a similar concept with a broader scope. Leanmanufacturing means doing more with less, cutting time tomarket, and eliminating unnecessary processes.

This impacts maintenance and the storeroom by stressing

improved, efficiencies, better planning, and reduced costsand running an operation with far less inventory.

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New Approaches

Purchasing through the Internet is an effective means ofacquiring indirect items and hard-to- find, inexpensive, orshort-notice spare and replacement parts.

Almost all OEMS, brokers, distributors, manufacturers,

and machine shops have web ordering capabilities. Most companies can purchase materials online.

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Mobile Computing And Use Of Bar Code

Technology For Spare Parts Tracking And Monitoring

This is being more popular in the advanced countries andis gaining ground in India as well.

Warehouse personnel can conduct cycle counts withouthalting operations by automating Parts identification withbar codes.

Wireless technology can capture inventory through barcodes and transmit the data in real time to the corporatenetwork.

Critical material availability is easier to track, resulting in

timelier asset management.

Mobile Computing And Use Of Bar

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Mobile Computing And Use Of Bar

Code Technology For Spare Parts

Tracking And Monitoring

With a wireless system, real-time information flowsthroughout each key process in the warehouse, includingreceiving, put-a-way or shelving, picking issues/returns,and bin movement activities.

For one energy company that implemented mobile assetmanagement, errors were slashed, pick time was cut byone-third, on-time picks were improved from 64 to 98.89percent, and overhead costs were reduced by 20 percent.

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Barcode Solution

Like a library system, the programme tracks the item,where it is, how often it is used, and when it is due back.

Reporting capabilities offer information on inventory value,asset locations, and equipment usage. In addition, the

radio frequency scanners (the industry uses with thesystem) mean that the operator is not chained to thecomputer.

He can communicate with the PC in real time from

anywhere in the tool room.

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Barcode Solution

Scanned data is sent to the database instantly, andinformation about the status of both the equipment and theemployees can be accessed from the hand-held.

If, for example, the employee at the counter has an

overdue spare part or is not certified to use the item he istrying to sign out, the PC will send that information to thescanner instantly where it will be displayed on the screen.

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Improved Communication

The system is proving to be of great benefit. The mostsignificant aspect is that the plant has a consistent methodof tracking spare parts as well as consumables in its entiresite.

This will result in a change in purchasing habits. Ordersare no longer going out just because one spare part runsout of an item.

Instead, operators can use the networked system to check

for the item's availability in other parts of the plant. In addition, by forcing operators to catalog their spareparts, the system will help to create an accurate count ofits own assets.

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New Attitudes

An attitude change accompanied the installation of thespare part tracking system will bring in a sense ofaccountability to the industry.

Generally, items may not have been returned for a number

of reasons. The employee may have simply forgotten to return the

tool or a spare part they have drawn, or perhaps left it at ajob-site with the intention of using it later.

These items could be left unclaimed for months, orperhaps mistakenly packed with a contractorsequipmentand removed from the site altogether.

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Additional Applications and Benefits

As labeling and cataloging process continues, the plant canstart using the system to track the industrystrucks (say).

This allows the staff to monitor how often the vehicles areused, and if they are returned on time.

By introducing accountability and effective reportingfunctions, as well as reducing the need for large annualexpenditures for asset purchases and rentals, the system isexpected to save a significant amount of money annually.

Such systems can be effectively utilized in large mineswhere material handling dumpers and trucks are utilized inlarge numbers.

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Other Aspects

Key performance indicators (KPIs) are increasingly populardecision support tools.

For example, an EAM (Advanced enterprise assetmanagement) solution can calculate a KPI on inventory

turns by dividing inventory expenditures by averageinventory level.

When problem areas are flagged, notification can be sentautomatically to the plant and storeroom managers for

escalation. Other supply chain KPIs can include vendor performance,obsolescence, items available but not used, supplierpricing, and more.

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Thanks You