How to Establish Stock-Out-Risk Goals

Here is an example of a recent question that we were asked by a client.

I have a unit that with a lifetime of 10 years and I want zero stock-out-risk. How many spare parts should I recommend?

The short answer to this is infinity spare parts. Only infinity spare parts could achieve a zero per cent stock-out-risk. Obviously this isn’t very helpful and therefore we need to strike a compromise. But how much risk should you accept?

This depends on what effect the stock-out situation would have on your operation.  If the LRU was a low-cost desktop telephone that could be replaced in 30 minutes by visiting a local electrical store then it would be reasonable to accept a very high chance of stock-out. The crisis resupply policy would be to drive to a local store and buy another.

If the LRU was a mission-critical klystron amplifier with a 2-year replenishment delay and a failure would be catastrophic then we need to make sure we minimize and mitigate any risk of outage. We could minimize our risk by making sure we have enough spare parts to cover the replenishment period and we might also agree a crisis resupply contract with the supplier and maybe a collaborative partner.

So what is the answer then? Unfortunately, there isn’t one. All a consultant can do is model the scenario and present the figures to the decision makers. It is the responsibility of the project sponsor to decide how much risk the organisation should accept and the decision should be recorded somewhere in the project documentation (possibly the project log or the minutes of a project meeting).

A common technique used in scenarios like this is called a Sensitivity Analysis (or What-If) analysis. Here we would model lots of different scenarios and measure the impact on our operation.

Thankfully, Spares Calculator simplifies this task by presenting data in graphical and tabular formats making it easy for decision makers to make the critical choice.