Managing Spares Inventory Through Life Time Value Assessment

Mohita Gangwar Sharma
FORE School of Management, New Delhi, India

Kashi N. Singh
Indian Institute of Management, Lucknow, India

Spare Parts Management in capital equipment intensive industries is a critical differentiating factor. As we work in a resource crunch environment, we have changed the vantage point for spares management system in this study. Determining the value and usefulness of the spare parts and understanding which spare part is more valuable should guide us in committing resource. Instead of looking from the vantage point of the equipment where the spare is used this spare considers spare part as an investment based on its value. Real Option Analysis has been identified in the literature as a quantitative means to evaluate the flexibility inherent in the decision making process. By adopting a real options framework we develop a model that incorporates the demand uncertainty and the financial implications involved. The value derived in terms of asset utilization determines the viability of this investment. Thus, the concept of ‘Spares Life Time Value’ has been proposed based on an analogy from ‘Customer life time value’. In this model the contribution of spare part reduces to an argument which can be used for strategic insights and decision making. The concept has been illustrated through a case study on the issue of spare resource allocation.

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