Dec 28, 2022

Taking stock – managing inventory when supply chains struggle

Yannick Dagan
Yannick Dagan
Contract Manager, LCS/MOI
Robert Baker
Robert Baker
Technical Sales Support, LCS
The last several years have seen mining producers needing to shift and adapt to rapidly changing markets. While many miners have seen impressive performance and opportunities driven by soaring prices for metals such as copper, gold, and battery metals, they have also had to deal with multiple new challenges.

One major issue that has impacted most sites globally has been how mines can find the balance between maintaining high production to take advantage of current commodity prices while at the same time dealing with supply chain logistics and excessive lead times for equipment parts. Prices for spare and wear parts is another challenge, as producers look for alternatives when deliveries are squeezed.

Shocks to the supply chain

In some ways, it has been a perfect storm when it comes to global supply chains. With manufacturing sites cutting back on production during the early years of the pandemic, they were not prepared for the snap-back in demand that followed when business began to recover. Manufacturing sites and foundries that had temporarily closed or gone on minimum production did not have the capacity to keep up when orders began to flow back in for large castings and components.

The conflict in Europe further pressured supply, causing many large components for mining crushers, filters, and mills to double or in some cases triple their standard lead times, with some electronic parts simply not available. Backlogs developed at ports as containers waited to ship and delivery dates have often been pushed further and further out. A side issue facing many sites is the knowledge-gap created by skilled personnel leaving the workforce for retirement or other reasons. Some plants have struggled to replace highly skilled capacity and production planners which has led to parts supply issues becoming even more serious and difficult to manage.

Mining producers have taken different approaches to mitigate supply challenges with mixed results. Some have opted to continue with transactional purchases while locking in prices under fixed price agreements, while others have made advance purchases to get ahead of the curve in terms of delivery. Some producers have looked to widen their supplier base, while another trend has seen a shift towards vendor owned inventory under long term contracts at customer sites. Each approach has advantages as well as points to be aware of before making decisions.

Fixed price agreements

Many sites have continued with their standard transactional approach to parts, ordering when the parts become needed. However, with prices for spares and wears fluctuating or increasing significantly, many have turned to longer term fixed price agreements to take the sting out of rising costs for wears and spares. There are obvious benefits that come with locking in rates in times of rising prices but there are also other factors. One perceived advantage is that there is no additional commitment from the mine site to purchase additional parts from a particular supplier, which in some ways provides the plant with additional flexibility. If a particular part is not available, the site can often look to source it from other site approved suppliers.

Another advantage in continuing to conduct transactional business is that additional storage space at the plant or site is not needed as extra parts are not being ordered in advance. Traditionally, Fixed price agreements (FPAs) tend to help mitigate price escalations, however, there are several drawbacks that can surface when maintaining production is critical. It still does little to manage the lead time issue. When a part fails unexpectedly or delivery times begin to shift further out, the site may be caught with both primary and even secondary suppliers being short of parts. With many sites planning efforts under pressure due to personnel moving to new roles or other changes, we have seen many sites struggling to deal with the problems brought on by longer lead times. On a last note for FPAs, many of these agreements do include an escalation clause meaning prices may still rise depending on the terms of the clauses.

Full container load deliveries

Another approach aimed at tackling the parts supply issues is one of mine sites ordering excess inventory or Full Container Loads (FCLs) of parts to guarantee sufficient inventory to avoid unplanned surprises. With enough spares and wears on hand, the chances of having unplanned downtime due to not having the right parts is minimized, but once again, there are other factors to consider. For sites with multiple pieces of equipment, bringing in FCLs of parts requires having enough storage space to keep the parts onsite. It also requires considerable planning to know which parts will wear out and when they should be preventively changed.

With production rates varying and incoming feed characteristics changing regularly, understanding how these elements will affect wear rates is not always easy. It requires the time and energy from both skilled planners as well as operations teams to plan for and bring in the right parts in the right quantities. Another consideration is the carrying cost of maintaining large inventories, often of parts that may be used very infrequently or not at all each year. With parts pre-emptively purchased in advance of when they will be used, cashflows can take a negative hit.

Bringing on additional suppliers

Another strategy we have seen sites try is that of exploring additional backup suppliers. If one’s preferred supplier does not have stock; having a third or fourth vendor can initially appear to be good planning. Though this does bring flexibility in some ways for select parts, many parts are not simply duplicates that can be interchanged. Parts built specifically for a certain crusher, mill, screen, or filter may bring unique and important benefits, so interchanging the OEM (Original Equipment Manufacturer,) parts for those from another supplier should be examined carefully before trying this option.

From what we have seen in the field, some sites have expanded their supplier base without fully vetting the new supplier’s capability to deliver in terms of lead times and even parts quality. In some case we have seen the perceived gains from having too many untested suppliers quickly evaporate when the quality of the parts does not hold up, resulting in an unplanned service stop — bringing production levels down or even to a stop. Even if an investment is made to vet new suppliers, this still carries a cost in terms of time, money and resources.

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Vendor owned inventory

One important trend we have seen rapidly gaining momentum with customers is the idea of vendor owned inventory being brought onto site to ensure the customer has parts when they need them most.

The inventory is set up at the customers site, but parts are only charged to the customer when they are used. This keeps the sites cashflows running smoothy without impacting them with large upfront costs. Vendor owned inventory does require that there be enough space to store parts at site, or if not, that there are alternative storage areas nearby that can be utilized.

The first steps in setting up a program like this is to have the vendor or supplier assess the customer’s existing inventories. Once this is complete, parts planners as well as maintenance experts work together to evaluate and recommend the right mix of spares and wears, taking into consideration the service history of the machines as well as other factors such as varying feed mix, planned production changes, or other factors which can affect wear rates. Once the parties agree to the mix of parts to be held at site, the inventory is brought in, but there are some things to consider here as well. The inventory would normally need to be separated from standard inventory and regularly monitored. It is often paired with a pricing agreement and in some cases, the supplier will also provide personnel to, not only help monitor the inventory, but to add their expertise to evaluate whether the selected mix of parts is performing as it should or if it needs adjustment. Are certain parts being used more quickly than anticipated? Are some parts sitting idle and unused too long? Have conditions changed that other parts not in the original planning need to be brought in? Investigating the answers to these questions can bring major benefits when the right time and expertise is applied.

Which is the right choice?

All the above options bring benefits to a site when it comes to managing fluctuating prices and widely ranging lead times. Each site needs to weigh their costs in terms of downtime from not having the right part on hand to the costs of carrying too large an inventory which can drag cashflows down to unacceptable levels. Of all the options, the vendor owned inventory approach is the one we have seen growing with the highest momentum in 2022.

Metso Outotec Owned Inventory (MOI) has seen a surge of close to 30% more overall agreements in place globally during and post pandemic. Many plants have seen the benefits of having parts on hand and ready to change out, yet only having to pay for them on usage. Additional services such as having access to OEM parts planners and maintenance experts have also made a substantial difference at multiple sites by changing up which parts and in what quantities are the best fit, helping to avoid unplanned stops due to missing components. In some cases, component replacement labor has been added which brings additional safety and efficiency benefits when it comes to replacing large components. A straightforward way to start is to see if an assessment can be done and then to evaluate what options are available. Taking stock of options can pay truly dividends when it comes to managing inventory.

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