Spare Parts As Insurance

Spare parts aren’t just inventory. They are insurance against costly ground time and production delays.

Spare parts are big business. The global aviation industry alone spends more than $5 billion annually to replenish and maintain an insurance policy against the inevitable failure of component parts.

For airlines, this translates to a collective balance sheet item of $19 billion. Yet, few, if any, aviation experts would say they’ve cracked the code for securing reliable operations while minimizing excess.

And this isn’t just an aviation problem. Other heavy industries such as oil and gas, utilities, and ground transportation also rely on spare parts inventory to keep their production equipment running.

Here’s the problem. Most companies think of spare parts as regular inventory that would be consumed in a factory to make final goods for sale. But spare parts are a very different class of asset, requiring a different set of tools and analysis to manage. Spares aren’t used and sold as part of a final product, so just-in-time inventory management doesn’t apply in the same way. Instead, spare parts for airplanes, trains, and oil rigs are insurance against costly downtime. Companies that rely on spares need to determine the best insurance coverage, figure out the right amount of spares, and ensure the parts are in the right place at the right price.

Failure to understand the insurance nature of these products can result in the nightmarish, but not uncommon, phenomenon of carrying high levels of spare parts while, at the same time, experiencing costly delays and downtime of critical production equipment.

Spare Parts As Insurance