Model of delivery consolidation of critical spare part : case study of an oil and gas company

Abstract

The availability of spare parts in oil and gas industry is very important to prevent the occurrence of very high opportunity cost, that is the loss caused by exploitation equipment which must stop because of unavailability of the spare part. This is done by providing safety stock with a very high service level that leads to high inventory costs. If the company wants to lower inventory costs, the choices are not to lower the service level but to lower the ordering cost. One of the components of ordering cost is the delivery cost. Exploitation facilities are usually located in remote areas so that the cost of delivery is high. In addition, many spare parts are supplied by the same supplier. Therefore, there is an opportunity to lower the cost of delivery of spare parts by consolidation. In this paper,mixed integer linear programming (MILP) model is developed to plan the procurement of spare parts so that inventory costs which include holding and ordering cost for spare parts can be minimized. The model has been verified and validated. Using this model the company can lower inventory costs of the spare part by 32%.