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II. CRITICAL ISSUES IN INVENTORY MANAGEMENT
2.1 TRANSIT SYSTEMS AND INVENTORY MANAGEMENT
The survey and data analysis disclosed a wide discrepancy in not only how transit agencies
define inventory but also in the varying methods used to manage, characterize and account for
inventory. Many of these differences are a result of the individual transit properties' fleet size and
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· . · · · ~· · · . . ~
composition, out also the size ot the organization as a whole, the placement of the inventory
management function within the organization and the use of technology in controlling inventory.
The following are the principal questions that emerged as a result of the preliminary data analysis:
Are all inventory management decisions relevant to public transit organizations of an sizes? A
majority of the smaller transit systems could not respond to many of the questions regarding
inventory performance. While such basic information as number of material issues and receipts is
frequently captured, the more sophisticated indicators of inventory performance such as percent
of unfilled orders and stockouts are not. This may be due in part to the operating constraints of
the smaller organizations and the lack of training in inventory management techniques. Even
larger transit systems could not always provide information on such indices as backorders and
inventor carrying costs.
How does placeme''t of the inventory management function in the organization relate to
inventory performance? Some transit systems do not have a dedicated inventory control
function. In other cases, responsibility for inventory management may be spread through more
than one organizational unit with no one individual responsible for the organization's overall
inventory management performance. In still other situations, responsibility for inventory
management may be located at a sub-department level under a department such as administration,
operations or finance. Only a small number of agencies reported a dedicated inventory
management function at the department level or higher.
How does the deft '`itio'' of inventory as characterized by individual public transit agencies really
affect inventory performance? Our survey responses show that the definition of inventory varies
widely among transit organizations. Many of the respondents do not have a formal inventory
management policy. In addition, inventory was most often defined very simply as either rolling
stock parts and supplies or items on-hand. Such inventory parameters as minimum dollar value
per item or minimum annual usage were seldom employed. In this study we examine the factors
used in defining inventory to determine how critical they are to inventory performance.
On the following pages we discuss the issues identified in the survey and present broad findings.
Chapters 3 and 4 present the detailed survey and analyses results.
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2.2 PROFILE OF THE INVENTORY CONTROL ISSUES IDENTIFIED IN ME
SURVEY
This section of the report presents a summary of the issues identified in the survey in
managing, characterizing and accounting for inventory. Each of the seven sections of the survey
are addressed separately. Following this section is a discussion on the generally accepted
definition of inventory that emerged from the survey.
2.2.! Agency Service Area and Operating Characteristics
Section I of the survey provides a profile of the transit properties responding to the
survey. During the preliminary analysis, this section of the survey was used to determine if the
sample of respondents represented a cross-section of the transit industry as a whole. Data
examined included service area, operating costs, and material purchases by mode. Other statistics
collected, as reported in Section 15 of the 1964 Urban Mass Transportation Act, Amended,
"Uniform System of Accounts and Records and Reporting System" included such operating data
as annual ridership, annual passenger miles, annual revenue miles, total route miles, total track
miles, and total number of employees. Based on our analysis, we determined that the respondents
did represent a cross-section of the public transit industry in terms of geographic location and
population area served.
2.2.2 Vehicle Fleet Composition
The second section of the survey focused on fleet size, composition, and age. Common
issues identified as having a potential effect on inventory include fleet size, fleet mix by vehicle
type, percent of vehicles of foreign manufacture, number of different vehicle models, average
annual miles per vehicle, and average age of the fleet.
Another variable identified as possibly affecting inventory performance and that
demonstrates the complexity of transit fleets is in the percent of foreign manufactured vehicles.
Survey results show that over ninety-five percent of buses, commuter rail cars, and commuter
locomotives are manufactured in the United States. However, for light and heavy rail cars only
seventy-seven percent are manufactured domestically and the number drops to forty-eight percent
for trackless trolleys. In later chapters, we discuss the impact, if any, of the variations in the
number of vehicle models and percent of foreign manufacture on inventory levels. Our
preliminary analysis showed that the respondents represented a cross-section of the public transit
industry in terms of the mix of bus, rail, and other modes oftransportation.
2.2.3 Inventory Management Organizational Structure, Responsibilities and Reporting
Relationships
Of consequence in determining the issues that may affect inventory management is the
structure and placement of the inventory management function within the transit organization, the
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formal and informal inventory responsibilities of inventory and non-inventory management
personnel, and the direct and indirect reporting relationships. Also of interest are the distribution
of inventory management responsibilities throughout the organization, particularly those for
material planning and forecasting, and accountability practices and procedures.
Approximately forty percent of survey respondents reported the Maintenance Department
as the organizational unit responsible for managing inventory. This appears to be related to the
size of the transit agency and its fleet of vehicles. Administration, Finance, and Procurement were
also identified as responsible organizational units. Less than ten percent of respondents identified
a dedicated Materials Management Department as the responsible organization. Ninety-three
percent of respondents reported the management level ultimately responsible for inventory as
either the executive or department levels.
When asked to provide information on total inventory management costs, many of the
respondents did not answer this question. Follow-up interviews confirmed that many of the
respondents did not track this information.
Size of inventory management staff provided another area for analysis. As expected, staff
size was most frequently tied to the size of the vehicle fleet and the organization. However, some
respondents reported some inventory management staff as being located outside of the
organization accountable for management of the inventory. Materials management activities
identified included (1) inventory planning and forecasting; (2) reorder methods and quantities; (3)
material ordering; (4) material issuance; (5) receiving and storing materials; (6) record keeping;
(7) physical inventory; (8) cycle counting; (9) inventory adjustments/write-offs; (10) material
expediting, and; (1 1) tracking and filling back orders. Over half of the responding agencies
reported no written procedures manual.
2.2.4 Inventory Management Practices
Section four of the survey focused on (1) specific inventory management goals and
objectives; (2) storekeeping responsibilities and measures; (3) inventory management and
replenishment methods, and; (4) catalog and parts management. The definition of inventory is
discussed in Section 2.3.
2.2.4. ~ Inventor Management Goals and Objectives
The primary policy objective stated by the survey respondents is to provide increased
service level. The second major objective is to decrease inventory levels. These two conflicting
objectives demonstrate the criticality of the issues associated with managing inventory. Other
objectives given include improving cost effectiveness, increasing security, increasing turnover,
improving management information' increasing accuracy, increasing value and quality control' and
implementing just-in-time deliveries.
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2.2.4.2 Storekeeping
Issues identified as potentially impacting material control, levels, and accountability
include number and location of storehouses, storehouse network configuration, security, hours of
operation, and inventory information available at the storehouses. For purposes of un~forrnity in
reporting, primary storehouses were defined as major warehouses, central stores, or distribution
centers. Secondary storehouses were defined as local on-site stockrooms.
Approximately half of all storehouse networks were reported as consisting of one primary
storeroom located in a single maintenance facility. An additional third of storehouse networks
consist of a combination of primary and secondary storerooms. Five percent of respondents
reported their storehouse network as being comprised of several independent storehouses with the
remaining respondents reporting some other type of configuration. Approximately eighty percent
of all storehouses are located within maintenance facilities with twenty percent of respondents
reporting some storehouses not located in maintenance facilities.
A second issue deals with storehouse security and controlled access versus "open"
storerooms. Nearly half of all primary storehouses are controlled while only about one quarter of
secondary storehouses have controlled access. Over half of all primary storehouses operate on a
five-day schedule with nearly one-third operating on a seven-day schedule. Of specific interest
are hours of operation, percent of full coverage, and responsibility for storeroom accountability
when no storekeeper is present. Hours of operation range from eight hours per day to twenty-
four hours per day. Primary storehouses are fully covered less than half of the time. During those
times when no storekeeper is present, responsibility rests with the maintenance supervisor
approximately half of the time followed by a mechanic or another individual outside of the
maintenance department. As a result' opportunities may exist for less than one hundred percent
accountability.
For secondary storehouses, approximately fifty percent operate five days a week with one-
third operating seven days a week. Approximately one-third operate on an eight-hour schedule
with another third operating twenty-four hours per day. Secondary storehouses are Filly covered
approximately one-quarter of the time. When a storekeeper is not present, maintenance
supervisors are responsible the majority of the time followed by mechanics.
Responsibility for storehouse management is a third issue. In nearly half of the responses
inventory management is responsible for stc~rehouse management
_ _~ ~ - - -r - --- - -'
~ However, maintenance,
operations, or some other organization has the responsibility the remaining fifty percent of the
time. For secondary storehouses, responsibility is equally divided between inventory management
and maintenance.
Availability of inventory information at the storehouses is a final critical issue presented in
this section of the survey. Ninety percent of survey respondents have access to information on
the number of parts on-hand, usage, and item cost. Seventy percent of respondents have access
to information on items on order by date, items received by date, items out of stock, and back
orders.
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2.2.4.3 Inventory Management and Replenishment
Inventory management and replenishment issues focus on replenishment and inventory
stratification methods and the setting of target inventory and service levels. Specific issues
include:
What inventory replenishment methods are used and under what conditions?
· How is inventory stratified?
· What percentage of inventory is classified as safety stock?
· How are obsolete and excess items identified?
· Are target inventory levels and target service levels set and if so, how?
The overwhelming majority of transit properties reported using the min/max method for
the daily replenishing of material needs. Often, this method is used in conjunction with
maintenance forecasts and project or campaign requirements to meet special needs. ABC
classifications were most frequently used for stratifying inventory, followed by commodity class.
Safety stock was defined for the survey participants as "a quantity of stock to protect
against fluctuations in demand and/or supply". When asked the percentage of inventory classified
as safety stock, only two-thirds of respondents answered. Of those that answered, half identified
the percentage of safety stock as ten percent or less. Another twenty-five percent stated that
between eleven and twenty percent of the inventory was classified as safety stock. The remaining
respondents classified safety stock as comprising between twenty-one and sixty percent of the
inventory. The number and range of responses indicates that there may be some uncertainty as to
either what constitutes safety stock or the amount of material representing safety stock.
Finally, fifty-eight percent of respondents reported setting target inventory levels but only
thirty-six percent reported setting target service levels.
2.2.4.4 Catalo,~/Parts
This section of the survey focuses on issues regarding the management of inventory and
maintenance parts. Only fifty percent of transit agencies publish a parts catalog. While many
transit systems manufacture and/or repair components in-house, only thirty percent track these
items as "bad-order (failed components) awaiting repair" in inventory. This is in contrast to the
eighty percent of agencies that stock repairable components in inventory.
Items designated as "free" or "open" stock include nuts and bolts and grease, oil, and
fluids. Items listed as stocking out most often include filters, brake parts, bulbs and electrical
items, body parts, cleaning supplies, and nuts, bolts and fasteners. The most common method for
valuing parts are average cost, followed by first in first out (FIFO), and last in first out (LIFO).
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2.2.S Inventory Management Performance
Section V of the survey contained questions on the measurements or benchmarks currently
used and their values. Most agencies responding to the survey were able to provide information
on total inventory dollars on-hand and average dollar usage per month. Similarly, many
respondents also routinely measure basic inventory transaction such as issues, receipts, returns to
stock, returns to vendors, and transfers between storehouses.
For inventory forecasting, however, while two-thirds of transit agencies reported that they
do monitor inventory forecasts against actual inventory level or usage, only slightly more than
one-third could provide the average inventory forecast error. This implies that there may be no
formal mechanism for measuring forecasts against actual usage or that those individuals
responsible for the performance are not informed of discrepancies between forecasts and usage.
Other questions measuring inventory performance issues included percent of unfilled
orders due to lack of material; percent of user requested items filled from inventory, average time
to fill backorders, average number of vehicles held out-of-service due to lack of parts; percent of
maintenance hours lost waiting for parts; percent of inventory that is excess or obsolete; turnover
rate, and; total number of stockkeeping units (SKU's). While many of the largest properties did
provide information for these indices, many of the medium-size agencies measure only about half
and the smallest properties do not track these indices.
Survey results indicated that the way in which transit agencies measure and track
stockouts is an additional issue in measuring inventory performance. Respondents generally fell
into one of two categories: those that measure stockouts as zero items in inventory and those
that measure stockouts as no items available when requested. As a further complication, some
agencies count only the initial occurrence of the stockout while other agencies report stockouts
each time the item is requested until the out of stock item is received into inventory. Either way
of measuring stockouts is correct, however, there are opportunities for both over and under
reporting stockouts which may result in benchmarking implications.
When survey respondents were asked to describe how such inventory performance
indicators as inventory levels, accuracy, customer service, inventory management performance,
physical inventory results and unfilled demand were measured, results were mixed. Measurements
described for inventory accuracy, physical inventory results, and unfilled demand indicators were
generally sound. Measurements described for inventory level, customer service level, and
inventory management performance indicated that many properties either do not understand how
these indicators should be measured or that they do not have the means to capture such
inflation.
Backorders were another measurement that is an issue for transit agencies. While most
respondents indicated that they define backorders as vehicle downtime waiting for parts, most do
not actually track this statistic.
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When properties were asked to provide information on carrying costs (shrinkage,
obsolescence, insurance, cost of capital, spoilage, cost of stores space) most could not report
total carrying costs. As a result, many transit agencies are not capturing the true cost of
managing inventor.
Questions about cycle counts show that slightly more than one third of respondents have
fewer than five percent of items out of balance. An additional thirty percent of respondents
reported between five and ten percent of items out of balance. For physical inventories, twice as
many respondents reported absolute dollar variance and absolute percent variance figures as
reported number and percent of part numbers out of balance.
Survey results for resolution of such common inventory issues as long lead times, scarcity,
fragile or short shelf life, foreign manufacture, insurance items, hazardous material, high "street
value", and Buy America indicate that a large majority of transit agencies are responding
proactively.
2.2.6 Technology and Information Systems
The last section of the survey explored issues associated with the use or lack of automated
systems and such technology as bar coding. Nearly ninety percent of respondents use an
automated inventory management system to capture some inventory data. Approximately 15
percent use bar-coding for some functions. An additional fifteen percent use such new or
emerging technology as swipe cards, light pens, hand held PC's, imaging systems, and scanners.
2~3 GENERALLY ACCEPTED DEFINITION OF INVENTORY
In order to form a basis for developing benchmarks with industry-wide application, the
research needed to determine if there is a generally accepted definition of"inventor~v". Survey
respondents were asked to describe (1) how the organization defines inventory; (2) the objectives
of the inventory management policy; (3) items excluded from inventory, and; (4) the
circumstances under which a non-inventory item can become an inventory item.
Survey respondents identified the circumstances under which a non-inventory item
becomes an inventory item as (1) when usage is increased; (2) a new continuing use is identified;
(3) upon user request; (4) when increased cost meets the requirement for minimum value; (5) a
need for control is identified; (6) the item is identified as uncritical", and; (7) a new item is required
for on-going maintenance.
Items identified for exclusion from inventory included nuts, bolts, and fasteners; non-
recurring items; low value items; bulbs and electrical items; non-revenue vehicle items; office
supplies; capital equipment; shop and cleaning supplies; lubricants and filial; direct purchase items;
high value items, and; tires.
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Based on the responses, the only common theme that emerged from the survey in defining
inventory is: Parts, materials, and supplies~in stock or on-had. Certain parameters are applied
by transit agencies to make this general definition more meaningful to the individual agency. In
particular, these parameters are used to determine which parts, materials and supplies are the
responsibility of the inventory management organization and for which of these parts, materials
and supplies are detailed records kept on the quantities in stock or on-hand. Based on the survey,
we have identified the following parameters:
Usage frequency -- recumng, one time, project specific
Minimum and maximum item value levels -- dollar thresholds for materiality
(minimum) and fixed assets (maximum)
· Type of assets supported -- rolling stock, facilities, track and structure, non-revenue
vehicles, etc.
· Item category -- filet, office supplies, maintenance parts, cleaning supplies, etc.
Storage characteristics -- on-site versus with the vendor
Funding for material and supplies -- purchased with capital or operating dollars
Asset accounting -- inventory asset versus expensed item
Criticality -- importance in supporting the organization's mission
Chapters 3, "Organizational Structures for Transit System Inventor Management",
Chapter 4, "Performance Indices for Assessing Inventory Management", and Chapter 5 "The
Affect of Organizational Structure on Inventory Management Performance", examine the issues
identified in this chapter of the report in greater detail.
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Representative terms from entire chapter:
transit agencies
