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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 . , · . · · · ~· · · . . ~ 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. s
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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 6
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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. 7
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220.127.116.11 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. 8
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18.104.22.168 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. 22.214.171.124 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). 9
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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. 10
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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. 11
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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. 12
Representative terms from entire chapter: