Inventory management should be a large part of private and public sector procurement departments.
Historically, governments have maintained large stores of inventory. In the private sector, it is generally assumed inventory holdings should not normally exceed the amount required to meet anticipated requirements during the current year.
Governments, however, as discussed in a previous article with respect of a just-in-time approach to procurement, are not direct analogues of private sector corporations.
Their needs and optimal performance configuration differ in many respects. To identify an optimal approach to inventory holding, it is necessary to consider the strategic purpose that inventory is intended to serve.
The primary purpose of inventory is to prevent an out-of-stock problem from arising. It is therefore necessary to be able to project both probable and extraordinary requirements for materials and the general pattern of demand.
Governments have tended to maintain large quantities of inventory because the services provided by government are often perceived as being vital and when so conceived there is a compelling rationale for holding a sufficient quantity of inventory in reserve so that shortages cannot arise.
So, for instance, the United States Defense Department believes it is necessary to maintain a war reserve supply plus sufficient material on hand to meet two years of expected peacetime requirements.
Even so, there is a clear limit on the benefit of an extensive inventory holding and the record indicates too little supervision is exercised to determine when the optimal level of inventory is on hand.
When ordering inventory, relevant considerations include the following:
- Does the item in question anticipate an emergency or other atypical need?
- Is the item of a kind that is often subject to short supply in the spot market?
- Does the item have a long shelf life?
- Is there a mechanism in place to ensure older inventory is the first to be consumed?
- Would it be more practical to enter into a pooled reserve arrangement with other neighbouring municipalities?
- Does the item relate to a kind of need that is likely to arise with little warning, leaving little opportunity for any alternative procurement?
The holding of an excessive quantity of inventory is costly. Such items must be stored and stores must be placed under the care and control of staff.
The longer that inventory is held the greater the risk that it will become obsolete, perish due to natural aging or become stale, be broken, misplaced, stolen or simply become surplus to eventual requirements.
Estimates vary, but the Canadian federal government places the cost of its inventory holding in the range of 25 per cent of the purchase price. Thus, there are obvious benefits in paring down inventory holdings to a minimum necessary level.
The causes of excessive inventory holdings vary from case to case, but the most frequent explanation are as follows:
- Poor record keeping;
- poor monitoring of changing patterns of usage;
- a failure to check records to see what inventory is available (e.g., as a result of automatic repurchase orders being filled after an arranged period of time); and
- the practice of purchasing a substantial volume of material either to establish the market for that material, or to guard against the possibility that an adequate supply will cease to be available in the market before the government need ends.
In terms of the determination of need, it is obviously unwise to place an order for new materials when there are existing materials in stock which are fully capable of addressing the requirements of the ordering department.
Often the cheapest way of addressing a need is merely to redeploy material either from stock or from some other place where it is no longer being used.
Unfortunately, governments are large organizations and as a result it is far too easy for the right pocket not to know what is available in the left.
Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.
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