Systematic procurement in maintaining inventory

The science of store (or stock) management is an integral aspect of systematic procurement.

A municipality will likely maintain an inventory of the materials that it needs to conduct its operations so that it is able to maintain continuous service to the public at an acceptable level. Unfortunately, there are costs associated with inventory holding, which mount steadily as the size of the holding increases.

Historically, governments in Canada have maintained large holdings of necessary material. The costs inherent in maintaining a given stock level of inventory, estimated by the Government of Canada at an annual cost of 25 per cent of the purchase price, must not be allowed to exceed the benefit that is derived from that holding.

A variety of methods have been developed in order to keep inventory costs under control. One approach to procurement, commonly known as the “just-in-time” method, is aimed at procuring materials and other input required for production at a work centre as closely as possible to the exact time that they are required.

This approach is in wide use in the private sector particularly with respect to manufacturing operations. For example, a steel company depends on a timely delivery of a wide range of products which must be received as they are required in the production schedule.

If they arrive late, production stops. If they arrive too early, there is nowhere to put them and special arrangements must be made – usually at some cost – to accommodate them until they are to be used.

In either case, productivity is lost. Generally, municipal projects are not of this type, but occasionally the nature of a municipal project is such that a just-in-time approach may be considered. The origin of just-in-time can be traced back to Henry Ford’s production line, in which he was keenly aware of the burdens of inventory.

The objective is to reduce storage requirements, distribution costs (as materials can be delivered directly to the production line), self-shrinkage, which means the less time goods are on the shelf waiting to be used the less likely they will be damaged, shifted to an unknown location or otherwise disappear, or become obsolete, and other queuing aspects of production.

The technique was implemented with considerable success by Japanese industrial companies, but the concerns it relates to are almost universal and have long been recognized.

Therefore, although municipalities do not “produce” in the same sense as an industrial enterprise, they can still economize their operations by adopting a modified just-in-time approach.

In order to adopt such an approach, it is necessary to have a clear and comprehensive understanding of the demands of a municipality for particular types of supply.

The approach should not be implemented without a prior complete study of the usage cycle for the materials in question in order to identify periods of peak demand, the delivery schedules of products, seasonal and other fluctuation in the availability of the material, etc. As should be fairly obvious, great attention is required to detail, because a just-in-time approach leaves no margin for error.

While there is much merit in the just-in-time approach, it is necessary to use common sense when employing it. Just-in-time procurement reduces certain costs, but it may increase other costs or give rise to additional risk.

For instance, the purchase price of snow and ice clearing materials for a municipality’s road operations may be considerably lower if that material is purchased out-of-season. If the price differential is sufficient to offset the perceived gains from a just-in-time approach, then the out-of-season purchase may be the best route to go.

It is an essential requirement of a just-in-time approach to procurement that suppliers be reliable. It cannot be used where the quality or quantity of supply is unpredictable.

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.