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Chapter 6.3

Improve Purchasing and Warehousing


Summary

The Texas Department of Transportation (TxDOT) purchases, warehouses, and distributes a large volume of goods each year. Unlike the cost of the materials and supplies, the storage and distribution costs are often hidden costs. Several opportunities exist for TxDOT to improve its purchasing and warehousing operations. Implementing just-in-time inventory programs and expanding its materials distribution pilot program reduces the need to store and distribute goods, reducing costs and eliminating the need for as much warehouse space. Creating a supply chain management group to apply best practices and conduct “Yellow Pages Tests” would allow TxDOT to identify and implement the most effective practices at the lowest cost.


Background

TxDOT operations are spread out among 25 geographical districts, 119 area engineer offices, and 288 maintenance sections, with anywhere from a few to several hundred employees at each location.[1] TxDOT maintains supplies at each location, but centralizes larger quantities of goods at its district warehouses and regional supply centers.[2] Each of TxDOT’s 25 geographical districts is organized, staffed, and managed independently of one another. In order to provide supplies to all 25 of these districts, TxDOT purchased more than $330 million of goods in fiscal 1999. [3] As of December 1999, TxDOT operates 3 regional supply centers, 25 district warehouses, and 436 warehouse/supply rooms in order to maintain a total of about $81.5 million in inventory.[4]

Under TxDOT’s current practices, when employees determine that their office is low or out of an item, they issue a supply request to the district warehouse. The district warehouse fills this request by shipping the item from its inventory, requesting additional inventory from its regional supply center if that center stocks the item, ordering goods on state contract, or forwarding supply requests to the district purchasing department.[5]

Another state agency, the General Services Commission (GSC), may also be involved in TxDOT’s purchase of goods. In some instances, purchasing authority is delegated by GSC to TxDOT. In this case, TxDOT must follow rules established by GSC. In other situations, GSC becomes directly involved in TxDOT’s purchasing processes.[6]

To streamline the purchasing process for items that the state uses in large quantities, GSC enters into term contracts with vendors to provide the items at a set price; however, GSC does not guarantee any specific purchase amount.[7] When TxDOT needs an item that is on term contract, it places an order and waits for the item to be delivered. Generally, items are delivered to TxDOT rather than GSC. For most term contracts, the vendor is allowed 30 days to deliver to a location specified by TxDOT.

In most instances, the district warehouse receives the order and holds it for pickup by the requesting office.[8] In this process, the inventory may be held for a significant period of time at one of three TxDOT locations—the regional supply center, the district warehouse, or the actual location where the item will be used. Throughout this process, it is possible to transport for TxDOT employees to handle an item several times, creating a recurring risk of damage or loss of the item.

At facilities served by TxDOT’s Athens Regional Supply Center (RSC), this process is slightly streamlined. This supply center delivers inventory to the locations it serves on a predetermined schedule via commercial transportation.[9] This practice reduces the number of times that inventory is handled, provides greater predictability of delivery, and allows the recipients to reduce the amount of “safety stock” needed on hand in order to avoid running out of the items ordered. [10]

TxDOT’s current purchasing and distribution process emphasizes the initial price of an item, which in practice excludes other materials management costs such as transportation, storage, and distribution.[11] An example of this process was observed during consultant visits to two TxDOT regional supply centers. About 10 to 15 percent of the space in these supply centers was devoted to storing toilet tissue and paper towels.[12] The regional supply center orders these products by the truckload in order to get the lowest price. When the vendor delivers these items, TxDOT employees unload and move them to an assigned area in the warehouse. As these items are requested, the order is moved to a staging area to await pick-up. When the TxDOT truck arrives, the requested items are loaded, transported, unloaded, and placed into local inventory for distribution as needed.

TxDOT’s average transaction cost for this entire process is $150 per order.[13] However, “hidden” expenses at both the regional supply centers and TxDOT field locations are not included in this calculation. These hidden expenses include tracking orders, investigation of inventory discrepancies, product obsolescence, and storage costs.


Supply Chain Management

The concept of a supply chain encompasses all the activities from requesting to ordering to receiving to distributing through paying for goods. Activities within a supply chain, such as purchasing or distribution of goods, may be assigned to different employees within a single group or groups of employees within an organization. When the activities in the supply chain occur independently of one another, constructive changes in one activity may have a negative effect on another activity. For example, buying janitorial supplies in large quantities in order to receive a better price could result in having more supplies on hand than the organization’s warehouses can store. Implementation of a supply chain management approach requires organizations, such as TxDOT, to recognize and manage the relationships between all of the components in their supply chain. Supply chain management also considers all of the costs, including “hidden” costs, and minimizes “non-value added” steps. Non-value added steps are any activities that do not improve the product or service. Traditionally, most organizations have focused solely on the initial cost of an item and have ignored the additional costs of handling and storing the item. Storing large amounts of inventory rarely adds to its value, and the costs associated with this practice are seldom calculated or included in the total price.[14]


Just-in-Time Inventory Approach

Ideally, goods are received when an employee needs them, such that little or no inventory is warehoused by an organization. This concept is the basis of a “just-in-time” inventory approach, which provides a strategy to quickly order needed items for direct delivery to a work site, with a minimal amount of time between order and receipt. This concept also includes exchanging the costs involved in smaller, more frequent orders for lower inventory levels and reduced administrative costs.[15]

The California Department of General Services implemented a just-in-time inventory approach for its office supplies. In January 1997, the department contracted with Office Depot to provide office supplies for all California state agencies. This contract allows employees to order from two different catalogs. One catalog includes approximately 350 office items on which the state spends a large amount annually. The savings to the state on items from this catalog range from 50 to 70 percent. A second catalog includes about 10,000 items that are available at 42 percent below the list price, with an additional 2 percent discount for use of the state purchasing card.

This contract also requires that office supplies be delivered within 24 hours to locations in urban areas and 48 hours to outlying areas. Orders can be made via telephone, facsimile, mail, or the Internet. The purchaser receives a fax to confirm the pricing. This process allows for office supplies to be delivered “just-in-time,” minimizing the state’s total amount of inventory.[16]

The California Department of General Services cites the following results from this program:

  • The Office Depot supply contract has increased customer satisfaction through cost-effective access to 8,500 supplies versus the former 350 high volume standardized products. For standardized products, there are substantial (50 to 75 percent) cost savings over the former centralized purchasing process. These items were bid at a cost savings of $9 million. For more than 8,000 additional products, the buyers receive 38 percent off the supplier’s list price.[17]
  • About a year later, the California Department of General Services entered into a similar contract for janitorial supplies with WW Grainger Company. This contract requires orders to be delivered to the location where they will be used within 48 hours in urban areas or 72 hours in outlying areas. In addition to competitive prices, important features of this contract include the ability to order by telephone, facsimile, mail, or the Internet. The contract also features a liberal return policy, easy account set-up, and the ability to process walk-in or will-call orders.[18]


Reducing Internal Distribution

Reducing the number of times goods are distributed within an organization removes the opportunities for goods to be damaged or lost. In November 1998, the State Auditor’s Office (SAO) issued a report on TxDOT’s inventory management. At the time, TxDOT was developing a pilot program for warehouse consolidation. In the report, SAO recommends consolidating district warehouses into five regional supply centers and continuing to reduce inventory levels. SAO also recommends conducting the pilot project on warehouse consolidation and developing an action plan based on the results.[19]

TxDOT implemented a materials distribution pilot, which began in February 1999 at the Athens Regional Supply Center. The goal of the pilot program was to evaluate the effect of distributing materials directly from TxDOT’s regional warehouse in Athens to all stocking locations in a four district area, thereby circumventing TxDOT’s district warehouses. This pilot program used commercial freight carriers to distribute inventory from TxDOT’s regional supply center, at an average cost of $50 per shipment to each location. The results of this pilot included significantly lower inventory levels. [20]

TxDOT’s executive director authorized expanding the pilot program statewide. According to the implementation schedule, 10 districts would join the four pilot districts in September 2000. Another seven districts would implement the distribution system in February or March 2001. One district would implement the system in May 2001, and the final district would implement the system in September 2001. As of December 2000, 15 districts participate in the new program.[21]

Expansion of this pilot program across the state means that a significant volume of inventory would be moving among TxDOT facilities. TxDOT’s initial estimates indicate that the expansion would result in significant savings. Although freight costs of this program are expected to total $1,245,000 annually, about 39 TxDOT employees would be freed up from activities not related to the new transportation infrastructure.[22] Additionally, TxDOT expects to realize a five to seven percent decrease in inventory stocking levels, worth approximately $4.2 million to $5.9 million.[23]

Under this plan, the district warehouses would no longer distribute goods to the other offices in their districts unless the district office is the source of the goods. For example, districts operate custom sign shops, which produce signs on request both for new roads and to replace signs that have deteriorated or have been damaged. Limiting the district warehouses to distributing only goods they produce is one key to eliminating duplicate distribution channels.


Supply Chain Management Group

Often in large, decentralized organizations employees responsible for various components of the supply chain are dispersed in various organizational units as well as geographically. This organizational structure can limit employees’ opportunities to share best practices or participate in any coordinated training activities.

To help overcome these limitations, in 1996, the State of California created Materials Management Business Solutions,[24] a ten-person team within the Department of General Services’ procurement division. Group members serve as consultants to California state agencies and other organizations in order to help them apply best practices to their own logistics and materials management. The group uses cross-functional teams to identify areas and processes for improvement. It also provides centralized support for freight rate negotiation and logistics training. As consultants, the group focuses on partnering with state agencies in order to eliminate bottlenecks and remove non-value added activities.[25] Group expenses (excluding salaries) for the previous fiscal year totaled $370,000.[26]

The Materials Management Business Solutions Group reports several notable achievements. Working with the California Department of Transportation, the group reduced warehouse order cycle time from 14 to four days by eliminating non-value added activities and bottlenecks, in addition to empowering employees.[27] Other activities resulted in reducing state warehouse personnel from 46 to six positions and reducing state warehouse space demands by 50 to 60 percent.[28]

In the private sector, leadership training and application of supply chain principles comes from professional organizations such as American Productional and Inventory Control Society (APICS)—The Educational Society for Resource Management. The State of California used APICS training as the basis for its supply chain management staff development efforts prior to establishing its own courses. APICS has chapters at 11 Texas locations, with courses frequently available through local chapters, community colleges, or via the Internet.[29] TxDOT should encourage warehousing and purchasing personnel to enroll in such courses as a means of professional development, encouraging the pursuit of a Certification in Production and Inventory Management (CPIM) or Certified Integrated Resource Management (CIRM).

Based on these favorable results, the State of California created the California Acquisition and Materials Management Institute to offer classes in materials and inventory management for agency purchasing and materials management personnel. The institute also teaches best practices in purchasing and materials management classes for vendors wishing to do business with the state.[30]


Recommendations

A. State law should be amended to require the General Services Commission (GSC) and the Texas Department of Transportation (TxDOT) to implement a “just-in-time” inventory pilot program for TxDOT office and janitorial supplies.

The GSC and TxDOT should be required by law to implement a “just-in-time” inventory pilot program for office and janitorial supplies. TxDOT and GSC should determine which office supplies and janitorial items would be included in the pilot program. GSC may need to modify the terms of its contracts with vendors as part of this pilot program, to ensure that items are delivered to TxDOT within 24 to 48 hours from the time of TxDOT’s order. To the extent possible, these items should no longer be inventoried at TxDOT’s regional supply centers or district warehouses, but instead be delivered directly to the location where they would be used.

GSC and TxDOT should use the California Department of General Services program described in this paper as a model for the pilot. TxDOT should offer one contract for office supplies and another for janitorial items. These contracts should provide service guarantees similar to the California program. They should also allow orders to be received by telephone, facsimile, mail, or the Internet, with the Internet used as the primary communication mode.

B. TxDOT should create a supply chain management group to lead the application of “best practices” in logistics and materials management across the agency.

TxDOT should create a supply chain management group of no more than five employees located at its Austin headquarters. At least two members of this group should have private sector experience in supply chain management and possess professional certification in this area. Remaining group members should be recruited from TxDOT and have demonstrated innovative work in purchasing or warehousing. Recommended placement of this group is within the Purchasing Section of the TxDOT General Services Division at a level that supports organizational visibility.

The group’s initial task should be to review all existing reports (such as the June 1997 KPMG Peat Marwick report and November 1998 report by the Texas State Auditor’s Office), identify viable recommendations, develop implementation strategies, and seek approval from executive management to implement these recommendations. After completing this initial task, the group should travel to the various TxDOT districts and divisions, facilitating the establishment of permanent supply chain committees. Suggested supply chain committee size is seven to nine members, with terms staggered to ensure continuity. Purchasing, warehousing, and district/division management should provide committee members with the balance of the committee membership consisting of representatives from end user groups.

The group should also focus its efforts on conducting “Yellow Pages Tests,” which states that “government should do no job if there is a business in the yellow pages that can do the job better and at a lower cost.” The group should review warehousing operations first and then expand “Yellow Pages Tests” to other areas of supply chain management.

C. TxDOT should implement the materials distribution pilot program no later than December 2001.

TxDOT has begun the implementation of the pilot program, but should ensure it is implemented fully statewide. To ensure that duplicative distribution channels are not created, TxDOT should adopt policies and procedures that limit the goods that can be distributed from the district warehouses.

D. TxDOT should collaborate with private sector logistics organizations to provide supply chain management training for its purchasing and warehouse managers.

The number and geographic diversity of TxDOT operations make centralized training difficult and expensive, particularly in multi-discipline areas such as supply chain management. While the supply chain management group recommended in this proposal could assist in training needs, TxDOT purchasing and warehouse managers should be encouraged to pursue additional training and certification. Training and certification programs can complement the efforts of the supply chain management group and integrate supply chain management principles throughout the state.

E. TxDOT should evaluate its warehouse space and determine how to maximize its use.

Implementing the recommendations above should result in district warehouse space that is not being used. Depending upon the amount of unused space, TxDOT should consider leasing space to other entities or converting the space to other uses.


Fiscal Impact

Savings from a pilot program to implement a “just-in-time” inventory approach include a reduced need for warehouse space, less damage to and loss of goods, and a reduction in the number of personnel needed to receive and distribute goods internally. A “just-in-time” inventory approach may also increase costs due to additional delivery charges for smaller amounts to more locations. The total amount of savings from this pilot cannot be estimated, as savings would vary based upon the scale on which the pilot is implemented and which inventory items are included.

Creating a supply chain management group would require the addition of two TxDOT employees. These professional salaries average $80,000, including benefits, or $160,000 annually.

Implementing the pilot project statewide is expected to cost about $1,245,000 in freight costs. However, these costs would be offset by an expected one-time reduction in inventory of $4.2 million and salary and benefit savings of about $1,421,000 associated with the 39 employees.

Fiscal Year
Net Savings to The State Highway Fund Available to Redirect
Change in FTEs
2002
$4,216,000
-37
2003
$16,000
-37
2004
$16,000
-37
2005
$16,000
-37
2006
$16,000
-37

Endnotes

[1] E-mail communication from Jefferson Grimes, manager, State Legislative Affairs, Texas Department of Transportation, November 8, 2000; letter from Charles W. Heald, P.D., executive director, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, Austin, Texas, August 14, 2000.

[2] Interview with Charles McKinney, Supplies Management Section Chief, Texas Department of Transportation, Austin, Texas, January 25, 2000.

[3] General Services Commission, Austin, Texas, December 1999. (http://www.gsc.state.tx.us/pa/fy99/all_pur_by_agy.txt). (Internet document.)

[4] This number does not include the Camp Hubbard facility in Austin, Texas, which serves a specialized distribution function; Texas State Auditor, An Audit Report on Inventory Management at the Texas Department of Transportation (Austin, Texas, November 1998) p. 16.; and E-mail communication from Larry Bloom, MSMS Branch Chief, Texas Department of Transportation, Austin, Texas, December 1, 2000.

[5] Interview with Lonnie Brooks, manager, Purchasing and Warehouse Division, Texas Department of Transportation-Bryan District, Bryan, Texas, February 24, 2000.

[6] Interview with Norma Barrera, General Services Commission, Austin, Texas, March 8, 2000.

[7] General Services Commission, “How the State of Texas Procures Commodities & Services,(http://www.gsc.state.tx.us/stpurch/howtobuy.html) (Internet document.)

[8] Interview with Lonnie Brooks, manager, Purchasing and Warehouse Division, Texas Department of Transportation-Bryan District, Bryan, Texas, February 24, 2000.

[9] Interview with Donny Morrison, manager and Darryl Stokes, assistant warehouse manager, Athens Regional Supply Center, Athens, Texas; and George Miller, Purchasing, Texas Department of Transportation, Austin, Texas, February 10, 2000.

[10] This reorder point is based on an estimate of the daily usage multiplied by the estimated number of days needed to receive the item after the initial order plus a buffer against supply and demand uncertainty which is often referred to as “safety stock.”

[11] Interview with Lonnie Brooks, manager, Purchasing and Warehouse Division, Texas Department of Transportation-Bryan District, Bryan, Texas, February 24, 2000.

[12] Interview with Bobby Cremming, warehouse manager, Chuck McKinney, supplies management section chief, and George Miller, material purchasing manager; Texas Department of Transportation, Seguin, Texas, February 23, 2000.

[13] E-mail communication from Glenn Hagler, equipment purchasing manager, Texas Department of Transportation, Austin, Texas, June 1, 2000.

[14] Supply Chain Council, Inc., “Supply Chain Council FAX,” (http://www.supply-chain org/Resources/faq.htm). (Internet document.), and R. Muthukumar, “Supply Chain Management,” (http://muthukumar.hypermart.net/scm1.htm#usm), pp. 4-5, (Internet document.)

[15] Tony Wild, Best Practice in Inventory Management, John Wiley & Sons, Inc., 605 Third Avenue, New York, New York, 10158-0012. pp. 52-53 and pp. 127-128.

[16] California Department of General Services Procurement, “Stockless Contracts” (http://www.pd.dgs.ca.gov/default.asp?mp=materials/mstock.asp). (Internet document.)

[17] California Department of General Services Procurement, “More About MMBS” (http://www.pd.dgs.ca.gov/default.asp?mp-materials/mabout.asp). (Internet document.)

[18] California Department of General Services Procurement, “Stockless Contracts”(http://www.pd.dgs.ca.gov/default.asp?mp=materials/mstock.asp). (Internet document.)

[19] Texas State Auditor’s Office, An Audit Report on Inventory Management at the Texas Department of Transportation, (Austin, Texas, November 1998), p. 11.

[20] Interview with Donny Morrison, manager and Darryl Stokes, assistant warehouse manager, Athens Regional Supply Center, Athens, Texas; and George Miller, Purchasing, Texas Department of Transportation, Austin, Texas, February 10, 2000.

[21] Telephone interview with Charles McKinney, Supplies Management Section Chief, Texas Department of Transportation, Austin, Texas, July 20, 2000; E-mail communication from Jefferson Grimes, manager, State Legislative Affairs, Texas Department of Transportation, Austin, Texas, December 12, 2000.

[22] Interview with Charles McKinney, chief, Supplies Management Section, Seguin Regional Supply Center, Texas Department of Transportation, Seguin, Texas, February 23, 2000; interview with Charles McKinney, chief, Supplies Management Section, Texas Department of Transportation, Seguin, Texas, February 23, 2000 and July 20, 2000; letter from Charles W. Heald, P.D., executive director, Texas Department of Transportation, to Clint Winters, Research and Policy Development Division, Texas Comptroller of Public Accounts, Austin, Texas, August 14, 2000.

[23] Based on a 5-7 percent reduction of the $85 million inventory level maintained by the Texas Department of Transportation as of February 23, 2000. Interview with Charles McKinney, chief, Supplies Management Section, Seguin Regional Supply Center, Texas Department of Transportation, Seguin, Texas, February 23, 2000.

[24] California Department of General Services, “New Material Management Business Solutions,”

(http://www.pd.dgs.ca.gov/default.asp?mp=materials/mmbs.asp). (Internet document.)

[25] California Department of General Services, Sacramento, California. (http://www.pd.dgs.ca.gov/default.asp?mp=materials/mabout.asp). (Internet document.)

[26] E-mail communication from Dan McDonough, Consultant, California Materials Management Business Solutions, Sacramento, California, July 13, 2000.

[27] California Department of General Services, Sacramento, California. (http://www.pd.dgs.ca.gov/default.asp?mp=materials/mabout.asp). (Internet document.)

[28] Telephone interview with Dan McDonough, consultant, MMBS Group, California Department of General Services, Sacramento, California, April 11, 2000.

[29] APICS, The Educational Society for Resource Management, Alexandria, Virginia. (http://www.apics.org/AboutAPICS.ab2top.htm). (Internet document.); APICS, The Educational Society for Resource Management, APICS Chapter Locator, Alexandria, Virginia. (http://www.apics.org/scripts/chapter/chaptersearch.asp). (Internet document.); Tony Swain, “Principles of Inventory Planning and Control;” telephone interview with Dan McDonough, consultant, MMBS Group, California Department of General Services, Sacramento, California, April 11, 2000.

[30] California Department of General Services, Sacramento, California. (http://www.pd.dgs.ca.gov/default.asp?mp=org/cammi.asp). (Internet document.)