ADMINISTRATIVE REPORT

Date: November 20, 1998
Author/Local: Carol Wyatt/7254
RTS No. 00375

CC File No. 1002

TO:	Standing Committee on City Services and Budgets
FROM:	Manager of Purchasing Services
SUBJECT:	Funding Request for Central Stores Upgrade

RECOMMENDATION

THAT Council approve upgrades to the City's Central Stores facility, at an estimated capital cost of $335,000 with funding from a loan from the Service Improvement Reserve, to be paid back from operating savings.

GENERAL MANAGER'S COMMENTS

The General Manager of Corporate Services RECOMMENDS approval of the foregoing, noting the significant financial and operational benefits which will be generated from the proposal.

POLICY

The Service Improvement Reserve was established, as part of the Better City Government Program, to provide loans to fund expenditures where the loans can be paid back by demonstrable cost reductions.

PURPOSE

To obtain approval and funding for an upgrade to Central Stores for the purpose of improving operational capabilities and reducing costs.

BACKGROUND

Central Stores, located in Manitoba yards, consists of a warehouse and a large open yard space. It is the largest of the City's eight material storage sites and is operated by Purchasing Services as a service to the departments. Approximately 2,900 items are held in stock, consisting primarily of materials required by the various Engineering branches such as pipe and lumber. Total value of the inventory is approximately $4.0 million.

A preliminary review of the operation indicated that Central Stores was not operating to the degree of efficiency and cost effectiveness that it should be. Consequently, Distribution Logistics, a consulting firm specializing in logistics management was contracted to conduct a comprehensive, in-depth study.

The study confirmed that Central Stores is facing a problem of on-going inefficient use of resources, specifically: City funds, facility utilization, and staff. In addition, there are safety risks and staff morale problems.

DISCUSSION

The Distribution Logistics study identified a number of serious deficiencies including:

· Excessive inventory levels, possibly as high as 50% of the current $4.0 million; inaccurate set-up of inventory items: records show 2,000 Stock Keeping Units (SKUs), but there are actually closer to 3,000 items; and a high incidence of dead stock: 42% of the 2,000 inventory items ($500,000) has not moved in five or more years.

· Modern inventory management practices such as direct deliveries to the site, consignment stock, and vendor managed stock are not used.

· Three separate service counters currently used require customers to possibly visit each of the counters to complete one order, thus incurring unnecessary delay getting operators staff to the job site. Further, the three service areas form invisible lines that Stores staff do not cross resulting in inefficient deployment of labour.

· The warehouse currently stores too much air: bin width and depth does not match velocity or product size; top four feet of the sixteen foot racking cannot be accessed and as a consequence, upper shelves sit empty. In addition, the racking does not meet seismic standards.

Consideration was given to delaying the Central Stores improvements until the Degelder/KPMG study pertaining to the consolidation of Engineering's works yards was complete. However, it was determined that the Central Stores improvements (e.g. the reduction of inventory, the need for safe racking, the more efficient use of space, the one stop shopping) would be required regardless of the outcome of the Engineering study.

To ensure compatibility between the two studies, the Central Stores improvements have been considered in light of the various possible outcomes of the Degelder/KPMG report. For example, bolt-less racking will be used to allow for ready re-organization of the storage space should Degelder/KPMG recommend combining the various stores or splitting Central Stores between Manitoba Yards and the new BNR yard. Further, it was felt that the identification of available space within Central Stores would assist Degelder/KPMG in their analysis and recommendations.

The Central Stores study also surveyed other divisions regarding provision of services where a value could be demonstrated. Identified opportunities include taking over the small power equipment loans from the Equipment Branch in order to improve the tracking of the loaned equipment and reduce shrinkage and taking over uniform inventories to reduce staffing and space requirements of the affected departments. However, decisions on whether to expand the services offered by Central Stores will be delayed until the Degelder/KPMG study is complete.

ALTERNATIVES

Three alternative approaches were evaluated:

1. improving inventory management only;
2. outsourcing the stores operation; and,
3. correcting the physical limitations while, at the same time, improving inventory management. Due to the ongoing drain on City resources, "status quo" was deemed an unacceptable alternative.

Each alternative was evaluated against the following criteria: cost reduction; improved customer service; improved use of space; enhanced employee safety and enhanced employee morale.

Improving inventory management only without any facility or equipment enhancements, would allow, over time, reduced inventory levels and inventory carrying costs and free up some yard space. However, it would not maximize cost reduction; improve customer service, employee safety, or employee morale; or free up any significant amount of building space.
Outsourcing the Central Stores operation was investigated as a possible solution. While this alternative would free up the building and yard space and eliminate the employee safety concerns, two major hurdles make this alternative impractical at this time.

Firstly, given the current overstock position and the lack of usage history for almost one third of the materials, determination of which inventory items should be outsourced cannot be identified with confidence. Consequently, the cost of outsourcing cannot be accurately projected at this time.

And secondly, engineering staff would be required to reserve their materials in advance, rather than ordering on demand as is the current practice. Regardless of whether the Central Stores in outsourced or kept in-house, the use of SAP's reservation functionality will need to become the norm in order to effectively manage the inventory levels and minimize cost. However, it will take some time for staff to become conditioned to this change in their way of doing business. Consequently, at this time, outsourcing Central Stores is operationally risky.

RECOMMENDED OPTION

The recommended alternative proposes minor renovations to the building and yard; purchase of a "stock picker"and new racking (both interior and exterior); and "re-slotting" and labeling of the inventoried items in conjunction with improved inventory management.

This solution provides the maximum cost reduction, frees up the most space, offers improved customer service, improves employee safety and provides advancement opportunities for staff which should contribute to improved morale.

These physical changes in conjunction with improved inventory management practices and lower inventory levels will permit a reduction of five Full Time Equivalents (FTEs) over a two to three year period. The benefits are set out in brief below.

The three counters would be merged into one with this counter being the focal point of the operation. All issues, returns and loans would be handled at this counter enabling operations staff to get to their job site more quickly and Central Stores staff to be deployed more effectively. New "lead hand" positions would be created, allowing for more opportunity for advancement and yard functions rotated to reduce employee stagnation.

Warehouse efficiency would be improved through the use of high density racking utilizing the full height of the building and a stock picker would move the employee up throughout the full height of the racking. The racking would meet seismic standards and be "bolt-less" to allow for easy re-design to meet changing product volumes.
To reduce the storage of "air", shelves would be a combination of widths matching the velocity and size of the product. Fastest moving items would be located closest to the counter. Every item would be given a unique slot and every slot would be numbered allowing ready identification of item location, faster picking and put away.

The re-designed yard layout will incorporate cantilevered racking for some products to maximize space efficiency and provide space to allow for the new Transfer Station access road. The fastest moving items will be re-located at the front of the yard; related products (e.g. vitrified pipe and fittings) moved close together; and obsolete inventory moved into one area until used or discarded.

Inventory management will be improved by lowering inventory levels, implementing vendor managed inventory, consignment stock and direct delivery of materials to the job site. With the assistance of Engineering staff, obsolete inventory will be used in new projects or sent to auction in two years.

PERSONNEL IMPLICATIONS

Assuming no significant expansion of services, it is expected that the Central Stores staff level will be reduced by five full time positions over the next two to three years. Where possible, this will be accomplished through attrition and every effort will be made to re-assign and/or re-train excess staff.

CUPE 15 and CUPE 1004 have received copies of this report.

FINANCIAL IMPLICATIONS

Renovating and re-organizing Central Stores is projected to cost $334,350. This would be funded as a loan from the Service Improvement Reserve to be repaid from ongoing operating savings. An additional $20,000 in salary upgrades would be required for the lead hands which would be funded out of operating budget.

Payback is calculated at 2.25 years in accordance with the following cash flow analysis. While some of the benefits shown below may be difficult to capture, the payback is 2.5 years based on the payroll savings alone.

	Year 0	Year 1	Year 2	Year 3
BENEFITS
Elimination of 5 FTEs	12,500	120,000	170,000	220,000
Increase in investment income - 6%	12,000	49,500	97,500	120,000
Reduction in inventory carrying cost - 5%	10,000	41,250	81,250	100,000
Reduced customer waiting time	17,500	35,000	35,000	35,000
TOTAL BENEFITS:	$ 52,000	$ 245,750	$ 383,750	$ 475,000
COSTS
Equipment, racking and modifications	273,500	200	200	200
Labor to implement changes	19,000
Net taxes	26,850
Salary upgrade for new lead hands (2)	20,000	20,000	20,000	20,000
Contingency	15,000
TOTAL COSTS:	$ 354,350	$ 20,200	$ 20,200	$ 20,200
ANNUAL BENEFITS/COSTS:	-$ 302,350	$ 225,550	$ 363,550	$ 454,800
CUMULATIVE NET BENEFITS:	-$ 302,350	-$ 76,800	$ 296,750	$ 751,550

CONCLUSION

Based on the financial and operational benefits set out in this report,. it is recommended that the facility be renovated and re-organized at a total cost not to exceed $335,000 in order to maximize the use of City funds and existing space, reduce costs and improve employee safety and morale.

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(c) 1998 City of Vancouver