Rural electric utilities have significant amounts of money invested in plant materials inventories, and we incur considerable expenses to order and carry this inventory, as well as incurring opportunity costs. While participating in the 1991-92 Management Intership Program, the authors developed the inventory models explained in this article and possible applications for the models, with the purpose of improving our ability to effectively and efficiently manage inventory.
The investigation of inventory analysis for distribution cooperatives and cooperatives that provide generation and transmission services was selected as an appropriate field of study by the MIP working group for several specific reasons. First, for all cooperatives, inventories of materials and supplies are both appropriate and necessary to the provision of cost-effective electric service. Second, the character and level of inventory would be presumed to be variable as a function of the activity performed by any one cooperative, including the character of service provided, the ecological and atmospheric environment of each cooperative, the seasonality of operating and construction activity, and transportation considerations for receipt of materials and cost of acquisition.
The contributors to this analysis are employed by utilities that display each of the varied activities involved in generation, transmission and distribution of electricity by cooperatives. In addition, the participants have variations in climatic conditions that may affect construction activity and are dispersed, in some cases centralized (e.g., Kentucky), near transportation headquarters (e.g., Oregon) or isolated (e.g., Alaska), which may affect inventory acquisition and carrying costs.
Each cooperative participant may be subject to unique conditions, yet is faced with the same fundamental problem--the means by which to evaluate inventory decisions and the cost-effectiveness of decisions made in regard to acquisition and retention of supplies. By this study of inventory analysis techniques, a common system applicable to a variety of cooperatives will be developed and performance measures established that provide reasonable identification of the effectiveness of inventory controls.
A model for evaluating inventory carrying costs and the level of acquisition for optimum economics will be developed for materials relevant to the specific utility activities associated with distribution service and provision of generation and transmission services, followed by a discussion of measures of performance and assessments of success in inventory policy.
The Nature of the Problem
All electric utilities, whether providing generation, transmission or distribution services are faced with similar considerations with regard to electric plant. Electric utilities invest in plant to provide electric service and must respond to service requirements by construction of facilities, maintenance and repair of those facilities, and the replacement of facilities as required to maintain a given level of service continuity and reliability. To effectively provide electric service, the utilities must be able to respond to plant installation and maintenance requirements while minimizing the total cost of service. To provide the appropriate level of responsiveness to service demands, a certain amount of construction and maintenance materials must be available to the workforce on an on-going basis, while other materials, that may not be immediately required upon demand, should be either readily accessible or available on a given schedule. The problem under consideration in inventory analysis techniques may be described simply as the determination of the amount of particular materials to maintain, when to place material orders, and the economic consequences of carrying material stocks.
For the generating cooperative, construction requirements may overshadow maintenance in terms of total dollars of materials, yet on-going maintenance of installed plant has a much greater impact on continuity and service reliability than construction (at a given level of load). …