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Ronald Reagan Presidential Library
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Collection: Reagan, Ronald: Gubernatorial Papers,
1966-74: Press Unit
Folder Title: [Government Organization] -
A Study of the Need for a Materials
Management System May 1970
Box: P36
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COMMISSION ON CALIFORNIA STATE GOVERNMENT ORGANIZATION AND ECONOMY
Chairman
D. W. HOLMES
Madera
ALFRED E. ALQUIST
Senator, San Jose
HOWARD A. BUSBY
San Diego
JACK R. FENTON
Assemblyman, Montebello
Vice Chairman
HAROLD FURST
Berkeley
H. HERBERT JACKSON
Sacramento
JAMES E. KENNEY
Pasadena
ANDREW L. LEAVITT
San Mateo
WALTER H. LOHMAN
Los Angeles
MILTON MARKS
Senator, San Francisco
PATRICK D. McGEE
Assemblyman, Van Nuys
NATHAN SHAPELL
Beverly Hills
L. H. HALCOMB, JR.
Executive Officer
A STUDY
OF THE NEED FOR
A MATERIALS
MANAGEMENT
SYSTEM
STATE OF
CALIFORNIA
A STUDYOF
THE NEED FOR
A MATERIALS MANAGEMENT SYSTEM
By the
COMMISSION ON CALIFORNIA STATE GOVERNMENT ORGANIZATION AND ECONOMY
May, 1970
STATE OF CALIFORNIA
RONALD REAGAN, Governor
COMMISSION ON CALIFORNIA STATE GOVERNMENT ORGANIZATION AND ECONOMY
11th & L Building, Suite 550
Sacramento 95814
Chairman
D. W. HOLMES
Madera
ALFRED E. ALQUIST
Senator, San Jose
HOWARD A. BUSBY
San Diego
May 14, 1970
C. E. DIXON
Modesto
JACK R. FENTON
Assemblyman, Montebello
HAROLD FURST
San Francisco
H. HERBERT JACKSON
Sacramento
JAMES E. KENNEY
Honorable Ronald Reagan
Pasadena
ANDREW L. LEAVITT
Governor, State of California
San Mateo
WALTER H. LOHMAN
Los Angeles
Honorable Jack Schrade
MILTON MARKS
President pro Tempore, and to Members of the Senate
Senator, San Francisco
PATRICK D. McGEE
Assemblyman, Van Nuys
Honorable Bob Monagan
NATHAN SHAPELL
Beverly Hills
Speaker, and to Members of the Assembly
L. H. HALCOMB, JR.
Executive Officer
Gentlemen:
The Commission undertook this review of the State's warehousing
and distribution practices to appraise the progress that has
been made in implementing recommendations made by the Governor's
Survey on Efficiency and Cost Control and to develop its own
current proposals for improvement in the efficiency and effective-
ness of management of the State's warehousing and distribution
systems.
This follow-up study was conducted under the general guidance of
a subcommittee consisting of the following Commission members:
Nathan Shapell, Chairman; Andrew L. Leavitt; Assemblyman Jack
Fenton; and Senator Milton Marks.* Staff work was performed by
John W. Berke, Management Analyst on loan to the Commission,
under the overall coordination of the Commission's Executive
Officer, L. H. Halcomb, Jr. During the course of this study,
several members of the Commission made personal inspections of
facilities in the Los Angeles and Sacramento areas and discussed
current problems with a number of people at operating levels.
The Commission finds that very little progress has been made in
the past two years to improve the State's warehousing and dis-
tribution practices. With few exceptions, the same problems of
inadequate policies, planning, and control persist. Little
management attention is being applied to the State's huge
investment in inventory. In the absence of any real leader-
ship or comprehensive policies or systems, too many decisions
regarding inventory are made at clerical levels. The Commission
strongly urges the Administration to organize and apply its
resources to develop adequate policies and procedures and to
clearly identify the responsibility of every agency for effec-
tive inventory management. While the Department of General
Services must assume leadership in this effort, management of
every other department must also assume its responsibilities
for minimizing inventory investment and related operating costs.
The report which follows sets forth, in more detail, the nature
of the problem and possible solutions. This Commission intends
to continue its active interest in this matter and to hold hear-
ings from time to time to receive reports of progress in imple-
menting the necessary changes.
Respectfully,
ChildHolmes
D. W. Holmes, Chairman
Harold Furst, Vice-Chairman
State Senator Alfred E. Alquist
Howard A. Busby
Assemblyman Jack R. Fenton
H. Herbert Jackson
James E. Kenney
Andrew L. Leavitt
Walter H. Lohman
State Senator Milton Marks
** Assemblyman Patrick D. McGee
Nathan Shapell
* Mr. C. E. Dixon was also a member of this subcommittee prior
to his appointment as Director of the State Department of
General Services.
** Assemblyman McGee's illness precluded his participation in this
study.
-2-
CURRENT STATUS OF MATERIALS MANAGEMENT PROGRAM
The Commission finds that substantial effort has been expended by various
study groups to identify the State's problems in warehousing and distri-
bution, but that little has been done to implement their recommendations.
This lack of implementation appears to result from management weakness in
two areas:
1. Management personnel in some operating departments have not felt that
management of physical resources is particularly important. Little
stress has been placed on achieving economy and efficiency in the use
of physical facilities, equipment or expendable goods. Some of the
largest departments have no one at headquarters level with continuing
concern for inventory management in any meaningful way.
2. The Department of General Services has not provided as much leadership
in establishing policies and procedures for effective management as
this Commission envisioned when it reviewed the proposal for creating
the department in 1963.* It was intended that the department be the
State's principal business manager and have central responsibility for
both real and personal property, but the department is not now organized
in the best manner to accomplish this. The concept of functional organi-
zation would suggest that one of the Deputy Directors be made respon-
sible for coordinating all divisions that acquire, construct, and main-
tail real property, while another deputy coordinates all divisions that
deal with personal property. The State Office of Printing can be con-
sidered a supplier and included in this latter grouping, together with
the Office of Procurement, Transportation Division, Office Services
Division, and the Central Services Coordinator. Within this structure,
one of the deputies of the department would be in a position to provide
substantial assistance to the Director in applying the materials manage-
ment concepts discussed in this report.
The State of California has so many warehouses of so many kinds in so many
locations and serving so many different functions that merely taking an
inventory of these facilities is no small task. The Governor's Task Force
on Efficiency and Cost Control, in its report on "Warehousing and Distribution"
completed in November, 1967, reported 140 warehouses with a total of about
2 million square feet. These facilities carried an average inventory of
over $30 million, employed over 700 people, and had an annual operating cost
of more than $6 million. Contrary to what one might expect, the central
supply agency, the Department of General Services, operated only three major
warehouses at that time (two now) principally to furnish office supplies
to operating agencies. These General Services Central Stores warehouses
had fewer personnel to run them and less space and stock than some of the
operating departments' distribution warehouses. This is still true.
* "Findings and Recommendations Concerning Organization for Central Staff
Services", Commission on California State Government Organization and
Economy, March 11, 1963.
-2-
The Governor's Task Force made twenty recommendations which can be summarized
as follows:
1. Establish an adequate warehousing capability under the control of the
Department of General Services that would eliminate the need for many
of the intermediate warehouses and stockrooms operated by other depart-
ments.
2. Install an inventory control system using high-speed data processing
and statewide standard commodity identification.
3. Install a quality control program and improve the development of product
standards and specifications.
The Governor's Task Force study also included consideration of some specialty
warehouses that are not part of the State's facilities for supplying its own
operations. For example, the Task Force recommended that the textbook and surplus
property warehouses now under the Department of Education be placed under
the control of General Services. Much of what these facilities handle is for
only a specialized clientele within local government and, therefore, these
materials could never be fully integrated with other materials under the
jurisdiction of General Services. With the numerous problems to be solved
within the State's own system, the placement of these facilities under General
Services can well wait.
Further development of information on the State's warehouses is contained in
a November, 1967, report on "Expendable Goods Inventories and Related Operating
Costs" prepared by a Department of General Services study team. Their study,
which included consideration of small stockrooms, revealed 1,473 facilities
at 646 locations, raised the estimate of operating manpower required to 1,000
man years and placed the cost of ownership for expendable goods at $8.7 million
annually. Since most of the data and recommendations contained in this report
on "Expendable Goods Inventories and Related Operating Costs" are still valid,
a copy of the report is included herewith as Appendix A. Only Exhibit X of
the report, which was a 16-page "Alphabetic Listing of State Operated Storage
Facilities" has been omitted because it is now out of date.
The study team's companion study of "Accountable Equipment Inventories and
Utilization" provides an estimate of the State's continuing investment in equip-
ment at $330 million with an annual reinvestment of $40 million.
The General Services study team drew a clear distinction between expendable
goods and equipment and its two separate reports pointed out that different
systems of management control for each are required.
When this Commission began its review of progress in implementing the Governor's
task force recommendations on warehousing and distribution, it was not informed
of the depth of the work that had been done by the General Services study team.
-3-
The former Director of General Services, in his discussions with this Com-
mission, talked of actions being taken in regard to various warehouses and
particular purchasing activities but made no mention of the comprehensive
study that had been made by his staff within the Department of General Services.
Much of the lack of progress in implementing improvements may have stemmed
from a lack of recognition of the need for broad, comprehensive changes.
Contacts with most of the departments of State government were made by Com-
mission staff during the course of this study to determine if any substantial
changes in these facilities had occurred as of December, 1969 and whether
any progress had been made in the past two years by any of the departments
in upgrading their management of expendable goods inventories. Very few
departments could report any change in either facilities or systems. There
are, however, a few exceptions:
1. The Departments of General Services and Water Resources completed the
phase-out of the Water Resources redistribution warehouse in Sacramento
and its consolidation with the adjacent General Services warehouse.
2. The Department of Water Resources phased out several of its local warehouses
that were no longer needed or became inefficient as departmental programs changed.
3. The Department of Public Works reassigned its Service and Supply function
from the Division of Highways to departmental administration, has designed
a new inventory control system, has committed personnel and computer
time to implement it, and plans to begin operating the new system with
live data by July, 1970.
4. General Services upgraded the placement of supply operations within the
Office of Procurement so its manager now reports directly to the Procure-
ment Officer. Inventory management personnel have also been added to his
staff. The Supply Operations Manager has done a thorough housecleaning
job on the facilities under his jurisdiction and improved their materials
handling and layout.
5. Contract purchases were increased from $20 million to $52 million annually
within a total annual volume of purchases of approximately $140 million.
Appendix B shows the breakdown by commodity groupings. The Office of
Procurement improved its staff services in support of purchasing operations
such as specifications, quality control and contract management. Develop-
ment of these three capabilities simultaneously made increased use of
contract purchasing possible.
6. Contract purchasing has been substituted for carrying inventories of
maintenance supplies for the Division of Buildings and Grounds and the
stockrooms that division formerly required have been eliminated.
While the foregoing improvements are significant and in keeping with the
recommendations of the Governor's Task Force and the General Services study
team, they represent only a small part of the total improvement needed.
-4-
A broad, overall concept of materials management must be adopted within which
specific improvements can be made. Aggressive leadership by the Department
of General Services and major commitments to improvement by operating depart-
ments will be required to solve the numerous problems involved in this change.
The description of a comprehensive materials management concept in the follow-
ing section of this report provides a beginning point for interagency dis-
cussion which can lead to such commitments.
-5-
A MATERIALS MANAGEMENT SYSTEM
The modern concept of materials management as applied to any large enter-
prise is one of a broad system which consists of at least four major parts:
1. Standards and criteria for determining needs
2. Purchasing
3. Inventory control
4. Physical distribution.
Of these four elements of a materials management system, only one has been
highly developed by the State. The State of California has had centralized
purchasing for many years, with virtually all the State's purchases made or
controlled by the Office of Procurement in the Department of General Services.
However, the savings inherent in centralized purchasing are easily lost in
inefficient or multiple handling or by overstocking warehouses and, as a
result, the cost of materials at the point of use may be substantially greater
than the purchase price. To obtain materials in the most efficient and eco-
nomical way demands that materials management be dealt with as a total system--
of which purchasing is only one part. The objective is to deliver the materials
to point of use when needed, at the lowest cost, rather than merely purchasing
at the lowest price.
Adopting a modern system of materials management is not simple. The overall
system as well as each part of such a system, as discussed in the sections
which follow, will require a greater application of both managerial and tech-
nical skills than are now being applied. The problem demands nothing less.
-6-
STANDARDS AND CRITERIA FOR DETERMINING NEEDS
Statewide standards and criteria for determining material need--an essential
part of a material management system--are almost totally lacking. Operating
agencies are given little or no guidance in how to estimate, or how best to
fulfill, their needs. This lack of standards was referred to by the General
Services study team as a "policy vacuum". Employees at the lowest level in
hundreds of locations are determining as best they can what and how much to
buy or stock. Some find that the way to satisfy their immediate superiors
is to simply "have plenty on hand". In the absence of statewide standards
for management control or reporting of inventories, one State operation may
have a huge inventory, much in excess of needs, while another operation is
being starved. Great inconsistencies now exist among State agencies in every
aspect of policy and practice concerning inventory content, value, turnover,
reorder practices, taking physical inventories, etc. Aggressive leadership
by General Services and commitment by management of operating departments
will both be necessary to fill the policy vacuum that now exists.
Basic standards for the purchase, storage, and distribution of materials
should be prescribed and distributed through such means as the State Admin-
istrative Manual (SAM). Such standards should be developed to encompass the
needs of both large and small users and presented in terms of "how to" rather
than "must not". Staff from the Office of Procurement should be available
to assist agencies in improving their procedures so greater efficiency and
economy can be achieved in the entire purchasing and distribution cycle.
Office of Procurement responsibility should extend to approval of any exist-
ing, new, or extended warehouse facilities since there is a direct relation-
ship between need for inventory and need for space.
Criteria governing the quantity and quality of goods required for various
operations can best be developed by joint efforts of operating personnel and
specialists in materials management. Operating personnel should define needs
in terms of objectives and use while specialists develop the specifications
for materials required and the best means for meeting those needs. The best
means to meet any particular need may or may not involve maintaining an
inventory. The guiding principle to apply is that operating agencies are to
be provided the means to obtain materials as needed, not simply provided the
means to store materials in anticipation of need. The central idea is (1) to
carry only those items for which central warehousing represents the low net
cost option and (2) carry no more of these items than needed to support the
user. This means both materials analysis and inventory management must be
applied to reducing costs.
In determining the need for keeping maintenance items on hand at a field
location such as a hospital or prison, for example, it is possible to identify
the few critical items that must be stocked locally to prevent operational
halts. All other needs can be met from a central warehouse or by con-
tracts which specify delivery on short notice at a given price. When-
ever the State can avoid carrying its own inventory, it can save not only
the obvious costs such as cost of space and personnel but it can also save
the costs of deterioration, obsolescence, and wastage that result from having
stock on hand.
-7-
The criteria developed for determining stock levels when an inventory is
maintained should take into account the stock levels at other points in the
system. It makes little sense to have two years supply of an item in a
user's storeroom which is replenished from a central distribution warehouse
that carries a 60 to 180-day supply. This relationship is all too common now.
In a specific case found during the course of this study, it took carbon
paper 2½ years to get to the point of use after purchase. After being
obtained from General Services Central Stores, it spent over two years going
from the user's central redistribution warehouse, to their district warehouse,
to the point of use--by which time it had seriously deteriorated.
Joint determination of needs among similar users could have a major impact
on size of stocks of slow-moving items. The State operates many large-scale
institutions, such as prisons and hospitals, which have many needs in common.
As a beginning, for example, all the institutions under the Human Relations
Agency in a given geographical area could cooperate in selecting one site for
storing items needed for emergency repairs and eliminate stocking such items
in the other institutions in that area of the State. Most of the State's
institutions are no longer isolated and could well consolidate some of their
requirements if encouraged by top management. Communications and transporta-
tion capabilities available today have removed the need to have "plenty of
everything" on hand at each location. The concept of such consolidation of
inventory at least among hospitals has been discussed at lower levels in the
Department of Mental Hygiene. However, top management has not become involved
and consequently the concept has not yet been implemented.
-8-
PURCHASING
The Department of General Services, through its Office of Procurement, serves
as the State's central purchasing agent. Every purchase of supplies or equip-
ment in excess of $25 is made by that office or under its supervision for
all State agencies except the University of California, which is completely
exempt, and the State Colleges, which are exempt for purchases up to $500.
For many years, the Office of Procurement played a rather passive role. Most
of its effort was devoted to converting requisitions received from operating
agencies into purchase orders. Emphasis was placed on obtaining the best
price for materials or equipment on each order. The ultimate cost, which
might be affected by warehousing and reshipping, service life, and ultimate
trade-in or resale value, was given little consideration.
In its 1967 review, the Governor's Task Force criticized the Office of Procure-
ment for not keeping abreast of the growth and changing conditions in the State.
The Task Force advocated that "emphasis should be placed on: ...
Purchasing
on the basis of lowest ultimate cost considering economics of direct shipments,
vendor versus state inventories, estimated service life and resale and main-
tenance costs." The Task Force recommended a cost reduction program which would
tie together consolidated purchasing, standardization, and quality control
procedures. It pointed out that standards and specifications had been developed
at that time for only 20 percent of the purchased items lending themselves to
standardization, and said "sound standardization and specification work is
widely recognized as being essential to realizing major purchasing savings.
The program has not realized its potential because of insufficient management
interest and support, inadequate procedures for identifying and evaluating
items on which action should be taken, and a lack of acceptance by other state
departments."
Historically, the other elements of a materials management system such as
specifications and warehousing have been placed in a position subordinate to
purchasing in the State's organization structure. The Task Force recommended
an organization plan that changed the title of the head of the Office of
Procurement from Procurement Officer to State Materiel Officer and that placed
the functions of traffic, warehousing, and administrative services (to include
planning, quality control and developing standards and specifications) on an
equal plane with the purchasing function. The organization changes of placing
these units directly under the division head have been adopted by the depart-
ment but the title of the top position has not been changed. Changing the
title of the top position would have the benefit of reflecting the broader
leadership role the department should have in improving the State's logistics
system.
The modern distribution or logistics manager (called Materiel Officer by the
Task Force) is responsible for all of the following:
1. Transportation and Traffic
2. Inventory Control
3. Purchasing
-9-
4. Warehouse Management
5. Logistic System Research and Development.
He may or may not manage his own information processing and communications
system, but as a major user of the system he must be able to assert his
interest in the system, obtain service, and work closely with system operators
to extend applications in the logistics area. Within the Department of
General Services, a lack of understanding between the distribution manager
and the data processing systems operators was a major factor in the failure
of the inventory control system as discussed below.
-10-
INVENTORY CONTROL
One of the basic elements of a good inventory system is centralized control
to maintain uniform assignment of nomenclature and stock numbers to common-
use items. This element of the system has been highly developed by many
commercial manufacturers and distributors and by such federal agencies as
the General Services Administration, Veterans Administration, and the
Department of Defense. As pointed out by the Governor's Task Force and the
General Services study team, the concept of uniform identification of items
should be, but has not been, applied by the State of California. The Task
Force said "A standard identification system should provide the basis for
controlling inventories, developing usage data, obtaining essential purchasing
information and prescribing proper freight rate classifications.' The Depart-
ment of General Services has started to assign uniform identification to items
it carries in Central Stores but has not extended the concept further to
establish central control over other agencies' assignment of uniform nomen-
clature and stock numbers for repetitively used items to permit identification
of items anywhere in the system.
Another essential element of inventory control, when applied to a wide variety
of items being supplied to numerous points of use, is a facility for high-speed
data processing that can rapidly identify stocks on hand or on order, process
orders from users to suppliers, and handle instructions to move or ship
materials. For large-scale, widely dispersed operations, such as the State
has, it may also be necessary to use satellite data processing centers linked
to a central computer by high-speed data communications to serve major users.
Low-volume users and users at remote locations may be adequately served by
low-speed data communication such as U.S. mail. Whether high-speed data com-
munication will pay for itself can be determined in each case by analyzing
the cost of such facilities versus the reduction in inventory carrying costs
which they make possible.
The third element of an inventory control system for large-scale operations
is statistical forecasting of materials requirements on modern data processing
equipment.*
Routine forecasting is designed to guide decisions on two questions in the
normal replenishment of stocks--(a) when to order, and (b) how much to order.
For each stock item an estimate is made of the expected (or average) demand
during the lead time required for replenishment and a separate allowance for
variation.
Forecasting systems have been developed by a number of large commercial enter-
prises and by several federal agencies. Package systems have also been prepared
by data processing software vendors, that might be purchased and adapted to
State use.
The essential elements of a system for inventory control include uniform item
identification, high-speed data processing, and statistical forecasting. The
significance of installing an adequate inventory control system was stressed
* See Brown, Robert G.: Statistical Forecasting for Inventory Control, McGraw-
Hill Book Company, New York, 1959.
-11-
by both the Governor's Task Force and the General Services Study Team. The
Task Force said, "Many of the difficulties being experienced in the warehouses
are directly attributable to an inadequate data processing system. Therefore,
a streamlined, integrated system is essential."; the General Services
study team said, "No attempt to operate an integrated warehousing system can
succeed unless adequate management control systems exist to both handle large
inventories and produce forecasts and related control data necessary to reduce
inventory investment." They went on to warn that the transfer of warehouses
from other agencies to General Services should not begin until this capability
has been developed.
At the time the Task Force and General Services Study Team recommendations
were made in 1967, the Department of General Services had a system utilizing
90 column punch cards for inventory control and billing, applied only to its
Central Stores operation. The Study Team report indicated that development
of a new data processing system capable of accommodating an integrated ware-
housing system had begun.
The Commission finds that, not only did the department fail to develop and
install the new system, but it also eliminated the old system and associated
data processing equipment, leaving the department no way to either control
inventory or to bill for shipments made from its Central Stores since September,
1969. The poor judgment used in eliminating the old system before a new one
had been developed and tested is incredible.
The department has now found it necessary to develop a new system to handle
just the billing portion of Central Stores operations on an interim basis,
while it tries to find means to recover from the setback suffered in failure
to implement an adequate inventory control system. At the request of the
Secretary of Agriculture and Services, the Office of Management Services has
begun to work jointly with the Department of General Services to develop an
improved inventory control system.
The Department of General Services should tie its central inventory control
system to those of operating agencies by:
1. Assisting agencies in developing their control systems to an appropriate
level of sophistication, and in a way that they become compatible with
the central system.
2. Requiring agencies to submit periodic reports of physical inventory.
3. Reviewing agency stocks on hand VS. usage to identify surpluses that
should be made available to other agencies or disposed of.
-12-
PHYSICAL DISTRIBUTION
The physical distribution portion of a materials management system consists
of two principal elements--storage and transportation. Physical distribution
gives time and place utility to goods and serves as the link between supplier
and user. Many organizations have found that the costs of physical distribu-
tion can exceed the cost to manufacture or purchase a product. Unfortunately,
the true cost is seldom known when warehousing and transportation are as highly
decentralized as they are in California State Government.
It was the discovery of excess storage that dramatized the 1967 studies of
warehousing and distribution by the Governor's Task Force and the Department
of General Services. Until then, it was not commonly known how many storage
locations the State had. The Task Force identified 140 warehouses, excluding
stockrooms of less than 2,000 sq. ft. By including small stockrooms, General
Services identified 1,473 facilities at 646 locations. The General Services
study team also called particular attention to the duplication in use of trans-
portation facilities among the eight redistribution warehouses in Sacramento
that belong to eight different departments. The team graphically depicted
how the trucks delivering to 52 different cities in California from these
eight warehouses were literally going over each others' tire tracks. (See
Map B, Appendix A.)
Many of the costs related to physical distribution cannot be seen by looking
at the accounts of individual operating departments; the duplication in use
of transportation facilities cited above is one example. Also, capital is
tied up in duplicate stocks (between levels or departments); rehandling of
merchandise becomes excessive because space and materials handling equipment
is inadequate or poorly utilized; and persons not classified as warehouse
personnel spend their time on the function but their time is not charged.
It must be recognized that, if distribution is centralized and placed under
tighter control so all costs are charged, the centralized operation may appear
to be more expensive than the former decentralized operation when in fact it
may not be.
The Governor's Task Force was critical of the way each department had developed
its own warehousing facilities and pointed to the excess inventory, poor use
of space and high cost of transportation that resulted.
The Task Force said that centralized warehousing would:
1. Result in substantially less capital tied up in inventories.
2. Use less warehouse personnel.
3. Require less storage space.
4. Reduce transportation costs.
5. Permit greater standardization of products stored.
6. Provide cost reduction through volume purchases.
7. Permit concentration of effort and talents toward improving warehousing
operations.
-13-
In advocating a centralized warehousing system, the Governor's Task Force
made it very clear that it was not merely a matter of putting together what
existed but really was proposing a new way of doing business. To bring the
General Services operations up to a proper level of competence and service,
the Task Force advocated making an investment of both money and effort,
including addition of expert personnel, improvements in physical facilities,
installation of an adequate EDP based inventory control system, and numerous
detailed changes in mnnagement and operating systems. The Task Force stated
operating departments were, at that time, reluctant to use the services of
the Central Stores warehouse because of the slow service, and operating
departments were finding other ways of meeting their needs. It is very sig-
nificant that the average time to fill orders has since been cut by General
Services from 30-40 days to 5-6 days--good progress. There is another indica-
tion of improvement that is even more clearly visible: two years ago parts
of the Central Stores warehouses were filled with junk furniture and equip-
ment. Now this junk is gone, the warehouses are clean and well-arranged,
new efficient storage racks and shelves have increased utilization of space,
and the entire operation has taken on a new look. What has not happened,
however, is the installation of an adequate, rapid response inventory and
control system. Without this system, there is no way that the degree of
centralization which the Task Force recommended can be made to work. Obtain-
ing the benefits of such centralization depends on General Services getting
its own house in order first so it can handle added responsibilities. The
State cannot simply close the warehouses which operating departments have
now without providing an alternate means of supply. To merely place them all
under General Services with an inadequate control system could result in chaos.
The State's warehouses can be placed in three broad categories:
1. Redistribution warehouses - serve statewide needs of one or more depart-
ments.
2. District warehouses - serve the needs of a single district of one depart-
ment.
3. Local stockrooms - serve needs of one building or facility of one department.
Statewide Redistribution Warehouses. The Department of General Services
operates two warehouses (one in Sacramento and one in Los Angeles) as part of
its Central Stores operation to provide general office supplies and sundries
to all departments statewide. The Department of Public Works also operates
two warehouses (one in Sacramento and one in Los Angeles) to serve only its
own needs, principally its Division of Highways. Six other departments--Social
Welfare, Human Resources Development (formerly Employment), Franchise Tax,
Equalization, Motor Vehicles, and Highway Patrol--operate one major facility
each to supply the needs of their own field operations.
Each of these departments' redistribution warehouses draws upon General
Services Central Stores for a portion of their stock. The duplication of
items stocked by Central Stores and the redistribution warehouses of these
-14-
six other departments was found to vary from 15% to about 50% in the study
by General Services, but it is more revealing to look at the percentage of
duplication for specific commodity groups. Under office supplies, for
example, one finds 80% to 100% duplication between the General Services
warehouse and the other redistribution warehouses in Sacramento. This
duplication is unnecessary and should be eliminated.
Several of these departmental redistribution warehouses are used as part
of the facilities to manufacture as well as store a multitude of forms
used exclusively by that agency. This applies particularly to agencies that
use specialized forms on a massive scale such as Human Resources Develop-
ment (Employment), Equalization, Motor Vehicles and Social Welfare. The
other departments which have Sacramento redistribution warehouses handle
forms that are exclusive to their agency on a much lesser scale. Unless
an efficient form supply system is developed to substitute for these
departments' facilities for manufacturing and distributing forms, only a
partial consolidation of the Sacramento redistribution warehouses can be
accomplished. This factor was ignored by both the Governor's Task Force
and the Department of General Services in their 1967 reports on warehousing.
It has to be recognized that a dependable supply of forms is like "life blood"
to some of these agencies.
District Warehouses. These exist primarily in the eleven districts of the
Division of Highways and six districts of the Division of Forestry. In
neither agency does there appear to be any real need for such warehouses in
each district. Substantial consolidation could and should be accomplished
by these agencies with assistance from General Services. Much of what these
district warehouses handle comes from a redistribution warehouse at either
Sacramento or Los Angeles and is held for reshipping to a local warehouse
or stockroom. Such rehandling at the district level should be avoided if at
all possible by direct shipment from vendors to users or, when state ware-
housing is necessary, by shipment directly from redistribution warehouses to
local stockrooms.
Local Stockrooms. These vary from closet-size rooms containing supplies for
a small office to multi-warehouse complexes having tens of thousands of square
feet of storage space serving a major institution such as a hospital or prison.
Regardless of size, they are usually the final point of storage before use.
Frequently, there are multiple facilities at a single location. For example,
at the Metropolitan Hospital at Norwalk, four different buildings serve as
warehouses.
Some of these local storage facilities are well-run by trained personnel who
take a keen interest in providing efficient service, but all too often local
storage facilities are not really managed at all; inventory control does not
exist and, in fact, there may be no one specifically in charge. These physical
facilities, which are at the end of the line in the State's system for materials
management, reflect the general neglect of all other parts of the system. Some
departments have not shown enough concern at headquarters level to even keep
a reasonably current list of all their local storage facilities, much less
-15-
determine how well or poorly these facilities are being run, or what should
be or is stored in them. There is no way that these local facilities can
function properly solely on their own. Each local facility should be re-
evaluated, some of them abolished, and the remainder improved. To maintain
efficiency in physical distribution, periodic audits need to be conducted
to determine the continuing necessity for each facility, what they should
stock, and how they should be operated.
-16-
SEQUENCE OF CORRECTIVE ACTIONS
The State's problems in warehousing and distribution have 80 many facets
that it is necessary to establish a definite sequence of implementing the
many recommendations that have been made by the Governor's Task Force and
the General Services study team. Stated in simplest terms, it is necessary
to: first, establish an improved system; second, eliminate the unnecessary
inventory and facilities; and, third, provide controls to prevent back-
sliding. The sequence of actions recommended by the Commission within those
broad categories are:
A. Improve System
1. Increase the use of techniques to select the proper mix of contract
purchasing and warehousing.
2. Establish inventory control systems which use standard item descrip-
tions and coding.
3. Develop and disseminate State-wide policies and standards to be
followed by all operating departments.
B. Reduce Inventory and Facilities
1. Consolidate inventories of general use supplies found in the eight
redistribution warehouses in Sacramento and place them under the juris-
diction of the Department of General Services. Eliminate the surplus
physical facilities.
2. Break the traditional pattern that exists in some agencies of having
branch distribution warehouses at each district or regional office.
Reduce the number to a minimum required for supplying emergency
operations.
3. Provide central supply rooms to serve concentrations of State buildings
as a substitute for the numerous supply rooms found in multi-tenant
buildings.
C. Provide Continuing Controls
1. Establish policies and procedures under which every agency request
for warehouse facilities will be reviewed by materials management
specialists within the Department of General Services.
2. Conduct periodic on-site inspections of facilities and systems, using
teams made up of persons knowledgeable in agency operations, together
with persons knowledgeable in central supply operations.
APPENDIX A
REPORT BY GENERAL SERVICES
STUDY TEAM, COMPLETED
NOVEMBER 15, 1967
EXPENDABLE GOODS INVENTORIES AND RELATED OPERATING COSTS
Introduction
The Governor's Executive Letter 67-21 dated May 26, 1967, directed the
Director of the Department of General Services to conduct a comprehensive
survey of State's inventory investment and utilization. This survey was
designed to provide the additional information necessary to implement
recommendations of the Governor's Task Force on warehousing and inventory
control. The goals of this study were:
1. The reduction of expendable goods inventories to the lowest economic
level consistent with the need to be met.
2. The elimination of unnecessary operating costs related to expendable
goods maintained in continuing inventories.
3. To establish a framework for an expendable goods inventory management
system providing both adequate inventory accountability to guard
against improper uses or losses of goods and inventory management
standards under which the Department of General Services can carry out
its responsibility to assure economic business management practices
within the State.
-1-
APPENDIX A (Cont.)
CONTENTS
Page
I
Scope of State Expendable Goods Inventory Investment and Operation
5
II Recommendations for Short Range Actions
9
1. Request the Governor to issue a general policy statement on
statewide inventory management.
10
2. Require agencies operating storage facilities to conduct a
physical inventory of such stocks (except for stock for which
a physical inventory has been taken within the previous 12
months) and report surplus to the Office of Procurement.
10
3. Require the Office of Procurement to screen all purchase
estimates for expendable goods and, where possible, estab-
lish local purchase contracts for such goods which rely on
supplier inventories.
10
4. Require agencies, when ordering supplies from the Department
of General Services' Central Stores, to have such commodities
delivered directly to the facility nearest the point-of-use.
11
III Recommendations for Long Term Materials Management
12
5. The Department of General Services act as the central ware-
housing program for the State and the eight redistribution ware-
house programs operated by agencies other than the Division of
Forestry be transferred to the Department of General Services.
12
6. Establish, within the Department of General Services, an ADP
based inventory control system capable of accommodating up
to 50,000 line items.
13
7. Re-engineer existing Department of General Services warehouse
program systems and methods to accept larger and more complex
warehousing activity.
13
8. Augment the Service Revolving Fund in the amount of $2,500,000
to fund a centralized inventory.
13
9. Achieve orderly transfer of these eight agency-operated ware-
housing programs to the Department of General Services including
required staff, equipment and facilities.
14
10. Establish a statewide program for effective management of
agency-owned expendable goods inventories.
14
11. Establish, in the State Administrative Manual, a basic state-
wide inventory management policy, to be augmented by individual
agencies and require that responsibility for inventory manage-
ment within individual agencies to be specifically assigned to
an accountable person or position.
14
-2-
APPENDIX A (Cont.)
12. Require agencies operating warehouses at any one location of
more than 2,000 sq. ft. with average inventories of expendable
goods exceeding $10,000 to maintain stock records of expend-
able goods and to conduct annual physical inventories.
15
13. Utilize the ADP system established to manage the Department
of General Services central inventories to store and report
basic data on shipments to point-of-use warehouses both from
the Department of General Services, Central Stores, and other
suppliers.
15
14. Require agencies maintaining point-of-use inventories to
classify items stocked as either "contingency" stock or
"regular expendable" stock and to record the individual or
unit to who "contingency" items are chargeable.
15
15. Require agencies to annually report to the Department of General
Services, Office of Procurement, all expendable goods regularly
maintained in continuous inventory by classification, commodity
description, value and approximate annual usage.
15
16. Establish general standards for audit of unit stock records.
15
17. Establish, in the Department of General Services' Office of
Procurement, sufficient staff capability in inventory manage-
ment to (1) effectively manage the Department of General
Services operated central warehousing programs (2) recommend
to the Director statewide inventory management policies and
standards (3) conduct periodic field audits of agency-operated
warehousing programs and (4) assist agencies in increasing the
effectiveness of their inventory management.
16
18. Establish standards for and maintain a master record of State
warehouse facilities.
16
19. Reduce and consolidate district type warehousing operated by
State agencies.
16
-3-
APPENDIX A (Cont.)
EXHIBITS
Page
I
Redistribution Warehouses
6
II
Point of Use Storage
7
III Suggested Executive Letter - Inventory Management
20
IV
Suggested Management Memo - Purchase of Expendable Goods for
Continuing Inventory Storage
21
V
Recommended SAM Revision - Ordering Supplies from Central Stores
23
VI
Sacramento Redistribution Warehouse Line Items Analysis
24
VII Actions Required to Establish the Department of General Services'
Central Warehousing Capacity
26
VIII Outline of Basic Statewide Inventory Management Policy -
Expendable Property
27
IX
Cost-Savings Analysis
29
X
Alphabetic Listing of State Operated Storage Facilities
30
Maps
A
State Storage Facilities - over 2,000 sq. ft.
B
Duplicate Routings of Shipments from Sacramento Redistribution
Warehouses.
-4-
APPENDIX A (Cont.)
I
Scope of State Expendable Goods Inventory Investment and Operations
A. General
The State maintains a continuing inventory investment in expendable
goods of approximately $28,350,000 stored in 1,473 facilities at
646 locations varying in size from large warehouses to small stock
rooms. An estimated additional $2 million of these supplies are
continuously stored in desks, cupboards, shelves and bins at the
final point-of-use.
This continuing inventory investment requires a major annual expen-
diture in related capital and operating costs. Over 3,000,000 sq. ft.
of storage area is required to house these goods and a staff equiva-
lent to approximately 1,000 man years annually is required to receive,
store and distribute these goods. While the aggregate cost of the
State's ownership of this inventory (space, manpower, equipment and
funds invested) is virtually impossible to isolate because State
accounting systems are not generally designed to expose such costs,
we estimate that the direct cost of ownership of this inventory
investment exceeds $8,700,000 annually. This estimate is made up
of the following components:
Salaries and Wages
$6,000,000
Physical Facilities
$1,500,000 (rent, lease or capital
investment at $.50 per
sq. ft. per year)
"Cost of Money"
$1,150,000
Equipment Depreciation
$ 50,000
B. Types of Inventory Operation (Map A)
The State's inventory operations fall into two basic categories.
1. Redistribution warehouses - Those shipping primarily to other
warehouses and storage facilities. The State is currently
operating 16 major redistribution facilities.
2. Point of use storage - Shipping or issuing goods to the unit
which is the final consumer of the product or to storage
facilities less than 2,000 sq. ft. These facilities are of
five types:
-5-
REDISTRIBUTION WAREHOUSES
Number of
Name of Department
Warehouse Space
Total Value
Total Number
Distribution
or Division
City
in Square Feet
Inventory
of Items
Points
Highways *
Sacramento
78,120
$1,727,749
3,690
300
Highways *
Los Angeles
72,200
1,405,397
3,760
300
General Services
Sacramento
51,000
1,143,096
2,007
360
Motor Vehicles *
Sacramento
47,940
386,000
1,879
149
Employment *
Sacramento
32,207
500,000
2,515
365
General Services
City of Industries
30,366
490,904
2,007
300
Water Resources *
Sacramento
25,000
225,000
2,229
13
Highway Patrol *
Sacramento
19,980
500,000
1,929
100
-9-
Social Welfare *
Sacramento
14,500
121,500
2,360
131
Forestry **
Redding
14,070
100,000
1,071
13
Equalization *
Sacramento
10,800
121,000
1,390
68
Forestry **
Monterey
9,570
50,000
763
10
Forestry **
Santa Rosa
9,300
100,000
986
14
Forestry **
Sacramento
9,288
28,506
955
12
Forestry **
Riverside
8,500
90,000
970
13
APPENDIX A (Cont.)
Forestry **
Fresno
7,500
40,000
873
11
TOTALS
440,341
$7,029,152
29,384
2159
* Recommended for integration into Department of General Services centralized warehousing program.
** Recommended for Major Reduction or Abolishment.
EXHIBIT I
1939
investiged to small
and
activité TO
a avainglit
*
ANY
A 10700
184
232.1
000,000
-
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1,
000
100,8
$00,000
R.
81
PESUS
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$ YOUR
not
000,001
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shallew taken?
5
03:02
grabber
to
CREDIT
#
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*
31
361
WILL
** VEHICLEY
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AND
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00.00
ETS
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98
to
the
APPENDIX A (Cont.)
statewide policy statements found on the subject of expendable goods
inventories appear in SAM 8652, Property Accounting and 10800-10890,
Institutional Stores Accounting. This latter section relates only to
General Fund supported institutions with resident populations. Even in
this limited context, stock records are maintained only for goods dir-
ectly related to inmate care. Little attention is given in the State
Administrative Manual to controlling or managing expendable inventories
or providing management standards for inventory control.
As a result of this policy vacuum, the key decision affecting inventory
investment (i.e. what is stocked in warehouses, the establishing of re-
order points, total dollar investment, etc.) have generally evolved onto
the lowest employee levels. In addition, the study team found that only
in a few instances were the results of these key decisions (average
inventory investment, turnover, costs, service level, etc.) receiving any
kind of management review.
Other indications of the general absence of a sense of management respon-
sibility for expendable goods inventory operations is the inconsistency
in the taking of physical inventories. Consistent annual physical in-
ventories are taken covering only about $12,000,000 of the $28,350,000
inventory identified. In several other units bi-annual physical inven-
tories are taken. In general, however, probably less than 50% of the
State's expendable goods inventories are consistently subjected to
reconciliation with book inventories. This is not particularly surprising
since accurate stock records adequate for a reconciliation are currently
required by the State Administrative Manual only for institutions financed
by the General Fund and having resident populations.
In the majority of interviews, agencies were unable to readily produce
current or accurate information on inventory contents, value, turnover,
shipments, or operating costs, or provide a clear statement of reorder
policies or practices. Based on information developed by the study team,
however, the following general observations are possible.
Stock Status - It appears that aggregate stocks equal to at least 6
months of usage are being held in various levels on inventories in the
State.
Turnover - It is unlikely that a turnover rate substantially exceeding
2.0 is being achieved by any but a few very active facilities. The
overall State average would probably fall in the range of 1.50 - 2.0.
Reorder Policy (Investment in Stock) - The establishing of minimums and
maximum stock levels appears to be largely left to the discretion of
lower level storekeepers and stock clerks. As a result, widely varying
practices were found. One of the most common was directly related to
the quarterly purchase cycle in which the minimum quantity was roughly
the equivalent of one quarter's usage and maximum quantity represented
roughly two quarters usage. Since, at best, this system could produce
a turnover rate of 2.5 (and usually a considerable lower rate due to the
tendency to hedge quantities upward), such a common practice results in
an inventory investment of as much as double that required.
It is interesting to note that, despite this unnecessarily large invest-
ment, agency warehousing personnel quite typically complained of their
-8-
APPENDIX A (Cont.)
inability to avoid "stock outs". This is the common result of the
absence of a system which is not based on accurate unit records and
cannot correctly take into account variations in usage patterns in
establishing reorder points (too much of what you don't need and too
little of items required).
D. Summary
With a few notable exceptions, the State is not effectively managing
its investment in expendable goods. Nowhere is this management phi-
losophy more clearly in evidence than in the State Administrative
Manual Section 8652 which dismisses expendable property as that which
has a unit cost of less than $25.00 and, as such, does not have "suf-
ficient value to merit item control" and is of "a nature that makes formal
property accountability impractical". It is reasonable to say that
agency managers do not, as a rule, feel accountable for the size of their
inventories or the costs created by them.
The study team finds this attitude difficult to understand. Roughly 50%
of the State's $140,000,000 annual expenditure for materials, supplies
and equipment is for expendable goods. All of these items are, at some
time or place, stored before consumption, creating an additional annual
cost of approximately $8.7 million. Over $30,000,000 of State funds
are continuously tied up in expendable goods inventories. This area
of materials management cannot continue to be ignored or written off
as too "expensive to keep track of".
The study team concurs with the Governor's Task Force that, under
effective management, both the State's average inventory investment
and cost of ownership could be substantially reduced. To that end,
the following recommendations are made as the beginning steps to achieve
a statewide expendable goods inventory management program.
II Recommendations for Short Range Actions (Results Achievable in 1-12 Months)
Since the State generally does not uniformly maintain unit stock records for
expendable goods, usage information necessary to arithmetically establish
correct quantities for storage is not available to either the study team or
agency management. Short range actions to reduce inventories, therefore,
must depend largely on administrative directives and intensive screening
of expendable goods purchases.
In private industry, it is generally accepted that "ownership" of goods
(warehousing, handling, record keeping, etc.) increases cost of goods from
15% to 25% each time it is handled. In some State agencies, expendable
goods are passing through as many as four levels of warehouse handling
before being consumed (i.e. Central Stores to agency redistribution ware-
house to "district" warehouse to local stock room). The unnecessary handling
nearly doubles the actual cost of goods in some instances. In addition,
State inventories at all levels frequently duplicate inventories maintained
by suppliers able to deliver to the point of use on a timely basis.
We, therefore, recommend several immediate actions to reduce this multiple
handling and the unnecessary duplication of supplier inventories and to
identify existing surpluses of expendable goods.
-9-
APPENDIX A (Cont.)
1. Request the Governor to issue a general policy statement on statewide
inventory management.
Exhibit III is a proposed draft of such a general policy statement.
This general policy statement will establish the framework in which
actions by the Department of General Services to reduce on-hand stocks
can be taken.
2. Require agencies operating storage facilities to conduct a physical
inventory of such stocks (except for stock for which a physical inven-
tory has been taken within the previous 12 months) and report surplus
to the Office of Procurement.
Such surplus stocks, once identified, may be usable by other State
agencies. If the Office of Procurement has a record of existing surpluses
of expendable goods against which to screen agency purchase requests,
it may be possible to effect interagency transfers or sales in lieu of
the purchase of additional supplies. The study team is, however, realis-
tic enough to anticipate that no large amounts of surplus will be "found"
by State agencies and probably only limited stock transfers will be
achieved. The immediate value of requiring agencies to conduct inven-
tories and seek out surplus will be to alert agency managers to the
size and value of their inventories and equip them to report information
needed by the Office of Procurement to establish contracts for expend-
able goods which rely on supplier inventories rather requiring large
stocks be maintained in State inventories (see recommendation #3).
3. Require the Office of Procurement to screen all purchase estimates for
expendable goods and, where possible, establish local purchases con-
tracts for such goods which rely on supplier inventories.
Many items now maintained in agency inventories in quantities equivalent
to a 90-180 day supply are readily available from suppliers able to
deliver to the point of use without substantial price increase or delay.
In such instances, State inventories unnecessarily duplicate those main-
tained by local suppliers.
We recommend that agencies submitting purchase requests for expendable
goods to be maintained in inventory storage be required to show on the
purchase estimate the following information:
That the ordered goods are regularly maintained in inventory stocks.
The average or estimated quantity required for a 6 to 12 month period.
The minimum delivery lead time required by the agency.
The Office of Procurement will accept the purchase estimate as authori-
zation to establish contracts with suppliers to fill such needs. Such
contracts will provide for simple and direct ordering by the agency from
the supplier at predetermined prices and/or discounts but limit such
orders to quantities not exceeding a normal 30 day supply. Such con-
tracts will also stipulate that items covered by the contract may not be
maintained in inventories in quantities exceeding a normal 30 day supply.
Office of Procurement will assume expendable goods purchases for which a
delivery lead time of less than 3 days is unacceptable or "contingency"
stocks maintained in inventory at all times to meet emergency needs
-10-
APPENDIX A (Cont.)
involving the protection of public health, safety or welfare. Purchase
requests for such contingency stock should be accompanied by a descrip-
tion of the anticipated emergency, the probable consequence of not
having replacement stock immediately on-hand and the quantity of stock
normally required to meet such emergencies, 80 that the ordering agency
management recognizes it is creating a continuing inventory cost and
reviews the validity of doing so. This information will also permit the
Office of Procurement to establish supplier contracts specifically
designed to meet the crisis needs associated with these expendable goods.
We recommend that such purchase estimates for "contingency" stocks be
reviewed and approved by the chief administrative officer of the depart-
ment, institution or college or an appropriate managerial person to
which this approval authority has been delegated.
The Office of Procurement will actively screen such "contingency" supply
requests and isolate those requests which appear to be unjustified.
Such requests will be returned to the ordering agency for re-evaluation.
By requiring agencies to provide such information, the Office of Procure-
ment will be able to convert many such expendable goods purchase requests
from stocks held in storage to contract purchases relying upon supplier
inventories. Within 12 months agencies will then have the opportunity
to reduce or eliminate continuing inventories of goods available, under
such contracts, from local suppliers. Exhibit IV is a suggested manage-
ment memo on this subject.
We estimate that if this procedure is actively pursued, a $4-5 million
inventory reduction can be achieved in a period of 12 months.
4. Require agencies, when ordering supplies from the Department of General
Services, Central Stores, to have such commodities delivered directly
to the facility nearest the point-of-use.
Exhibit V is a suggested State Administrative Manual revision on this
subject. This policy will substantially reduce multiple and unneces-
sary handling of goods available from the Department of General Services,
Central Stores.
Summary
It must be noted that reduction of on-hand inventories does not automatically
reduce the State's continuing related operating costs. A half-empty warehouse
costs substantially as much to operate as does a full one. Corollary reduc-
tions in warehouses, staff and equipment must be made by individual agencies
to achieve an effective inventory management program. Section III of this
report includes actions to substantially reduce these operating costs and
must be aggressively implemented to accomplish the overall savings envisioned
by the Governor's Task Force.
-11-
APPENDIX A (Cont.)
III Recommendations for Long Term Materials Management (12 - 36 Months)
The State faces several basic problems in permanently reducing inventory
costs (1) overcoming the current management apathy toward inventory manage-
ment (2) duplicate inventories in redistribution warehouses and (3) over-
stocking at point-of-use facilities. The study team, therefore, makes two
basic policy recommendations followed by a series of recommended actions
necessary to implement these longer term policies.
5. The Department of General Services act as the central warehousing program
for the State and the eight redistribution warehouse programs operated
by agencies other than the Division of Forestry be transferred to the
Department of General Services. (See Exhibit I)
The eight redistribution warehouses maintain inventories duplicating
those at point-of-use. Operating such overlapping warehouse programs
not only represents an uneconomic use of inventory funds ($5,000,000), man-
power (148 positions), equipment (86 pieces) and space (300,000 sq. ft.) but
also results in the shipments from these warehouses to virtually identical
locations being split into uneconomically small and multiple units. (Map B)
The inventories maintained in these facilities already contain substan-
tial amounts of items obtained from the Department of General Services,
Central Stores (see Exhibit VI). In addition, a number of items in
these warehouses purchased from non-stores suppliers appear to be sub-
stantially similar and, therefore, unnecessarily duplicated because of
the multiple inventories.
We estimate the total operating costs of these eight agency-operated
programs to be at least $1,500,000 annually exclusive of freight on
outbound shipments.
Integration of these eight facilities into a centralized warehousing
program will produce savings in several ways.
Operating Costs - We estimate that an integrated warehousing program
can reduce space required from 300,000 sq. ft. to less than 200,000 sq. ft.
and staff from 148 to less than 80 positions. This would result in an
annual savings of at least $700,000.
Inventory Reduction - Average inventory investment in these eight pro-
grams can be reduced from $5,000,000 to $2,500,000 for an annual savings
of approximately $100,000 ($2,500,000 at 4%).
Freight Costs - Based on total shipments from the warehouses of about
$10,000,000 annually, current freight costs are $500,000 to $600,000
annually. This cost can be reduced at least 20% or $100,000 by freight
consolidations from integrated facilities (see Map B).
The study team is confident that such an integrated central warehousing
program can result in annual savings of at least $900,000 and a one-time
net inventory reduction of at least $2,500,000.
Implementation of an integrated central warehousing program requires the
following basic actions in the general sequence in which they are listed:
-12-
APPENDIX A (Cont.)
6. Establish within the Department of General Services an ADP based
inventory control system capable of accommodating up to 50,000 line
items.
No attempt to operate an integrated warehousing system can succeed
unless adequate management control systems exist to both handle large
inventories and produce forecasts and related control data necessary
to reduce inventory investment. An integrated program as recommended
above would have to accommodate a total inventory investment of about
$4,000,000 and between 20,000 and 25,000 line items shipping to about
1,000 points throughout the State. Such an ADP system would cost at
least $100,000 annually.
Such a system has, as a basic ingredient, the adoption of standard
nomenclature and commodity coding similar to and based on the Federal
GSA system. This step is already nearing completion of its design and
application to expendable goods in the Department of General Services,
Central Stores program.
We are informed that implementation of such an ADP system, including
design, programming and trial periods, would require at least one full
man-year assuming one of several available software programs (e.g.
Honeywell "Profit", IBM "Impact", etc.) were used. We also are informed
that originally designed systems would require at least twice to three
times as many man-years to implement.
7. Re-engineer existing Department of General Services warehouse program
systems and methods to accept larger and more complex warehousing
activity.
The present Department of General Services, Central Stores, program is
not adequately effective in such areas as stock handling, space and
manpower utilization and shipping consolidation to accept management of
substantially larger inventory responsibility. The services of a quali-
fied industrial engineering consultant are required to establish effective
stock handling methods and standards for full utilization of manpower
and space.
Exhibit VII shows the sequence of actions required to prepare the
Department of General Services, Central Stores, program for operation
as an integrated centralized warehousing activity.
8. Augment the Service Revolving Fund in the amount of $2,500,000 to fund
a centralized inventory.
This $2,500,000 additional Service Revolving Fund allocation will be
required to fund the inventories required in the recommended centralized
integrated warehousing programs. The inventories of the eight agency
programs recommended for integration are funded from various sources,
other than the Service Revolving Fund. In a majority of programs, funds
used are essentially the operating expense allocations for supplies of
the parent departments.
This $2,500,000 additional capitalization of the Service Revolving Fund
is in lieu of the $5,000,000 now continuously required to fund the
aggregate inventories of these eight agency-operated redistribution
programs.
-13-
APPENDIX A (Cont.)
9. Achieve orderly transfer of these eight agency-operated warehousing
programs to the Department of General Services including required
staff, equipment and facilities (see Exhibit I).
These programs should be transferred, one at a time, to the Department
of General Services at 60-90 day intervals to permit the smooth tran-
sition to a centralized program. This transfer should begin only when
the Department of General Services, Central Stores program has developed
both the ADP and operating capabilities described in recommendations #7
and 8 above.
Assuming that the Department of General Services, Central Stores,
achieves the required capabilities described above by 12/1/68, we
recommend that these programs be integrated in the following order:
1. Department of Water Resources - 12/1/68
2. Board of Equalization - 2/1/69
3. Social Welfare - 4/1/69
4. California Highway Patrol - 7/1/69
5. Department of Motor Vehicles - 10/1/69
6. Employment - 1/1/70
7. Division of Highways, Sacramento - 3/1/70
8. Division of Highways, Los Angeles - 7/1/70
10. Establish a statewide program for effective management of agency-owned
expendable goods inventories.
The State's current policy on inventory management of expendable goods
is largely one of "abstinence." The Department of General Services,
through its uniform accounting system, should require departments
maintaining point-of-use inventories to (1) maintain adequate basic
inventory control stock records and (2) identify and report both inven-
tory investment and cost of ownership information. In addition, the
Department of General Services must develop and enforce general standards
for agency inventory management including, at least, space and manpower
utilization standards for warehousing operations and general standards
for levels of inventory investment.
The following are specific actions required to implement such a policy:
11. Establish, in the State Administrative Manual, a basic Statewide inventory
management policy, to be augmented by individual agencies and require
that the responsibility for inventory management within individual agen-
cies to be specifically assigned to an accountable person or position.
Exhibit VIII is an outline of a recommended general State inventory
management policy. Within the framework of this policy, individual
agencies should develop their own specialized policies and procedures
for effective inventory management. The responsibility for achieving
effective inventory management must be clearly identified as an area
for serious and continuing management concern. Funds budgeted for
expendable goods cannot be considered simply an unavoidable cost of
doing business but must be tightly managed and controlled.
-14-
APPENDIX A (Cont.)
12. Require agencies operating warehouses at any one location of more than
2,000 8q. ft. with average inventories of expendable goods exceeding
$10,000 to maintain stock records of expendable goods and to conduct
annual physical inventories.
Facilities of the size described above represent what the study team
believes to be the smallest practical unit for which unit stock records
can be economically maintained. Typically, smaller units do not have
the capabilities for required record keeping and are supplied from
larger warehouse facilities capable of maintaining overall stock records.
There are 216 units of the capacity described above which should main-
tain basic stock records.
13. Utilize the ADP system established to manage the Department of General
Services Central Stores inventories to store and report basic data on
shipments to point-of-use warehouses both from the Department of General
Services Central Stores and other suppliers.
While a complete inventory control system for all State expendable goods
inventories is probably prohibitively costly, basic data easily drawn
from shipments by Central Stores and purchases made from suppliers by
the Office of Procurement for delivery to point-of-use warehouses will
provide adequate control data on inventories not directly managed by
the Department of General Services. This data, in conjunction with
regular by-product reports from annual physical inventories, will per-
mit the Department of General Services to oversee and control expend-
able goods inventories throughout the State.
14. Require agencies maintaining point-of-use inventories to classify items
stocked as either "contingency" stock or "regular expendable" stock and
to record the individual or unit to whom "contingency" items are charge-
able.
Most point-of-use inventories contain stock items which are maintained
as insurance against serious emergency needs for which immediate replen-
ishment is required (i.e. critical electrical, plumbing, and communica-
tion parts, firefighting supplies, etc.). Such items should be largely
exempt from general inventory standards derived from usage history. To
prevent the arbitrary and uneconomic overstocking of such items or the
improper classification of items as "contingency", however, agencies
must identify which person or unit is responsible for this portion of
the inventory investment and be required to periodically review the
validity of the management decision to maintain such stock without regard
to ownership cost. Such stock classification greatly expedites auditing
of inventory investment and control procedures.
15. Require agencies to annually report to the Department of General Services,
Office of Procurement, all expendable goods regularly maintained in con-
tinuous inventory by classification, commodity description, value and
approximate annual usage.
Information on inventories maintained by agencies, including the usage
history of such items, will permit the periodic review of overall State
inventory investment and the identification of repetitively used items
suitable for contract purchase or inclusion in a central warehousing
program. Such information should be made a regular by-product of regular
physical inventories.
16. Establish general standards for audit of unit stock records.
Expendable stock should turn over at least 3.0 times annually. Stock
with less active usage should either be purchased in smaller quantities,
purchased seasonally (1f usage is seasonal) or should not be stored at
15.
APPENDIX A (Cont.)
all. Periodic field audits should be made to determine if inactive,
obsolete or excessive stocks are being maintained. Such an audit review
can be included in the regular Department of Finance audit or internal
department audition activity but will require sampling audit by the
Department of General Services. Exhibit VIII, Outline of Basic State
Inventory Management Policy, contains such auditable standards.
17. Establish, in the Department of General Services, Office of Procurement,
sufficient staff capability in inventory management to (1) effectively
manage the Department of General Services operated central warehousing
programs (2) recommend to the Director statewide inventory management
policies and standards (3) conduct periodic field audits of agency-
operated warehousing programs and (4) assist agencies in increasing
the effectiveness of their inventory management.
Nowhere in State government is there any organization specifically
responsible for, or sufficiently expert to advise on statewide inventory
management particularly as this field relates to activities such as
purchasing, traffic, transportation and warehousing. Clearly all of
these areas of State's business activity are within the scope of the
Department of General Services' interest. Private industry has long
recognized that effective management of its inventory operations is one
key to economies in operation and have developed staff capability to
achieve it. The Federal Government has, in both its military and
civilian operations, developed major inventory management programs.
For example, in the San Francisco regional office of G.S.A., nearly
25% of the staff assigned to that office are in its inventory control
activity (as distinguished from its purchasing, warehousing and quality
control department). Such a basic unit is recommended in the Governor's
Task Force and initial first phase staffing is contained in the recent
Office of Procurement reorganization plan.
18. Establish standards for and maintain a master record of State warehouse
facilities.
The study team found no central record of the State's capital investment
in warehouses and related facilities nor did it encounter any policies
or standards covering the expenditure of funds for such facilities. The
study team strongly recommends that the Department of General Services,
Facilities Planning Division or other appropriate unit, utilize the data
gathered for this report to establish and maintain such a master record.
We further recommend that warehousing space, manpower and utilization
standards evolved from the re-engineering of the Department of General
Services, Central Stores warehouses, as recommended in #3 above, be
expanded into statewide standards which can be used both for audit of
existing facilities and to assess agency requests for additional storage
facilities.
19. Reduce and consolidate district type warehousing operated by State agencies.
Within several large agencies such as Division of Highways, Forestry,
Fish and Game, Parks and Recreation and Water Resources a special prob-
lem has been created by the geographic organization of these agencies.
The problem is best described as "stepped warehousing" in which the
agency divides the State into regions or districts and establishes
within each self-contained warehousing systems, operating largely
independently of both other warehousing systems within the same agency
and similar warehousing systems operated by other agencies.
-16-
APPENDIX A (Cont.)
The principal criticisms the study team has of such situations are:
1. Patterning warehousing and distribution systems around geographic
divisions of work does not result in economic or effective inven-
tory management. While it may be necessary, for example, to
divide the State in 12 highway districts it does not follow that
required warehousing and distribution requires 12 independently
operating warehouses.
2. Despite differences in program missions of individual agencies,
many such "district" type storage facilities tend to cluster at
the same points. It is not unusual to find, within one small area,
several "district" storage facilities operated by several agencies
functioning almost completely independently. Stocks in these ware-
houses are, at least in part, duplicate items and the aggregate
square footage, manpower and equipment utilized substantially exceeds
that which would be required by a consolidated facility.
Some examples of such concentration of independent storage facilities
within single small cities are:
Bishop
San Bernardino
Forestry
4,710 sq. ft.
Forestry
3,520 sq. ft.
Fish & Game
5,320 sq. ft.
Highways
8,236 sq. ft.
Highways
7,880 sq. ft.
General Services
2,340 sq. ft.
17,910 sq. ft.
14,096 sq. ft.
Eureka
San Luis Obispo
Highways
12,292 sq. ft.
Forestry
2,310 sq. ft.
Parks & Rec.
2,738 sq. ft.
Highways
21,989 sq. ft.
Fish & Game
777 sq. ft.
24,299 sq. ft.
15,807 sq. ft.
Red Bluff
Stockton
Fish & Game
2,000 sq. ft.
Agriculture
1,250 sq. ft.
Forestry
8,420 sq. ft.
Highways
9,670 sq. ft.
Water Resources 9,300 sq. ft.
General Services
1,634 8q. ft.
19,720 sq. ft.
12,554 sq. ft.
Redding
Fish & Game
7,760 sq. ft.
Forestry
18,070 sq. ft.
Highways
7,816 sq. ft.
33,646 sq. ft.
We must recognize that many of these facilities are associated with gen-
eral purpose installation and complete elimination of independent storage
activities in favor of consolidated facilities is not feasible.
We do, however, believe, that (1) more district type facilities have
been established than are actually required because of the "self-
contained district" organizational concept and (2) jointly housed and
operated facilities in such areas as Bishop, Eureka, Red Bluff, Redding,
San Bernardino and San Luis Obispo, under the management of the largest
tenant, could materially reduce inventory management cost.
-17-
APPENDIX A (Cont.)
Agencies operating district facilities should be required to
explore methods of sharing space and consolidating inventories.
In addition, the agencies should be required to thoroughly re-
evaluate their self-contained district warehousing programs and
consolidate facilities into regional systems capable of multi-
district supply support. Exhibit IV lists all State storage
facilities identified by this study used for expendable goods
inventories and clearly reflects this overlapping supply and
distribution system problem.
-18-
APPENDIX A (Cont.)
EXHIBIT III
SUGGESTED EXECUTIVE LETTER
Agency Administrators
Department Directors
Recently completed task force studies indicate that some State agencies are
maintaining inventories of expendable goods in uneconomically large quantities.
This results not only in an unnecessarily large amount of State funds con-
tinuously tied up in such inventories but also requires large continuing
expenditures for storage facilities, staff and equipment.
I have, therefore, instructed the Director of the Department of General
Services to immediately initiate a continuing statewide program to reduce
such inventories and related operating costs and to establish effective manage-
ment standards and policies governing such inventory investments.
As such programs and standards become operative, the management of individual
departments must reduce or eliminate all possible items from continuing inven-
tory storage and consolidate or eliminate unneeded storage and distribution
programs.
Ronald Reagan
Governor
-20-
APPENDIX A (Cont.)
EXHIBIT IV
SUGGESTED MANAGEMENT MEMO
TO: All State Agencies
SUBJECT: Expendable Goods Inventories
The Governor's Executive Letter
, requires all departments to elim-
inate unnecessary expendable goods inventories. To achieve this, the fol-
lowing actions are required:
1. All departments must review existing inventories of expendable goods and
identify surplus stock. For purposes of this review, stock exceeding a
normal 60 day supply should be considered surplus to inmediate needs
with the exception of (a) items readily available from supply sources
(b) contingency stock maintained for emergency needs involving public
health, welfare or safety or (c) items which must be accepted in large
single deliveries to conform to market practice or to achieve significant
unit cost savings.
2. Purchases of expendable goods for which surplus exists must be deferred
until such surplus is consumed. Departments must report to the Office
of Procurement surplus expendable items suitable for use by and available
for sale or transfer to other State departments. Departments which have
not conducted a physical inventory of expendable inventories within the
preceding 12 months should do so in determining the appropriateness of
inventory quantities.
3. Effective
, all purchase estimates, Form 66, submitted to the
Office of Procurement for repetitively used expendable goods (except
subsistence and related commodities) which are or will be maintained in
continuing inventory storage prior to consumption, must contain the
following:
A. Anticipated requirements for a period of at least 6, and preferably
12 months and funds adequate for anticipated purchases during a
comparable period.
Where inadequate data is avilable to project anticipated usage of all
items within a general class of expendable goods (maintenance, labora-
tory, photographic supplies, etc.) agencies may select the individual
items repetitively used in the largest quantities and include estimates
of anticipated usage of these benchmark items. Usage of remaining
items within the same general class of goods may be estimated in terms
of total dollars for the period.
B. Minimum delivery lead time required (interval between placing of order
and receipt of goods).
All such required delivery lead times must be stated as either
(a) contingency stock maintained for emergency use involving public
health, welfare or safety or (b) not less than 3 days (longer intervals
may be specified if acceptable).
-21-
APPENDIX A (Cont.)
Purchase estimates for contingency stock must be approved by the
department director, college president or chief financial officer
of the ordering organization and be accompanied by a description
of the emergency need anticipated, the probable consequence of delay
in obtaining the items and the maximum quantity normally required by
such emergencies.
Such expendable goods purchase estimates will be accepted by the
Office of Procurement as authority to establish local purchase con-
tracts with suppliers able to provide required expendable goods
within the specified delivery lead time.
Local purchase contracts will provide for direct ordering by the
State agency under predetermined prices or discounts from the supplier
by sub-purchase order and, except for contingency stocks, in quantities
not exceeding a normal 30 day supply. Agencies will use such contracts
with the stipulation that on-hand inventories of expendable goods,
other than contingency stocks, covered by the contract will be reduced
to a 30 day supply or less or, if possible, completely eliminated.
C. Agencies may specify, for inclusion in the purchase contract, informa-
tion to the supplier on authorization to place orders, invoicing,
delivery instructions, etc.
Agencies are encouraged to adopt the simplest and most direct method
possible for placing orders and paying invoices under such contracts.
Unnecessary reviews, approvals, documentation and other delays will
negate much of the value of such rapid stock replenishment contracts.
-22-
APPENDIX A (Cont.)
EXHIBIT V
RECOMMENDED SAM REVISION
ORDERING SUPPLIES FROM STORES
3543
Requisitions for Stores stock items are submitted only on Form 116, Supply
Order. (Sub-purchase order forms will not be used for ordering of Stores
stock.) All supply orders, regardless of area of origin, should be forwarded
to the Central Stores Manager, P.O. Box 20191, Sacramento 20. All supply
orders must indicate the catalog stock item numbers in the space provided on
Form 116.
Delivery addresses shown on Form 116 must be the facility nearest the point
of use capable of accepting shipments. Agencies may not order delivery of
supplies from Stores to intermediate warehouses for redistribution to other
locations. While agencies are encouraged to order supplies as infrequently
as practical, those agencies located in buildings with limited storage space
should order supplies delivered directly to those buildings in whatever quan-
tities that can be conveniently handled. List prices of Stores supplies
include freight, therefore, no additional cost to agencies results from
increasing the frequency and decreasing quantities of orders to conform to
available space at the point of use.
CENTRAL STORES CATALOG AND PRICE LIST
3544
Stores issues a catalog and interim revisions listing and describing all
available stock items and providing information necessary for requisitioning
commodities from Stores stock. Periodically, Stores issues a supplemental
price list for agency information and, on a more frequent schedule, a bulletin
containing information about new products, product uses, changes in procedure,
etc. List prices are F.O.B. destination and freight on all shipments are pre-
paid by Central Stores regardless of destination within the State.
-23-
EXHIBIT VI
SACRAMENTO REDISTRIBUTION WAREHOUSE LINE ITEMS ANALYSIS
Commodity
EMPLOYMENT
EQUALIZATION
FORESTRY
HIGHWAY PATROL
Total
Total
Percent
Total
Total
Percent
Total
Total
Percent
Total
Total
Percent
Line
Items
Items
Line
Items
Items
Line
Items
Items
Line
Items
Items
Items
C/S
Dupli-
Items
c/s
Dupli-
Items
C/S
Dupli-
Items
c/s
Dupli-
cated
cated
cated
cated
Forms
1625
47
2.9
600
100
16.6
335
35
10.4
500
50
10
Janitorial
Supplies
78
33
42.3
10
10
100
84
42
50
170
85
50
Office
Supplies
782
424
54.2
600
590
98.3
175
175
100
700
630
90
Handtools
1
120
6
Medical
Supplies
29
24
25
Automotive
Supplies
19
5
26.5
500
Other
Misc.
180
198
16
8.1
28
Total
2515
504
20.1
1390
700
50.4
955
273
28.6
1929
765
39.6
APPENDIX A (Cont.)
Total
c/s
%
Total
c/s
%
Total
c/s
%
Total
c/s
%
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Space
32,207
7,118
22.1
10,800
4,374
40.5
9,288
1,393
15
19,980
7,393
37
SACRAMENTO REDISTRIBUTION WAREHOUSE LINE ITEMS ANALYSIS
(Page 2)
Commodity
HIGHWAYS
MOTOR VEHICIES
SOCIAL WELFARE
WATER RESOURCES
Total
Total
Percent
Total
Total
Percent
Total
Total
Percent
Total
Total
Percent
Line
Items
Items
Line
Items
Items
Line
Items
Items
Line
Items
Items
Items
C/S
Dupli-
Items
c/s
Dupli-
Items
c/s
Dupli-
Items
c/s
Dupli-
cated
cated
cated
cated
Forms
500
225
45
1080
11
1
1,776
71
4
438
134
30.6
Janitorial
Supplies
62
6
9.6
86
63
73.2
69
59
85.5
Office
-25-
Supplies
500
400
80
600
490
81.5
485
422
87
1,500
1,200
80
Handtools
100
5
102
Medical
Supplies
26
16
46
Automotive
Supplies
1
1
1
100
Other
Misc.
2,501
81
3.2
91
99
74
18
24.4
Total
3,690
712
19.3
1,879
565
30.1
2,360
493
20.9
2,229
1,411
63.3
APPENDIX A (Cont.)
Total
c/s
%
Total
c/s
%
Total
c/s
%
Total
C/S
%
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Whse.
Sq.Ft.
Dupli-
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Sq.Ft.
Used
cation
Space
89,405
21,099
23.6
47,940
7,239
15.1
14,500
2175
15
25,000
7,875
31.5
INVENTORY REDUCTION
DEPARTMENT OF GENERAL SERVICES
REDISTRIBUTION
WAREHOUSE
INVENTORY MANAGEMENT
CONSOLIDATION
OCTOBER 1, 1967
JULY 1, 1967
CONTRACT
PURCHASES REDUCE
LEAD TIME STOCK
WAREHOUSING
OPERATION
INDUSTRIAL
TRAFFIC OUTBOUND
CAPABILITY
ENGINEER CONSULTANT
SHIPMENTS INCREASE
HIRE 90 DAYS
SERVICE LEVEL
48 HOUR SERVICE
ESTABLISH SPACE AND
MANPOWER STANDARDS,
OPERATIONAL
LAYOUT ANO ORDER
CAPABILITY
PROCESSING PROCEDURE
INTEGRATE BLDG.
DEVELOP PROGRAMS
EVALUATION AND ACCEPT
E.D.P.
PROGRAMMING
SYSTEM TEST
INTEGRATE
DEPARTMENT OF
AND
E.D.P. SYSTEM
STATEMENT -
SYSTEM
DEVELOPMENT
AND
REMAINDER
"PROFIT
GROUNDS INVENTORY
WATER
DESIGN
DEVELOPMENT
OF D.G.S. INVENTORY
NEEDS
SOFTWARE"
DEBUG
INTO SYSTEM
RESOURCES WHSE
UTILIZE
SYSTEM ACCEPT
NEW
STOCK ITEMS
-26-
HA 1181HX3
APPENDIX A (Cont.)
INVENTORY
HIRE I/C
OUTPUT DESIGN
INPUT PREP. CODE,
MANAGEMENT
SUPERVISOR AND
REPORTS, INQUIRY,
DESCRIBE HISTORY,
CAPABILITY
I/C ANALYST
AUDIT TRAIL, INVOICE
FACTORS
ESTIMATED
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
MONTHS
REQUIRED
APPENDIX A (Cont.)
EXHIBIT VIII
OUTLINE OF BASIC STATEWIDE INVENTORY
MANAGEMENT POLICY - EXPENDABLE PROPERTY
I General Policy
A. The Department of General Services will function as the central ware-
housing organization for all State agency requirements of repetitively
used expendable items. Agencies may maintain continuing inventories
of expendable items only at the point of use of such items. Except in
storage facilities at or near the point of use, agencies may not dupli-
cate inventories of expendable goods maintained by the Department of
General Services, Central Stores, or operate warehousing facilities for
this purpose.
B. Agencies are responsible and accountable for their continuing investment
in expendable property inventories and for operating costs generated by
the continuing maintenance of such inventories. Such inventories and
operating costs shall be no greater than is actually required or economi-
cally justified and will be subject to periodic audit to assure that
individual agency managers have regularly and effectively maintained such
inventories and related operating costs at the lowest practical level.
C. Expendable items will be maintained in continuing inventory storage only
where such items are required for emergency needs involving public health,
welfare or safety, are not readily available from supplier inventories
or, because of their specialized nature, must be accepted in large single
shipments to achieve maximum net savings or conform to market practice.
The Department of General Services, Office of Procurement, will be respon-
sible for establishing effective purchase methods for expendable items
which provide means to reduce the quantity and type of expendable items in
State inventories. The Office of Procurement will also be responsible to
recommend policies and procedures to reduce the State's expendable inven-
tories investment, review agency inventory control practices and recom-
mend to agencies actions to achieve more effective inventory management.
II Agency Inventory Management
A. Agencies will maintain such unit stock records as are required to permit
(1) management analysis of probable future needs for expendable items
(2) identification and reporting of the value and content of such con-
tinuing inventory and (3) the reconciliation of periodic physical inven-
tories of such items.
B. Agencies will annually report to the Department of General Services,
Office of Procurement, all expendable items maintained in continuing
inventory in any one location in quantities averaging $100 or more during
the previous 12 months, except those items obtained from the Department
-27-
APPENDIX A (Cont.)
of General Services, Central Stores. Such reports will show for each
item, the description, location, source of supply, last unit price
paid and total quantity used for the period.
C. Expendable items maintained in continuing inventory will be classified
by stock categories indicating the purposes for which they are stored
to permit the reporting of inventory information in terms directly
related to the program mission of the agency. Such categories must be
designed to clearly show which agency sub-program needs are creating
these inventory costs and the specific program function to which such
continuing inventory costs should be related. Continuing management
review must be given to contingency stocks maintained to meet emergency
needs involving public health, welfare or safety to assure that the most
economic and effective methods are employed to meet such emergencies.
Program managers ordering that such stocks be held in stock must be made
aware of, and periodically required to review and justify the continuing
cost of maintaining such inventories.
D. Agencies shall, within the general framework of this policy, develop
and establish internal policies and procedures to control and minimize
inventory investment and related operating costs. Such policies and
procedures must contain at least the following:
1. Specific assignment of management responsibility for effective
inventory control of both agency wide level and within each organi-
zational unit which maintains continuing inventories of expendable
goods.
2. Policies and procedures governing the size and scope of continuing
inventory investment, criteria for establishing stock levels, methods
for generating control data for management of inventory investment
and operating costs; standards for utilization of storage space and
related manpower and equipment and procedures for periodic manage-
ment review of inventory control effectiveness.
3. Procedures for generating and reporting to the Department of General
Services, Office of Procurement, information on expendable property
requirements necessary for the effective consolidated purchase of
such items.
-28-
COST-SAVINGS ANALYSIS
$40 Million
Statewide Inventory Investment
$30 MillioN
4 Millions
REDUCTION
7 MILLION
$20 Million
Statewide S Costs
12.5 Million
$10 millioN
Statewide Operating Costs
SAVINGS
1MIILION
3 million
1 year
2 years
3 years
4 years
5 years
$5 MillioN
4 MILLION
4million
-67- General Services Costs
3 Million
c/s Inventory
3millioN
APPENDIX A (Cont.)
2 Million
2 MILLION
GLS - Operating
Costs
I Million
1MillioN
500,000
EXHIBIT IX
APPENDIX A (Cont.)
MAP A
STATE OF CALIFORNIA
STORAGE LOCATIONS
Redistribution Warehouse
(16)
Point of Use Warehouse
(216)
(over 2,000 Sq. Ft.)
Not Shown Point of Use Storage Facility (414)
(under 2,000 Sq. Ft.)
TOTAL STORAGE LOCATIONS
646
Sacramento
San Francisco
Los
Angeles
San Diego
APPENDIX A (Cont.)
MAP B
STATE OF CALIFORNIA
DUPLICATE ROUTING OF SHIPMENT
FROM EIGHT REDISTRIBUTION WAREHOUSES
IN SACRAMENTO
:-
:-
3-4 R/D Warehouses Making Shipments to the Same 52 Cities
:
5-6 R/D Warehouses Making Shipments to the Same 20 Cities
7-8 R/D Warehouses Making Shipments to the Same 19 Cities
Sacramento
San
Francisco
B
:-
X
8
:
Los
Angeles
San Diego
&
2
APPENDIX B
State of California
Revenue and Management Agency
Memorandum
To
:
Mr. John Berke
Date : February 19, 1970
Commission on California State Government
Organization and Economy
File No.:
11th and L Building, Suite 550
Sacramento, CA 95814
From : Department of General Services
OFFICE OF PROCUREMENT-Sacramento
Subject:
Per your phone request, here is a current list of the State Office of
Procurement's annual purchases by broad commodity groupings:
Commodity
Purchase Orders
Annual Contracts
Electrical Equipment
$ 8,569,000
$ 406,000
Research & Laboratory Equipment
5,139,000
- -
Highway Patrol Vehicles
--
5,564,000
Automotive General Purpose
6,877,000
4,930,000
Vehicles and Equipment
Food
14,667,000
10,842,000
Office Supplies & Stationery
4,449,000
771,000
Agric. Supplies & Feed
3,311,000
-
Communication & Electronic Equipment
5,188,000
480,000
Mineral Construction Materials
6,712,000
--
Office Machines
2,563,000
961,000
Furniture
3,076,000
614,000
Drugs
3,619,000
2,276,000
Gasoline & Petroleum
137,000
11,177,000
All Others
23,319,000
14,353,000
TOTALS
$ 87,626,000
$ 52,374,000
FranbE. Oliver
Frank E. Oliver
State Procurement Officer
FEO:kt
cc: J. S. Babich
R. L. Vance
J. Knibb