Centre for Excellence in Operations

Project 10: Inventory Management at a Major Utilities Company

Detailed report

This project deals with inventory management for The Client, a major player in Alberta?s recently deregulated electrical utilities industry. The company currently holds in excess of $15 million in spare parts inventory between three power generation facilities in Mid-Western Alberta. These inventory items are used to service the generation facilities, and so are critical to the continued operation of the company. Nonetheless, the company wants to release some capital from its inventory investment by simply reducing inventory levels. The stochastic consumption of spare-parts inventory makes the possibility of stockouts a very real threat. The goal of this project, then, is to 'right-size' inventories such that the total level of inventory held can be reduced while not exposing the company to the risk of stockouts, which can cost the company in the neighborhood of $1 million per hour if the generation facilities have to be such down. Obtaining this delicate balance is our objective.

The current inventory management system within The Client has many problems, not the least of which is the broad range of products. The variation in the value of inventory items held is quite staggering: they range from mere pennies per item to over $120,000 per item. Despite the various characteristics of the inventory items, such as the turnover ratio, price, and function of the items, all inventories are treated quite similarly within the system.

Our approach to rectifying the current inventory situation was to build a decision support system (DSS) that could simulate the consumption of various inventory items. Different minimum and maximum inventory levels could then be examined while the costs of such strategies were explicitly evaluated. The inputs of the system are cost measures such as the cost of carrying, ordering, and running out of inventory, as well as the historical consumption patterns of the inventory itself. The outputs are a fill rate, a breakdown of total costs, and an aggregate view of the tradeoff between holding too much inventory and the potential costs of holding too little on a per-product basis.