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As a rule, governments have tended to maintain large quantities of inventory because the services provided by government are often perceived as being vital, and when so conceived there is a compelling rationale for holding a sufficient quantity of inventory in reserve so shortages cannot arise.

So, for instance, the United States believes it is necessary to maintain a war reserve supply plus sufficient material on hand to meet at least two years of expected peacetime requirements.

Even so, there is a clear limit on the benefit of extensive inventory holding. The record indicates too little supervision is exercised to determine when the optimal level of inventory is on hand.

A study by the General Accounting Office revealed the U.S. Department of Defense was holding as much as 100 years of needed inventory for some items.

For some other items, it was continuing to order new inventory even though it held 20 years or more of supply in hand.

Relevant considerations include the following:

• Does the item in question anticipate an emergency or other atypical need (e.g., the occasional June snowfall)?
• Is the item of a kind that is often subject to short supply in the spot market?
• Does this item have a long shelf-life?
• Is there a mechanism in place to ensure older inventory is the first to be consumed?
• Would it be more practical to enter into a pooled reserve arrangement with other neighbouring municipalities?
• Does the item relate to a kind of need that is likely to arise with little warning, leaving little opportunity for any alternative procurement?

The holding of an excessive quantity of inventory is costly. Such items must be stored, and stores must be placed under the care and control of staff.

The longer the inventory is held, the greater the risk it will become obsolete, perish due to natural aging or become stale, be broken, misplaced, stolen or simply become surplus to eventual requirements.

Estimates vary, but the Canadian federal government places the cost of its inventory holding in the range of 25 per cent of the purchase price.

Thus, there are obvious benefits in paring down inventory holdings to a minimum necessary level. The causes of excessive inventory vary from case to case, but the most frequent explanations are as follows:

• Poor record-keeping;
• poor monitoring of changing patterns of usage;
• a failure to check records to see what inventory is available (e.g., as a result of automatic repurchase orders being filled after an arrangement period of time); and
• the practice of purchasing a substantial volume of material either to establish the market for the material, or to guard against the possibility that an adequate supply will cease to be available in the market before the government need ends.

In terms of the determination of need, it is obviously unwise to place an order for new materials when there are existing materials in stock that are fully capable of addressing the requirements of the ordering department.

Often the cheapest way of addressing a need is merely to redeploy either from stock or from some other place where it is no longer being used.

Unfortunately, governments are large organizations and as a result it is far too easy for the right pocket not to what is available in the left.

An important responsibility for those involved in procurement is to ensure accurate and complete records are maintained of the materials on hand so that unnecessary orders are not placed.

Moreover, before any item is reordered on a routine basis, it is advisable to make sure the existing stock is continuing to be used.

Managing your inventory levels properly will result in a very large savings to the municipality.  

Stephen Bauld is a government procurement expert and can be reached at swbauld@purchasingci.com. Some of his columns may contain excerpts from The Municipal Procurement Handbook published by Butterworths.