Electric Utility Inventory Analysis and Optimization

July 2013

Helping Electric Utilities Get the Right Level of Inventory

How Much Inventory Do We Need to Support the Company’s Assets?

Electric utilities are faced with steady demands for capital investments to upgrade and maintain infrastructure, address increasingly stringent regulatory requirements, and demonstrate leadership in sustainability. Simultaneously, regulators and rate payers want utilities to show an equal commitment to controlling costs to offset these expenditures.

Determining how much inventory is needed to support a company’s assets is one of the most difficult questions posed to electric utility supply chain leaders today. A utility’s generation, transmission, and distribution inventory can mean millions of dollars in valuable capital that could be used to meet its growing list of demands. The ability for electric utility supply chain teams to accurately determine the appropriate level of inventory to hold, based on operating profile and strategic plans, offers significant value in terms of financial performance and reliability of service.

ScottMadden has developed an Electric Utility Inventory Regression Report—fed by publicly available and self-reported data—to help our clients gain a better understanding of how much inventory they actually need. The report analyzes several data elements (e.g., generation capacity, miles of transmission, total customers served, generation, transmission, and distribution capital assets, and age of assets) and uses a regression equation to calculate a theoretical inventory level. More than 10 years of electric utility data went into designing the regression model. The report also provides utilities with key metrics to gauge how their inventory levels compare to other companies. A sample report is shown below.

For a limited time, ScottMadden is offering the Electric Utility Inventory Regression Report free to all utilities interested in learning more about their inventory performance and ScottMadden’s analysis capabilities. The report is only the first step in understanding if a company has the right inventory to support its assets.

Inventory – A Balancing Act

Optimizing inventory levels is a careful balancing act. Carry too much inventory and a company will unnecessarily burden its supply of capital that could otherwise be reinvested in growth opportunities or other strategic demands. Too little inventory, on the other hand, may reduce the reliability of operations by impairing the company’s ability to respond to damaged transmission assets, replace critical generator parts, etc.

There are multiple “drivers” of inventory level differences between companies including:

  • The relative mix of generation, transmission, and distribution assets (e.g., generation assets require more inventory than distribution assets)
  • The relative mix of generation assets (e.g., combustion turbine assets require more inventory than fossil assets)
  • The type of assets in service and the years they were placed in service (e.g., GE 7F gas turbine parts are 8 to 10 times more costly than those for EA turbines)
  • The company’s service territory (e.g., higher storm-incidence areas require more storm-restoration inventory)
  • The company’s strategy with respect to holding inventory (e.g., a strategy of holding combustion turbine generation rotable spares versus having the original equipment manufacturer hold a greater proportion of this inventory under long-term service agreements)
  • The company’s ability to share inventory resources across its service territory (e.g., Public Utility Commission restrictions may hinder the ability to share parts across state jurisdictions)
  • Management’s perception of the importance of inventory optimization and the resources applied to this issue

The ScottMadden Electric Utility Inventory Regression Report can only control a few of the factors listed above. Publicly available data serves as a general proxy for inventory performance but is insufficient to pinpoint the specific drivers of inventory levels. To truly understand the real drivers of inventory levels, supply chain teams must examine the practices and processes used to:

  • Plan and forecast the material needed to support its capital assets
  • Source and procure material
  • Manage the flow of material throughout the utility supply chain: 1. suppliers, 2. warehouse, 3. engineering and maintenance, 4. returns to warehouse, and 5. returns to suppliers

ScottMadden Supply Chain Support

ScottMadden’s long history of working with electric utilities and deep understanding of the key performance levers in supply chain gives us a clear lens through which to view efficiency and effectiveness. Additionally, ScottMadden’s proven methodology to uncover the true drivers of inventory levels and develop realistic improvement plans is the most comprehensive approach in the industry. We encourage you to learn more about our capabilities and opportunities to optimize your inventory levels.

To submit a request to receive a free ScottMadden Electric Utility Inventory Regression Report for your company or to learn more about ScottMadden’s supply chain practice, please contact us.

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Contributing Authors

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