May 2012

Inventory Management: Building a Transit Supply Chain Network

by Naeem Farooqi

Few North American transit systems have been bold enough to challenge long-standing beliefs about parts inventory management. These transit systems think of parts inventory not as a method to hedge against stock-out risks, but as a component of an integrated network of part sourcing, delivery and usage. Underlying this paradigm shift has been the adoption of best practices from leading retail, automotive and consumer electronic supply chains.

This article will chronicle the experience of Canadian-based Metrolinx in developing an integrated vendor-managed inventory network across Southern Ontario.

Identifying the problem
In 2009, Metrolinx recognized the prevalence of inventory stockpiling practices across transit properties. To identify the cause of these lead times, Metrolinx commissioned a survey examining key inventory practices across Southern Ontario. It became evident that the threat of an out-of-service fleet was real, as long part inventory lead times, sometimes in excess of eight to 12 weeks for single parts, had become standard.

In many industries, similar statistics will prompt critical evaluation of how value can be maximized. However, in an area that has been the domain of power for suppliers than fleet managers and stockroom staff, these metrics tell only half the story. Consultation with key stakeholders across transit properties revealed the unique challenges related to the administration of transit properties. Procurement, finance and legal departments are but a few of the many stakeholders that influence what have become inefficient inventory procedures.

The Metrolinx experience affirmed that a project that seeks to dissect and reassemble the parts inventory supply chain requires interaction with all the key players as early as possible to develop a unified strategy.

Through the assembly of a team of core transit properties across Southern Ontario, Metrolinx began formulating a plan to minimize parts inventory costs and lead times on a regional basis.

Equally important was to open up lines of communication with fellow transit properties to share knowledge they have acquired by developing a Vendor Managed Inventory (VMI) system. VMI is a model of using a single supplier to plan and replenish all transit parts across one or more transit properties. Learning from the successes and challenges of properties adopting VMI enabled Metrolinx to avoid costly delays in establishing a similar inventory supply chain. For example, discussions with N.Y.-based

Rochester-Genesee Regional Transportation Authority led to the following:
•    The identification of benchmark data for key performance indicators related to the current supply chain.
•    Deeper understanding of transit information technology integration policies and potential hurdles.
•    The general support of the shop room floor.

Charting new territory
The business case for building a new materials supply chain is strengthened by the clear cost savings derived by adopting unified sourcing, delivery and storage techniques. As part of this paradigm shift, Metrolinx examined 10,000 parts SKUs to determine the savings potential. While reviewing these parts, it became apparent that apart from transit jargon, there was a third language with the transit industry around part descriptions, which tended to vary from each property regardless of the fact the part number was the same. The analysis yielded for a fleet mix 70% specific to one bus assembler a parts match of only 7% from which the matched parts had a variance of 36.2% on average in price. An exercise of checking prices among peer transit systems was never carried out on this scale in Ontario. This discovery increased the interest of the core group of transit properties to explore this dynamic further.

Using an RFI
The supplier community was also interested in developing a unified inventory management system. By soliciting a Request for Information (RFI) to transit parts supplier in the region, Metrolinx asked suppliers 25 questions, including whether and how much they could save through this initiative. Utilization certainty and minimization of procurement costs were cited as key advantages to realigning the material procurement process. These findings strengthened the business case by gauging supplier interest and testing cost scenarios.

The RFI results provided the first form of engagement with the supplier regarding the potential benefits to be expected. These findings for Metrolinx help solidify the business case to move the project forward. Developing a strong financial model early on is a critical step to generate buy-in and delivery of a VMI system.

We recognized that getting better transit bus supply chain knowledge and access is at the heart of getting results from VMI. The same parties that can provide these benefits do not have the expertise in rail or general auto, and vice-versa. Just like you wouldn’t buy buses and railcars from the same supplier, keeping the VMI program focused on the relevant supply chain helps capture maximum benefits.

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