Perspectives

Published Article

Looking for cash?

Questions an electric utility executive can ask about their inventory

We have been in an economic contraction for some time now. In February 2009, the Institute of Supply Management's Non-Manufacturing Index registered at 42.9 percent, indicating business contraction (i.e. anything lower than 50% is a contraction). Revenues are down in most business sectors including the electric utility sector, and major companies have cut dividends or postponed capital projects to conserve money.

For electric utilities, the need to keep generation plants up and running with minimal down time typically leads to a buildup of inventory with little regard for cost. As the economic downturn continues and acute financial pressures become more prevalent, keeping plants up and running becomes more of a focus and this augments the already existing problem of having too much inventory on-hand. Inventory management at power plants is generally viewed tactically vs. strategically (how do I make sure I have what I want vs. how do I make sure I have what I need). As a result, we rarely see a power plant with annual inventory turns exceeding 0.25.

In this write-up, we propose several questions utility executives can ask that will help them to better evaluate and improve their inventory management practices to release cash. The improvement ideas discussed are proven and based on work we've done for a number of utilities. We will walk through an overall framework on how to look at inventory management and discuss questions that can be asked across this framework. Ultimately we believe improving inventory management can help utilities release cash into other areas of their business particularly during this era of decreasing revenues, while maintaining or improving service-levels.

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