Making the case for inventory optimization

How to use inventory analytics to your advantage

The days of inventory being considered an asset with expected rate recovery are long gone. Inventory investment is increasingly under scrutiny by both management and the utility commissions—meaning that inventory optimization needs to be effectively managed and budgeted.

The cost of carrying inventory

Inventory isn’t free. Chances are, you’re holding more inventory than is in your rate base, possibly diminishing your earnings potential through regulatory lag and O&M carrying cost expense.

Chief among the cost of inventory is its ongoing carrying costs—including warehouse facility costs, labor costs associated with managing inventory, and recurring costs related to taxes and insurance.

A secondary impact on inventory is related to regulatory lag. Inventory balances are typically included in the original rate base during rate case filings. Unfortunately, as inventory balances grow, that growth often isn’t reflected in the current rates. The utility suffers a lag or delay in being able to recover these costs (if ever) in their rates.

These two impacts on inventory costs help make the case for inventory optimization and using inventory analytics to your advantage.

Making the case for inventory optimization

The need for inventory optimization to manage unplanned costs

Perhaps the most worrisome costs are those that are unplanned and unforeseen. Many companies don’t adequately budget for annual obsolescence of aging inventory that’s no longer used and useful.

Once inventory is identified as obsolete, it must be segregated from inventory, with the book value written off to an operations and maintenance expense account. Most organizations assign obsolete inventory expenses directly to the business unit and asset base, and not at a corporate level. This practice may lead to disincentives on behalf of the business units to proactively assess their aging inventory.

Many companies do not adequately budget for annual obsolescence of aging inventory that is no longer used and useful.

Five levers of inventory management

There are five inventory management methods that all have unique impacts—companies can use one or multiple methods.

What inventory management method is right for you?

Adopting a holistic view of inventory management, combined with the use of marketplace tools, can help utilities control their inventory growth and improve inventory utilization. Deloitte has engaged with numerous clients across industries to help companies pull one or more of the five levers of inventory management.

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