How to Discover Hidden Cost Savings in Your Transit Operations

Almost every transit system in North America is looking for ways to cut costs, raise its revenue, or both – all while maintaining high service levels. One of the biggest sources of cost savings and cash generation is hiding in plain sight: your inventory of service and spare parts.

Here’s why you should pay more attention to it. Service and spare parts inventory ranks among the largest assets on the corporate balance sheet. Our research indicates that eight of the largest transit systems in North America (ranked by ridership) have approximately $850 million in materials and supplies inventory, of which about $650 million is invested in service and spare parts sitting in their distribution centers, stocking locations, and repair facilities. While much of this parts inventory is essential, some parts are over-stocked, some are under-stocked, and others are simply obsolete. The extent of misalignment defines the opportunity for improvement, and this can be very substantial.

Understanding the levels of inventory that will be required to meet parts demand – and protect the organization from fluctuations in demand – requires an accurate demand forecast. You need to know how many of which parts to have on hand. Ideally, you want to have the right part, at the right place, at the right time and the minimum amount of inventory necessary to meet a desired service level over a replenishment lead time.

There are a number of generic forecasting systems on the market that use historical data to project future demand, but they generally run into trouble when forecasting service and spare parts. Why is that? The big problem with parts inventories is intermittent, “slow-moving” demand. Every parts operation - large or small - experiences intermittent demand.

Here’s an easy way to explain the intermittent demand problem. Your organization probably stocks many expensive parts like axles, wheels and gears in case you need one of these items to repair rolling stock, and some of  these parts may be many years old. In some cases, it may take 6 months or a year to re-order them. As an example, you may need one axle this month and not need another for 4 months, and then you may need 3 axles. The demand for this type of item is intermittent, in contrast with a headlamp which you need to replace on a regular, recurring basis.

Intermittent demand is very difficult to forecast, and in many parts operations, it can be found in up to 70 percent of all items. There’s no way that your enterprise resource planning (ERP) system can accurately forecast the demand for that axle, wheel or gear. It wasn’t designed to do that.

Since intermittent demand is so hard to forecast, organizations often don’t forecast items that have it! They just forecast the items with “normal”, higher volume demand, and “eyeball” the 70 percent that remain. The result is unbalanced, often over-stocked inventories. And it’s in those unbalanced inventories where a lot of cash can be found hiding

Here’s the second big problem transit systems face in realizing cost savings: resistance to change. Transit systems have tremendous commitments to existing technologies like ERP systems. Some of those existing technologies work very well for their intended purpose. But, no system does everything well.

The right technology can provide better inputs to your ERP system that can help you achieve the cost savings you’re looking for. This is especially true when it comes to planning your service and spare parts needs.

So, how can you overcome resistance to change and find the cost savings hidden in your distribution centers and parts warehouses?

• For starters, we’ve found that successful efforts that achieve real cost savings always start at the top. Executive management needs to be committed and involved, and middle managers need to be accountable.

• Commitment needs to be clearly communicated to managers at the operational level to get buy-in across the organization and prevent units from working at cross-purposes.

• Look for a solution that can solve your problem. Specifically you want a solution that can not only accurately forecast intermittent demand but also tell you how much inventory and safety stock you need to cover demand over replenishment lead times. While most ERP systems, even those specializing in service operations, claim they can do the job, most cannot.

• How do you know? Make every vendor prove that they can solve your specific problem.  For example, Metro North Railroad (MNR) recently purchased a solution after exhaustively evaluating a number of vendors, and asked finalists to forecast MNR’s service/spare parts consumption, using actual MNR data. The best solution’s forecast accuracy outperformed its nearest competitor by 50 percnet. That kind of performance can be worth millions of dollars - not only in inventory cost savings, but also in increased ROI and reduced payback time.

• Normally, your IT department will become involved in the selection process. Most of the time, their inclination will be to use a solution that’s easiest for them or that they already know. Remember, the needs of the IT department and your department – even the organization as a whole – may differ. However, the less disruptive the solution you choose to existing systems, the less resistance you’ll get from others in your organization.

• Look at the total cost-of-ownership (TCO) of any solution you’re considering - initial purchase cost, ongoing maintenance costs, installation and training costs, time-to-results, projected payback and ROI. Having this kind of information can be very useful when trying to justify a purchase.

It’s not unusual for the right intermittent demand planning tools to achieve a 20 percent reduction or more in inventory levels, while maintaining or improving fill rates and service levels. If we take another look at that $650 million dollars worth of parts we referred to above, there’s probably at least $130 million of savings that can be found there and put to more productive uses.

You’re in business to service the public. If given a choice of saving millions by reducing customer service or by fixing an out-of-balance inventory situation, which would you choose? Maybe it’s time to take a look at your parts inventories, and find out what savings you’ve got hidden.

Charles N. Smart is president and CEO of Smart Software Inc., Belmont , Mass. , provider of the SmartForecasts demand forecasting, planning and inventory optimization system for transit agencies and other organizations in the transportation industry. He can be reached at charless@smartcorp.com or 1-800-762-7899.

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