Water and Wastewater Services Inventory Process Review

Transcription

1 Water and Wastewater Services Inventory Process Review May 30, 2006 Report No Evan A. Lukic, CPA County Auditor

2 Executive Summary This report summarizes our review of central warehouse inventory processes of the Water and Wastewater Services Division (WWS). WWS inventory is maintained in support of WWS service infrastructure and equipment and is valued at approximately $2 million. Our objectives were to review and evaluate the current WWS inventory process in accordance with County policies and industry standards. To accomplish our objectives, we performed interviews, reviewed supporting documentation, and toured the warehouse facility. Our review disclosed that the division does not have adequate processes to identify inventory loss, ensure accurate inventory records, and efficiently and effectively manage inventory. We recommend the Board of County Administrator to: 1. conduct a physical inventory count of all WWS inventory at all locations by this fiscal year end, September 30, 2006, 2. develop and formalize standard inventory procedures addressing routine processes and physical inventory counts, 3. reconcile the physical inventory count to the underlying system records and accounting system, 4. implement the use of automated ordering and monitoring reports, and 5. investigate the feasibility of interfacing the inventory system with the accounting system Purpose and Scope The objectives of our review were to review and evaluate the current inventory processes and procedures in accordance with County policies and industry standards. To accomplish our objectives, we: interviewed management, staff, and external consultants hired by WWS, reviewed available records and reports from the inventory and accounting systems (Maximo and Advantage), reviewed procedures, and toured the warehouse facility Background WWS operates within the Public Works & Transportation Department and is responsible for providing quality potable water and sewer services. The Division operates and maintains the County s water supply and drainage systems, two water treatment plants and one wastewater treatment facility. WWS employs operators, mechanics and electricians to repair and maintain the County s water and wastewater services infrastructure, such as pumps, lift stations, and water and sewer lines. The WWS Fiscal Operations Division (FOD) operates the WWS Central Warehouse, managing 3,500 types of inventory items valued at approximately $2.0 million. The inventory is carried for the purpose of maintaining the WWS service infrastructure and equipment. FOD Warehouse staff consist of one manager and three storekeepers responsible for inventory management, tool storage, and 1

3 non inventory shipping and receiving. Staff enter transactions into an inventory management system (Maximo 1 ). Transactions are also entered into the Advantage accounting system for financial reporting purposes. Primary inventory processes consist of the following: ordering, receiving, storing, and issuing. Ordering Warehouse staff periodically review selected inventory types and determine quantities to order. Orders are entered into the Maximo inventory and Advantage accounting systems. Receiving When items are received, they are stocked and dual entered as a receiver into the Maximo and Advantage systems. These entries increase the inventory balance in each system. Storing Items are grouped by type and stored within the warehouse and warehouse yard. Items are also held on various trucks and other locations maintained by WWS personnel. Issuing Warehouse staff receive electronic inventory requests through their work order system. The requests are distributed and the transaction decreases the inventory balance in the Maximo inventory system. Semimonthly, FOD staff run a Maximo inventory system report of all issued items per the Maximo inventory system and enter the totals into Advantage accounting system. This entry decreases the inventory balance in Advantage accounting system. 1 Maximo is an automated information management software. Inventory is one of nine distinct modules within this system. 2 Findings and Recommendations Finding 1 The inventory reported in the County s financial statements is not supported by physical inventory counts or underlying system records. Physical Inventory Counts Physical inventory counts have not been completely and accurately performed since July Prior to this time, partial physical inventory counts were performed on a periodic basis. Generally Accepted Accounting Principles (GAAP) require that a physical check of perpetual inventory records be made periodically (usually annually). Inventory quantities must be physically counted and reconciled to the Maximo inventory system in order to identify losses, detect errors, prepare adjustments, and provide accurate information for decision making purposes. An outside vendor performed a physical inventory count in June, 2005 at a cost of $5,200; however, staff were unable to reconcile and adjust the Maximo inventory system to the vendor count records. We noted the following contributing factors: The warehouse was not properly prepared. Barcodes located on physical location labels did not match those listed in the Maximo inventory system. Also, noninventory items were not adequately segregated from inventory. Furthermore, staff did not follow the outside vendor s recommendation to postpone the count until these issues were resolved. The process followed in reconciling the Maximo inventory system to the vendor s count was not in

4 accordance with instructions per the Maximo software manual. Standard procedures including warehouse preparation, preliminary testing, and coordination with the outside vendor were not developed and formalized. Procedures were limited to a one-page high level list of points and an . In order to ensure accurate inventory reporting, inventory should be tracked, monitored, and included in physical counts and records until such time as it is issued for use and expensed (i.e. a part is issued from the warehouse and installed on a pump). We noted that several unrecorded inventory locations such as inventory trucks exist that are not included in the Maximo inventory system or otherwise monitored. Underlying System Records As of September 30, 2005, Maximo inventory records showed $301,816 more inventory than the Advantage accounting system. At least annually, the Maximo inventory system should be reconciled to the Advantage accounting system in order to provide accurate information for decision making and financial reporting purposes (i.e. preparation of the Comprehensive Annual Financial Report (CAFR)). These systems are not reconciled. Recommendations Administrator to: Conduct a complete physical inventory count of all inventory at all locations including locations previously not monitored or recorded. Develop and formalize standard inventory procedures addressing routine processes and physical inventory counts. Reconcile the physical inventory count to the Maximo inventory system and to the Advantage accounting system. Finding 2 Staff do not utilize automated processes in ordering and monitoring inventory. The warehouse is primarily operated based on staff intuition and manual processes. Inventory is not effectively ordered and monitored due to the under utilization of automated processes. Ineffective ordering resulted in 469 out of stock items (13%) on September 9, As a result, customers (operators, mechanics, and electricians who repair and maintain WWS infrastructure) do not rely on the warehouse to obtain materials; instead, they make individual purchases utilizing purchasing cards. During fiscal year 2005, $653,545 of inventory and materials were obtained with purchasing cards whereas $831,465 of inventory and materials were obtained from the warehouse. Automated processes should be utilized in warehouse operations. These include the use of standard automated reports. Such reports specify what, when, and how much inventory to order. They also identify what items are highly used and what items may be obsolete. These reports result in more efficient and reliable decision making than is otherwise realized by guesswork and analysis on an item by item basis of the approximately 3,500 types of inventory. One type of automated report is a suggested order quantity report. This 3

5 report should provide a listing of all types and quantities to order based on factors such as current quantities in stock, order points, open orders, and expected usage. Warehouse staff do not use suggested order quantity reports. Instead, they individually analyze each inventory type based on intuition and manual processes. Another type of automated report is a turnover report. This report should provide ratios of usage to quantities in stock so that over and under utilized inventories may be identified. Management does not perform this type of monitoring. Recommendation Administrator to implement the use of automated ordering and monitoring reports. Finding 3 The Inventory and Accounting Systems are not Interfaced, Resulting in Inefficiencies. The Maximo inventory management system does not interface with the Advantage accounting system; therefore, transactions must be entered twice into each system. This duplicate data entry requires additional staff resources and increases the risk of errors in data entry (i.e. a transaction be entered differently into each system). Recommendation Administrator to investigate the feasibility of interfacing the inventory system with the accounting system. 4