Chapter 5: Asset and Financial Management
Reduce the State’s Use of Leased Warehouse Space
Summary
State agencies spend almost $3.8 million a year to lease 76 warehouses with almost 804,000 square feet of space. To reduce or eliminate unnecessary leased warehouse space, the General Service Commission should work with state agencies to review and evaluate the operations of the warehouses in Austin eligible for renewal after October 2001.
Background
The General Services Commission (GSC) reports that Texas state agencies occupy nearly 804,000 square feet of leased warehouse space.[1] GSC also controls about 198,000 square feet of state-owned warehouse space.[2] In Austin alone, agencies lease 21 warehouses at a cost of more than $2.2 million annually.[3] A recent report conducted for e-Texas indicated that four state agency warehouses store about $241 million worth of goods.[4]
The purpose of warehousing is to ensure that materials and equipment can be issued to customers when needed at the best possible cost. Too often, warehouses are used inappropriately to store items that could be promptly and directly delivered from a supplier to the customer, or end-user of the item. Further, some items that are stored cannot be efficiently accessed by customers because the customers’ needs are not readily identified and matched to available inventory in the warehouse. In fact, e-Texas consultants collected inventory information relating to 15 warehouses in the state and determined that nearly $242 million of the inventory could be considered overstock.[5]
Inventory Management in Other States
Government agencies across the country are adopting innovative practices to reduce warehouse costs. The State of Washington’s Department of Social and Health Services (DSHS) sells its surplus property on an agency Intranet and holds weekly warehouse open houses. In 1998, the department rented 60 warehouses throughout the state at an annual cost of $720,000 per year. Selling off surplus property yielded annual savings of $108,000 by eliminating nine rental storage units.[6]
Los Angeles County runs a “just-in-time” system for equipment and supplies that has eliminated the need to stock supplies over long periods of time. The system allows for the frequent delivery of goods as they are needed, shifting the storage burden to the supplier. After switching to this type of system, Los Angeles County was able to sell a 275,000 square-foot warehouse. The county now reviews its need for warehouse space as leases come up for renewal to ensure that space is used only to store essential items for brief periods.[7] The county also developed guidelines for disposing of surplus items over the Internet. Now county departments can post surplus property on an Intranet, where other departments can view them. If the items are not sold on the Intranet, they are listed on the Internet for public sale.
In Summer 2000, the Detroit Independent School District gave public school principals responsibility for buying all supplies independently without going through district Central Purchasing. An office supply business was selected through a competitive bidding process to provide schools with supplies, in exchange for receiving the schools’ excess supplies in storage. Schools receive a discount of up to 20 percent and next-day delivery. This agreement provided several benefits for both parties: the district was able to inventory all the items in its warehouse and discard obsolete items, and the office supply company received the remaining supplies in exchange for providing the schools with a credit toward future purchases. Because of the new system, the district reduced its need for warehouses, not only saving the district money, but also allowing it to have more control over existing inventory.[8]
Sandia National Laboratories in Albuquerque, New Mexico has adopted a procurement approach that allows the end user to order off-the-shelf, low-dollar items on a “just-in-time” basis, eliminating the need for conventional purchase orders and storage.[9]
Inventory Management in Texas
Lockheed Martin Tactical Aircraft System uses a procurement system called “on call” through which over 6,000 items such as office supplies or safety equipment can be delivered as needed. The system eliminates the need to warehouse many frequently used items.
The Comptroller of Public Accounts freed up over 4,000 square feet of warehouse space by outsourcing its outgoing mail operation; another 7,885 square feet of space was freed up by eliminating unneeded items with no monetary value. Planning is underway to determine whether the space can be transferred to another agency or to the outgoing mail vendor to reduce warehouse costs.
The Texas Department of Human Services (DHS) uses a combination of methods to obtain its office supplies, including credit card purchases, vendor delivery, and purchases from the Texas Industries for the Blind and Handicapped. DHS uses a system called “drop shipment,” which involves the delivery of items directly to the office where they will be used rather than distributing the items from a central agency warehouse. The delivery timeframe depends on the needs of local offices across the state and is worked out between the offices and vendors. The agency stopped using central warehouses to store office supplies and streamlined its disposal process.[10]
In June 2000, e-Texas consultants evaluated warehouse operations at six state agency warehouses and analyzed data at the Texas Department of Criminal Justice, the General Services Commission, the Department of Mental Health and Mental Retardation, and Department of Health. The reviews showed all four maintained excessive inventory in their warehouses. Examples included a 17.5 year supply of Polaroid film, a 21.3 year supply of screw cap vials and a 31.3 year supply of enema administration sets.[11]
Best Practices in Warehouse Use
Eliminating excess or unnecessary inventory is an important first step toward reducing warehousing costs. Surpluses must be sold off when possible, and leases terminated to ensure that inefficient practices are not perpetuated.
Management practices also must be updated to ensure the same problems do not recur. First, organizations must document the demand for various goods. Second, they must be able to track the availability of these goods so that demand can be satisfied by existing stock whenever possible. Third, agencies should have the capacity to aggregate orders and obtain bulk purchase discounts whenever possible. Finally, agencies must work to develop relationships with suppliers who can readily provide needed items in a timely manner.
The key to meeting all of these conditions is information management. Unfortunately, not all Texas state agencies have sophisticated computer systems to manage warehouse operations. When warehousing goods is unavoidable, agencies should either continually review and update their warehouse management practices or contract with experts to assist them.
Some of industries best management practices to ensure the efficient use of warehouse space are as follows:
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Examine methods used for ordering supplies. The customers’ demand for goods represents the beginning of the supply chain. The entry process for orders should be automated whenever possible.
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Train customers how to use the supply system. Customers should be taught to order reasonable quantities and to avoid ordering excessive amounts. Customers should be kept informed of their orders’ status so they don’t over order.
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Change relationships with suppliers. To reduce inventory, investigate the feasibility of practices such as “just-in-time” and “drop shipment” delivery. Suppliers can offer volume discounts up front.
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Establish supplier support agreements. Suppliers should agree to maintain sufficient inventory to support the agencies’ needs over a short time. In many cases, agencies could receive next-day delivery on some items and eliminate stocking them in the warehouses altogether.
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Train the supply staff at all levels to use data to manage supplies. Agencies should establish training programs for supply and warehouse staff to develop knowledge on supply cycles and supply contracts.
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Reduce administrative cycle times through automation. The internal process accounts for a significant portion of the time—and delays—needed for supplying goods. Reengineering and automating those processes reduces overall costs.
Recommendation
The General Services Commission (GSC) should work with state agencies to review and evaluate the operations of the first four leased warehouses in Austin that become eligible for lease renewal after October 2001.
GSC should exercise its authority under Government Code Section 2165.102, which requires the agency to “adopt standards regarding state agencies’ use of space and needs for space, including type of space needed.”
GSC should adopt practices used successfully by other government agencies to reduce warehouse space and terminate warehouse leases when feasible. GSC and the agencies with warehouses with leases up for renewal should:
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Identify excess inventory and determine the most appropriate way to eliminate it.
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Determine the extent to which agencies practice the management principles discussed above.
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Identify improved practices, such as “just-in-time” or “drop-ship” approaches that can help prevent recurring problems.
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Reduce inefficient warehouse space use.
GSC should help the agencies affected by this recommendation develop a plan that sets targets for reductions in warehouse space, surplus property and inventory. In addition, GSC should assist agencies in setting goals for managing future warehouse operations. These plans should be included in agencies’ strategic plans. State agencies’ next strategic plans are due June 2002 and will project activities through 2007.[12]
For all warehouses with leases expiring after October 1, 2001 (Exhibit 1), GSC should conduct a survey as soon as possible. Significant improvements can be identified with a relatively simple review. E-Texas consultants, for example, spent about one hour walking through a state warehouse with more than 49,000 square feet and, with data from agency computers, found significant excess inventory and identified several ways to improve management practices.[13]
Exhibit 1
State-Leased Warehouses with Leases Due
for Renewal after October 1, 2001 in Austin
| Name of Agency | Austin Address | Exp. Date | Sq.Ft. |
| Texas Department of Human Services | 3636 Dime Circle | 10/21/2001 | 5,372 |
| Texas Department of Criminal Justice | 4708 MLK Blvd. | 11/30/2001 | 12,000 |
| Texas Rehabilitation Commission | 6001 Technicenter | 11/30/2001 | 12,000 |
| Texas Workers' Compensation Comm.* | 3714 Dime Circle | 12/31/2001 | 18,566 |
| Texas Workers' Compensation Comm.* | 3714 Dime Circle | 12/31/2001 | 5,980 |
*Rates per square foot are different.
Source: General Services Commission.
Fiscal Impact
A review and evaluation of these four leased warehouses could lead to the elimination of some or all leases, which could generate significant annual savings that cannot be estimated at this time. After the review is completed, the Legislature would have firm data on which to base future reductions in agency appropriations if warehouses were closed or lease costs reduced.
Endnotes
[1 ] General Services Commission, “Lease/Query, Summary by City,” Austin, Texas, March 13, 2000. (Computer printout.)
[2 ] Interview with Michael Lacy, director of Facilities Planning, General Services Commission, Austin, Texas, November 3, 2000.
[3 ] General Services Commission, “Lease/Query, Summary by City,” Austin, Texas, March 13, 2000. (Computer printout.)
[4 ] Texas Comptroller of Public Accounts, Draft Report: Warehouse and Inventory Control, by Resource Consultants, Inc. (Austin, Texas, July 20, 2000), p. 2. (Consultant’s report.)
[5] Texas Comptroller of Public Accounts, Draft Report: Warehouse and Inventory Control, by Resource Consultants, Inc. (Austin, Texas, July 21, 2000), p. 2. (Consultant’s Report.)
[6 ] State of Washington Governor’s Office, “Warehouse on the Intranet and on the Highway” and “Asset Management,” in Governing for Results 6 (Olympia, Washington, April 1999), p. 63 (http://www.governor.wa.gov/quality/results/results.htm). (Internet document.)
[7] Interview with Martin Memmott, principal administrative analyst, Los Angeles County, Los Angeles, California, July 24, 2000.
[8] Peggy Walsh-Sarnecki, “Direct Supply Line to Cut Waste in Detroit Schools,” Detroit Free Press (April 26, 2000) (http://www.freep.com/news/locway/skuls26_20000426.htm). (Internet document.)
[9] Best Manufacturing Practices, “Best Practice: Just-in-Time Procurement System,” December 17, 1999 (http://www.bmpcoe.org./bestpractices/internal/sandi/sandi 35.htm). (Internet document.)
[10] Interview with Sandy Flanagan, Texas Department of Human Services, Austin, Texas, September 6, 2000.
[11] Texas Comptroller of Public Accounts, Draft Report: Warehouse and Inventory Control, by Resource Consultants, Inc., p. 2.
[12 ] Interview with Shari Curtis, Texas Comptroller of Public Accounts, Austin, Texas, November 6, 2000.
[13 ] Texas Comptroller of Public Accounts, Draft Report: Warehouse and Inventory Control, by Resource Consultants, Inc., p. 2; and e-mail communication from Scott Yerecic, consultant, Resource Consultants, Inc., November 6, 2000.
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