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PACIFIC GAS AND ELECTRIC COMPANY
CHAPTER 5
SUPPLY CHAIN – MATERIALS HANDLING AND INVENTORY
A. Introduction
1. Scope and Purpose
The purpose of this chapter is to demonstrate that Pacific Gas and
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Electric Company’s (PG&E or the Company) operating costs and capital
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expenditures forecasts for materials and supplies (M&S) inventory and
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warehousing and distribution services provided by Supply Chain - Materials
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Operations (Materials Operations) are reasonable and should be adopted
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by the California Public Utilities Commission (CPUC or Commission).
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In support of PG&E’s ongoing maintenance and construction activities,
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Materials Operations warehouses and distributes materials and supplies to
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the field organizations throughout PG&E’s service territory. In addition,
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Materials Operations provides inventory control and management and other
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supply chain-related support services, including electric equipment repair,
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transportation logistics and risk management.
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2. Summary of Dollar Requests
Materials Operations’ capital expenditures and operating costs are
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included in the revenue requirement calculation in eight ways:
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(1) As M&S inventory, an element of rate base;
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(2) As plant additions or replacements for materials handling tools and
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equipment, an element of rate base;
(3) As direct capital salvage labor charges for the disposition and sale of
scrapped equipment (surplus, obsolete or damaged);
(4) As direct capital removal credits from the revenues received for
scrapped equipment (surplus, obsolete or damaged);
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(5) As direct materials in expense and capital projects;
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(6) As materials burden in expense and capital projects;
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(7) As direct expense charges for electric equipment repair and scrapping;
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and
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(8) As provider cost center (PCC) charges in expense and capital for
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intra-company mail services.
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In this chapter, PG&E is requesting that the Commission adopt its 2005
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through 2007 forecasts for Category 1 and 2005 through 2009 forecasts for
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Categories 2 and 3 as detailed below. Requests for the costs associated
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with Categories 4 through 8 are included in the forecasts of other programs
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and, therefore, are not requested in this chapter. Categories 4 through 8
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are referenced here for informational purposes only.
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For Category 1, M&S inventory, PG&E requests that the Commission
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adopt its weighted average forecasts of $32.6 million for 2005, $33 million
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for 2006 and $33.1 million for 2007. PG&E’s 2007 forecast in the amount of
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$33.1 million for the weighted average of M&S inventory is 5.7 percent
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higher than the 2004 recorded adjusted weighted average of $31.3 million.
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This request covers M&S inventory needed to support the maintenance and
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construction activities of electric and gas distribution. M&S inventory
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balances for Generation are included in Chapter 11 of Exhibit (PG&E-3),
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Electric Generation Rate Base.
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For Category 2, handling tools and equipment, PG&E requests that the
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Commission adopt its total-Company capital expenditures forecasts of
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$164,000 for 2005, $561,000 for 2006, $594,000 for 2007, $547,000 for
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2008 and $534,000 for 2009. PG&E’s 2007 expenditures forecast in the
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amount of $594,000 for tools and equipment is 330.4 percent higher than
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the 2004 recorded expenditure of $138,000. The allocation of these
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forecasts to electric and gas distribution is discussed in Exhibit (PG&E-2),
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Chapter 8, Electric, Gas and Common Plant.
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For Category 3, direct capital salvage labor costs related to the
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disposition and sale of PG&E’s surplus, obsolete or damaged equipment,
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PG&E requests that the Commission adopt its total-Company capital
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expenditures forecasts of $234,000 for 2005, $382,000 for 2006, $392,000
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for 2007, $404,000 for 2008 and $418,000 for 2009. PG&E’s 2007
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expenditures forecast in the amount of $392,000 for investment recovery is
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14.3 percent higher than the 2004 recorded expenditure of $343,000. The
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allocation of these forecasts to electric and gas distribution is discussed in
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Exhibit (PG&E-2), Chapter 8, Electric, Gas and Common Plant. For
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Category 4, PG&E’s direct capital removal credits from the revenues
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generated through the disposition and sale of PG&E’s surplus, obsolete or
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damaged equipment are included in the depreciation chapter.
For Category 5, PG&E’s forecast for direct materials costs is included in
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the expense and capital project forecasts of other programs and, therefore,
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is not requested in this chapter. Direct materials costs are not part of the
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M&S inventory rate base because they are issued and charged to capital
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and expense projects.
For Category 6, PG&E’s forecast for materials handling costs is
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included in the expense and capital forecasts of other programs as
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materials burden and, therefore, is not requested in this chapter.
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For Category 7, PG&E’s forecast for the repair and scrapping costs of
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electric equipment is included in the expense forecasts of other programs
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and, therefore, is not requested in this chapter. The allocation of this
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forecast is discussed as major work categories (MWC) BG and BK in
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Exhibit (PG&E-4), Chapter 2, Electric Distribution Maintenance.
For Category 8, PG&E’s forecast for operating costs related to the
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handling of intra-company mail is included in the expense and capital
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forecasts of other programs and, therefore, is not requested in this chapter.
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The allocation of this forecast to other internal operating clients is based on
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the amount of square footage occupied.
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3. Support for Request
PG&E’s forecasts for M&S inventory, tools and equipment, and salvage
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costs are reasonable and necessary because the Company:
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Uses over $500 million worth of materials and supplies annually to
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support its ongoing maintenance and construction activities to provide
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safe, reliable service;
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70,000 square mile service territory;
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Manages a large supply chain distribution network throughout PG&E’s
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Provides materials and supplies to the field organizations during
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emergencies (e.g., storms, earthquakes, car pole accidents, major
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mudslides, etc.);
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Establishes key supply chain metrics (e.g., order fill rate, inventory
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turns, inventory count accuracy, returns rate, etc.) to measure operating
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and financial performance and to drive improvements and cost savings;
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Implements process improvement initiatives (e.g., reducing goods
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receipt cycle time, enhancing internal controls, etc.) that increase
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operational efficiency and inventory accuracy; and
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Identifies and implements inventory reduction opportunities
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(e.g., inactive inventory review, standardization of materials, vendor-
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direct shipments to jobsites, etc.).
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4. Organization of the Remainder of This Chapter
The remainder of this chapter is organized as follows:
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Program Management Process;
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Estimating Methods;
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Costs by Major Activities;
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Materials and Supplies Inventory; and
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Cost Tables.
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B. Program Management Process
The supply chain director and the immediate Materials Operations staff
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manage all aspects of the organization including its expenditures. This
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management team is responsible for the oversight of PG&E’s materials,
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information, and finances as they move through the supply chain process. On a
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monthly basis, the management team monitors the department’s year-to-date
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expenditures to ensure consistent and rigorous accountability over costs and
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spending. The Materials Operations staff regularly reviews anticipated materials
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demand with the internal operating clients to establish appropriate inventory
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levels, to adjust burden rates, and to improve mutual performance metrics.
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C. Estimating Methods
In forecasting the M&S inventory under Category 1, the 2005 through 2007
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forecasts are based on the 2004 recorded weighted average, which includes
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adjustments for inactive inventory and unbilled receipts. Stock is considered
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inactive if it has been in inventory for more than three years. Unbilled receipts
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are stock items that have been received from vendors, but have not been
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invoiced to PG&E for payment.
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In forecasting the capital expenditures needed for materials handling tools
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and equipment under Category 2, MWC 05, Materials Operations evaluated the
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condition and quantity of the equipment currently used in its operations and
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determined whether it was necessary to repair or replace the existing equipment
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or acquire additional equipment.
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In forecasting the capital expenditures needed for direct salvage labor costs
related to the disposition and sale of PG&E’s equipment under Category 3,
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Materials Operations evaluated the quantity of equipment that is expected to be
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salvaged based on historical trends and the related resources needed to sell
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and dispose of such equipment.
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In forecasting the direct capital removal credits from the revenues generated
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through the disposition and sale of PG&E’s equipment under Category 4,
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Materials Operations evaluated the quantity of equipment that is expected to be
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salvaged and compared the forecast with historical trends. As noted earlier,
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Category 4 is referenced here for informational purposes only.
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In forecasting the expenditures needed for managing and distributing M&S
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inventory under Categories 5 and 6, the materials required for anticipated
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maintenance and construction activities were estimated and compared with
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historical labor costs of Materials Operations. As noted earlier, Categories 5
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and 6 are referenced here for informational purposes only.
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In forecasting the expenditures needed for repairing electric distribution
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equipment under Category 7, the equipment required for anticipated
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maintenance and construction activities was estimated and compared with
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historical labor costs of Materials Operations. As noted earlier, Category 7 is
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referenced here for informational purposes only.
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In forecasting the operating costs needed to provide intra-company mail
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services under Category 8, historical labor and contract and materials costs
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associated with such services were used. As noted earlier, Category 8 is
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referenced here for informational purposes only.
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D. Costs by Major Activities
1. Supply Chain – Materials Operations
Materials Operations has 348 employees located throughout the PG&E
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service territory who are responsible for the day-to-day operation and
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execution of the four core activities described below.
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2. Warehouse Distribution
Through its warehouse distribution group, Materials Operations
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manages and operates a network of three major distribution centers to fill
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orders, manage inventory and returns, and deliver materials. These
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distribution centers are strategically located in Fremont, Marysville, and
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Fresno to deliver materials and supplies directly to PG&E’s field
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organizations (including gas and electric distribution, information systems
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technology services, metering services, gas transmission, electric
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transmission, and electric generation). The three major distribution centers
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occupy 54 acres of land and approximately 177,000 square feet of enclosed
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storage space to receive, store, and issue PG&E’s inventory. In 2004, the
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warehouse distribution group logged over 1.8 million miles to deliver
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materials to the client organizations throughout PG&E’s service territory.
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The warehouse distribution group is also responsible for maintaining
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and overseeing PG&E’s Materials and Fleet Coordination Center (MFCC) in
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Fremont to support and respond to major emergencies and catastrophic
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events. The primary purpose of the MFCC is to operate as a 24/7 resource
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during emergencies, to coordinate the delivery of materials, supplies,
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equipment, vehicles, and to provide other logistical support as needed. The
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warehouse distribution group prepares for storm seasons by adjusting
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inventory levels in anticipation of spikes in demand for items commonly
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used for service restoration. In addition, the warehouse distribution group
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provides ongoing emergency training to its employees and participates in
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companywide emergency drills and mandatory practice exercises.
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Other services provided by the warehouse distribution group include
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procuring fuel for all of PG&E’s service centers, substations and other
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facilities. In 2004, the warehouse distribution group purchased nine million
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gallons of fuel valued at $17.6 million. In addition, this functional group
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manages overnight deliveries of intra-company mail to 175 office locations,
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covering approximately 680,000 miles per year.
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As stated earlier, PG&E is not requesting in this chapter handling costs
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under Categories (6) and (8) associated with warehouse distribution and
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intra-company mail because such costs are included in the forecasts of
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other programs. However, PG&E is requesting in this chapter that the
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Commission adopt its 2005 through 2009 total-Company capital
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expenditures forecasts for materials handling tools and equipment under
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Category 2 needed to support warehouse distribution.
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3. Materials Field Services
The materials field services group within Materials Operations provides
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yard stock, on-site materials management, and other local supply chain
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support to the internal operating clients at over 130 sites throughout PG&E’s
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territory. These sites provide PG&E’s crews with immediate access to the
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yard stock and materials needed to perform maintenance and construction
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activities. The materials field services group is responsible for:
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(1) replenishing and managing appropriate yard stock levels at these remote
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locations; (2) receiving shipments from PG&E’s distribution centers and
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suppliers; and (3) arranging the yard stock and materials for the crews.
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Additionally, this group delivers materials directly to jobsites and supports
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emergency power restoration efforts in coordination with the warehouse
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distribution group.
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As stated earlier, PG&E is not requesting in this chapter materials
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handling costs under Category 6 associated with materials field services
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because such costs are included in the forecasts of other programs.
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However, in this chapter, PG&E is requesting that the Commission adopt its
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2005 through 2009 total-Company capital expenditures forecasts for
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materials handling tools and equipment under Category 2 needed to support
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materials field services.
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4. Electric Equipment Repair Services
Materials Operations operates an electric equipment repair and
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refurbishment facility in Emeryville. This facility provides scheduled in-shop
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inspection and cost-effective repair and refurbishment of electric distribution
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equipment, primarily transformers, regulators and reclosers. It also
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performs scheduled and emergency field repairs of in-service electric
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equipment. As part of its repair and refurbishment program, the Emeryville
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facility engages in the disposition and salvage of outdated and damaged
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electric equipment, which includes recycling waste oil. This group also
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provides insulation testing of rubber goods (e.g., blankets, hoses, and
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jumpers, etc.) and inventory management of the Company’s emergency
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substation equipment.
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Through its repair, refurbishment and recycling services, the Emeryville
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facility has captured $9.9 million in 2003 and $8.1 million in 2004 in avoided
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purchase costs for electric distribution equipment. Avoided purchase costs
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are achieved by repairing or refurbishing existing equipment (when it is
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economically feasible to do so) and placing the equipment back into service.
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Through the use of recycled oil, PG&E is able to avoid the purchase of new
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oil for its repaired or refurbished electric equipment. The duration of
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outages can often be reduced by performing on-site repairs of electric
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equipment rather than removing the defective unit and replacing it with new
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equipment.
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As stated earlier, PG&E is not requesting in this chapter repair and
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scrapping costs under Category 7 associated with the Emeryville facility
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because such costs are included in the forecasts of other programs.
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However, in this chapter, PG&E is requesting that the Commission adopt its
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2005 through 2009 total-Company capital expenditures forecasts for
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materials handling tools and equipment under Category 2 needed to support
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the Emeryville facility.
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5. Materials Planning
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The materials planning group provides the following four supply chain
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services to the other functional groups within Materials Operations:
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(1) inventory planning and management; (2) oversight of inbound and
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outbound transportation logistics; (3) investment recovery of PG&E’s
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surplus, obsolete or damaged assets; and (4) coordination of risk
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management and compliance activities.
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The inventory planners are responsible for forecasting inventory
requirements and collaborating with internal operating clients and PG&E’s
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vendors to minimize inventory levels while maintaining required service
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levels. They also assist in controlling the cost of freight transportation by
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managing most of the shipments from PG&E’s suppliers to ensure the
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lowest possible rates.
The investment recovery specialists determine the best options for the
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disposal of surplus, obsolete, or damaged materials and equipment.
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Redeployment, sales, and recycling are used to maximize the return on
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PG&E’s investment. These investment recovery efforts also demonstrate
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PG&E’s commitment to environmental stewardship because they reduce the
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Company’s use of local landfills. In 2004, PG&E recycled over 34 million
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pounds of materials and equipment (including metals and plastics) and over
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500,000 gallons of used mineral oil. The Company’s overall investment
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recovery strategies in 2004 generated $10.6 million in credit to accumulated
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depreciation.
The materials planning group also handles the risk management and
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regulatory compliance activities of Materials Operations, including
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Sarbanes-Oxley compliance, hazardous materials management, and
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business process documentation and management.
As stated earlier, PG&E is not requesting in this chapter direct capital
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removal credits and materials handling costs associated with the materials
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planning group under Categories 4 and 6 because such costs and credits
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are included in the forecasts of other programs. However, in this chapter,
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PG&E is requesting that the Commission adopt its 2005 through 2009
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total-Company capital expenditures forecasts for direct capital salvage labor
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charges under Category 3 needed to support the materials planning group.
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6. Special Projects
Materials Operations engages in process improvement initiatives to gain
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operational efficiencies, improve service levels, and optimize PG&E’s
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utilization of its assets. Materials Operations has been working on the
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following key initiatives since 2004:
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a.
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Warehouse Operational Improvements Initiative
The purpose of the warehouse operational improvements initiative
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is to increase the efficiency of PG&E’s materials management
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processes by identifying and implementing operational improvements at
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its three main warehouses. These improvements will enable Materials
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Operations to increase its service levels to the field organizations and
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reduce operational and inventory costs at the distribution centers. The
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initiative has resulted in increased inventory accuracy, shorter receiving
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time, and improved supplier delivery performance. An updated
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performance scorecard has been established for each warehouse,
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which management reviews monthly.
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b. Yard Stock Reduction Initiative
The purpose of the yard stock reduction initiative is to identify,
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reduce (as appropriate), and improve the management of materials
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staged for use at over 100 yards in the PG&E service territory. Over a
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five-year period, PG&E estimates a $5 to $8 million reduction in yard
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stock with any surplus either worked down through normal consumption
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or returned to the distribution centers for re-stocking.
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Electric Equipment Repair to Stock Initiative
The purpose of the electric equipment repair to stock initiative is to
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consolidate stock management of regulators and reclosers in order to
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create systemwide visibility of these assets and to capture potential cost
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savings. By monitoring and controlling stocking levels centrally in the
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materials planning group, Materials Operations can ensure that there
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are optimal numbers of regulators and reclosers available to meet
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ongoing needs for new installations, scheduled replacements, and
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emergency response. Over the next two years, PG&E estimates that
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$1.5 million worth of regulators and reclosers will be worked down
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through normal consumption or returned to the distribution centers for
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re-stocking.
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7. MWC 05—Capital Tools and Equipment
The 2005 through 2009 capital expenditures forecasts under
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Category 2, MWC 05, to support Materials Operations is based on PG&E’s
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evaluation of existing tools and equipment as described in Section C of this
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chapter. PG&E is requesting that the Commission adopt its total-capital
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expenditures forecasts to:
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and materials field services;
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Ensure that tools and equipment are available for warehouse operations
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Ensure that specialized tools are available to install, test, repair or
remove electric distribution equipment;
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Ensure safety and productivity within Materials Operations; and
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Replace defective, worn out or obsolete tools and equipment, including
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those that pose safety or ergonomic risks.
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Tools and equipment that are commonly used by Materials Operations
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include, but are not limited to, wrapping and strapping machines, electric
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testing equipment, materials storage racking, and handling equipment.
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Departmental policy requires that all major tools and equipment purchases
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are subject to the supply chain director’s pre-approval. Each purchase
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request to the supply chain director contains a cost/benefit analysis that
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includes safety considerations and the availability of other cost-effective
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options (e.g., sharing, repairing, leasing or substituting).
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E. Materials and Supplies Inventory
As discussed earlier in this chapter, M&S inventory is positioned throughout
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PG&E’s service territory to support maintenance and construction activities.
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M&S inventory is necessary to support new business, planned and unplanned
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maintenance, required upgrades to facilities, new business capacity projects,
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and emergency response.
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Materials Operations has established guidelines and procedures for the
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ongoing replenishment and management of M&S inventory to ensure the lowest
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total cost of ownership. The Company’s practices for managing M&S inventory
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include, but are not limited to:
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Maintaining an effective materials distribution system;
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Monitoring materials warehouse performance through the use of metrics and
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industry benchmarks;
Performing periodic audits (e.g., wall-to-wall inventories and compliance
reviews, etc.) to ensure optimal inventory management;
Performing quarterly Sarbanes-Oxley testing to ensure that effective internal key
controls are in place;
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Managing inventory levels through the use of forecasting tools, replenishment
guidelines and performance metrics;
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Managing surplus and inactive materials and supplies; and
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Sustaining an integrated warehouse management system.
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F. Cost Tables
The capital expenditures and operating costs estimates for Materials
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Operations are summarized in the following tables:
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Table 5-1 summarizes total capital expenditures for MWC 05 under Categories
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2 and 3 for recorded year 2004 and forecast years 2005 through 2009;
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Table 5-2 summarizes the weighted average balances of active M&S inventory
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under Category 1 for recorded year 2004 and forecast years 2005 through
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2007 for electric and gas distribution.
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