I first met T&D World Editor-in-Chief Rick Bush when he came up to Illinois Power (Decatur, Illinois, U.S.) late last year for a visit. Over dinner, we chatted about the difficulty of getting departments to work together to get work to flow more smoothly. Of course, providing the materials to the crews is a critical step in the process. I asked Bush why T&D World had profiled individuals in virtually every part of the business except supply chain. I now know I need to be more careful of what I wish for. Bush put me on the spot to write an article on Illinois Power's supply and logistics operation. Fortunately, it's a subject I never get tired of talking about.

Now, mind you, I didn't grow up planning to go into supply-chain services. In fact, I wanted to be a farmer. But growing up on a dairy and beef farm in northwest Missouri gave me a firsthand education about managing “inventory” across an operation. Professionally, my career includes 18 years on the warehouse side of the food service wholesale and retail industry, and a stint as consultant on the Wal-Mart Supercenter warehouse project.

In 1996, I used some built-up vacation time to plan my next career move and to turn a one-room schoolhouse in Central Illinois into my home. While I was knee-deep in sawdust and Sheetrock, my wife was busy sending out my résumé. One day, while I was hammering away on the house, Illinois Power called and asked me to interview for a job. I've been here ever since.

Illinois Power's successful supply-chain process didn't happen overnight. The company has made several transitions over many years as its business has changed to move supply chain where it is today.

Just eight years ago, the company had no formal supply-chain process. Rather, 27 separate area locations existed throughout Illinois Power's territory, which spans three core regions in north central, east central and southwestern Illinois, and serves 650,000 customers. Eventually, those 27 offices were consolidated into 13 field locations. Area storeroom personnel and inventories are managed through Illinois Power's Supply Chain Services and its materials distribution facility (MDF) in Decatur.

Even after this warehousing facility was opened, the company's outlying area storerooms still functioned as their own retail locations. Prepackaged jobs were readied for job-site delivery at the service areas rather than the MDF. The MDF, instead, functioned as a wholesale store, where materials headed for the areas could be standardized. This included inventory such as nuts and bolts stored in “self-help” bins at the area locations, which crews could use to stock their truck supplies. Eventually, the MDF became the site where retail jobs were packaged as well.

Today, the MDF is the nerve center of Illinois Power's Supply Chain Services. Illinois Power has successfully developed a functional model designed for customer service and response. In the fall of 2002, our organization proved its worth when it was called to help an out-of-state utility whose territory had been struck by tornadoes. The storms knocked out power to tens of thousands of customers.

As crews labored through a Saturday night into Sunday, materials began to run short. Illinois Power's field director contacted Supply Chain Services for supplies, and sent his crew to rest about 2 a.m. When our line personnel reported for duty around 10 a.m. on Sunday, two trailers full of materials had already arrived at the site.

Just as Supply Chain Services focused to get materials to the field quickly to restore power after a storm, utility supply chains must stay attentive to all their customers' needs, improving processes and using technology to distribute materials quickly, efficiently and cost effectively.

Coordinated Distribution

Our distribution system at MDF is completely paperless, except for a single packing slip that is packaged and sealed on top of the order. All MDF system data is real-time information. Illinois Power's Utility Operations division forwards its material requirements electronically from its engineering system into Supply Chain Services' material management system on a daily basis. Project requirements are assembled into delivery units by function, and then sent on to the warehouse management system.

The MDF distribution personnel retrieve work assignments via radio-frequency equipment mounted to their fork trucks and narrow-aisle equipment. Because all items and storage locations are bar-coded, the warehouse management system sorts all the items requested in the order in which they are arranged in the warehouse. The employee then locates the first item on his list, clears it off the touch-screen on his fork truck, and moves on to the next item until the work assignment is complete. As items are removed from the shelves, the system is updated to reflect the current inventory balance, and an electronic purchase order is sent out that evening to replenish the item.

Now the job is staged for packaging, and materials from different zones of the MDF are married into a complete retail work request. A retail work request is an engineered job, packaged for job-site reporting of our customers' crews. Most retail shipments from the MDF are delivered directly to job sites so operations crews can job-site report.

Illinois Power's material and warehouse management systems also handle data on the delivery location and other special instructions, if necessary. With a packing slip enclosed and bar-code identification attached, the retail work request is ready to deliver to the job site. Order items pulled from on-site consignment stocks are electronically cataloged, and payment is sent to the vendor electronically, within 24 hours.

After staging, retail work requests are then scanned and tracked onto delivery trailers. These trailers can be conventional box, flatbed or soft-side trailers. Conventional box trailers are used for large distribution or transmission retail work requests for mobility and security. These trailers often are staged at the job site, and once construction is complete, unused and reclaimed materials from the work request are returned to the MDF for restocking or processing via investment recovery. Flatbed and soft-side trailers are side loaded by delivery drivers. Supply Chain Services' third-party transportation organization is responsible for the material after staging. Flatbed and soft-side trailers have fork trucks attached that are capable of moving up to 7000 lbs (3175 kgs) of material. With this and other equipment, our transportation organization can deliver material largely unassisted by the customer.

Just as materials are scanned before loading, our drivers scan the bar codes again at delivery, recording the delivery location, date and time. Delivery personnel download this information into the material management system when they return from their routes. This information is sent to Illinois Power's Utility Operations division, notifying them that the work request has been delivered.

Electronic Purchasing

Many utility supply-chain organizations carry a fully staffed purchasing department. If your organization is structured this way, then you've just discovered the first redundancy in your supply chain. Making purchases in this manner ensures that your staff buys from folks who buy from other folks, and so on. Furthermore, I'm willing to bet that few, if any, of these companies provide this service for free. The bottom line is that the more layers in your supply chain, the greater the margins or other charges associated with the cost of your material. My advice: Find the most economic and efficient procurement staff in your supply chain, and bless them with the information they need to buy for your company.

In 2002, Illinois Power's Supply Chain Services purchased 90% of its materials electronically. Along with cutting out the middlemen, electronic purchasing cuts the cost of writing purchase orders. Our organization's line-item cost per purchase order in 2002 averaged $5 per item. Supply Chain Services' accounts payable department consists of two individuals who are responsible for all account payable activities for Illinois Power. These two individuals, using electronic and conventional payment methods, last year cleared 260,694 invoices with 99.31% accuracy. Conservatively, that's 63 invoices per hour, per person, with a kickout rate of one per 1800 invoices processed.

By focusing on key suppliers and by integrating technologies and processes, in a short period of time a fair piece of your purchasing and payment can be electronic. Then, you and your supplier base can begin establishing forecasting models, and eliminating unnecessary layers and costs in your utility supply chain.

Forging Alliances

Utility supply chains have built-in redundancies as safeguards for material integrity and fill rate. Establishing agreements that are managed through governance and measuring performance will allow you to build trusted relationships with your suppliers. Place an effort on identifying the cost associated with duplicating these efforts and you will find ways to eliminate unnecessary steps.

Sometimes relationships are established and contracts for commodities and services are made only to be disregarded for the “three bids and a cloud of dust” school of purchasing. This “bid and buy” process is one of the most expensive ways to purchase commodities or services in our industry. It should be used only to establish on-going suppliers for purchasing unusual quantities, to test the market, or for large projects. In any other case, this method of purchasing destroys any efficiency that can be achieved through a commodity agreement. Collaborative, not combative, relationships and agreements with suppliers and manufacturers allow both organizations to understand costs and business structures. This open communication will improve more than just material margins.

Inventory Reduction

Inventory reduction is an area that most, if not all, utility supply chains can focus on. Just being a utility makes this difficult. From an operational perspective, utilities are required to have on-hand inventory for any equipment or material installed and in service. Illinois Power is no exception to this rule. Even so, over the past eight years, total company inventory has been reduced by 50%.

Centralizing the majority of the inventory at the MDF was the first step. Once the inventory was sited in one location, actual annual usage history could be monitored and documented. Using this history, stocking levels were established for Supply Chain Services. Total inventory turnover for all materials at the MDF in 2002 was 4.3 average turns, with 2002 average line-item fill rates better than 95%.

Process, technology and supplier relationships contribute heavily to these measures, which increase company cash flow and ensure material availability for Utility Operations. Nearly all materials purchased for Illinois Power's Utility Operations, with annual inventory turns of two or more, can be vendor-managed with net terms of 24 hours or less. This is part of our supplier agreements.

Second, alliance relationships and vendor-managed inventory agreements further reduced required stocking levels. Through sourcing agreements, Supply Chain Services negotiated with several major vendors to integrate their local branches, inventory, services and personnel into the MDF. These alliance partners are charged market rates for the space and labor used to operate their branches. The supplier owns the material on the shelves it leases.

Finally, Illinois Power identified and implemented methods to reduce redundant inventory values. Inventory carrying costs may be the determining factor when deciding who should own the bulk of your organization's turning inventory. For example, are your purchases delivered to your supplier's warehouse, sent to your shelves weeks or months later, and then shipped to your customer in another couple of weeks? We found ways to remove these layers and focus on building an operation that provides totally independent, cost-effective and efficient customer service.

If your supply-chain organization is focused on making these changes, I predict that redundant inventory will be eliminated, the supply-chain collapsed and significant savings realized.

When the roles of the buyer and material handler move into one organization, the systems are shared and information is made readily available. Product technical support can be an arm's length or a good shout away. Entire facilities, equipment and transportation are eliminated, staff is reduced and responsibilities are realigned to focus on each supply-chain partner's core competencies. A successful supply chain is one that shares assets, processes, technologies and customers.

Mike Sanders is director of Illinois Power's Supply Chain Services, which has annual spending of US$120 million. He is responsible for central and outlying stores, procurement and company fleet assets. He also manages the relationships with three fully integrated, on-site business partners in the supply-chain area. Prior to joining Illinois Power, Sanders shared expertise with companies including Wal-Mart (Supercenter project), a convenience store chain (store opening and network setup), and a refrigerated foods business. Sanders holds a professional certification with the Logistics Institute.

Investment Recovery

A supply-chain operation manages forward logistics, supplying customers with materials and service requirements. Reverse logistics, or investment recovery, is required to round out a true utility supply chain. Within Illinois Power's Supply Chain Services organization, investment recovery uses Supply Chain Services' processes and technology to capture returned or retired company assets.

Investment recovery is partially about being a good corporate citizen. Any time a utility can redeploy or recycle an item, it's kept out of a landfill. Many investment-recovery programs almost pay for themselves through the savings realized from the reduction in dumpster tipping fees. A good investment-recovery program requires commitment of resources and relationships with key commodity users. Successful investment recovery also means working to collapse the reverse logistics supply-chain process as much as possible. Remember, scrap brokerage is a profitable business for a reason.