METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

IX. SUPPORT SERVICESBackground - The Stratified Management and Operations Audit of Metropolitan EdisonCompany (Met-Ed), Pennsylvania Electric Company (Penelec), and PennsylvaniaPower Company (Penn Power) (collectively referred to as the FirstEnergy PennsylvaniaCompanies or FE-PA Companies), conducted by the consulting firmBarrington-Wellesley Group, Inc. (BWG), released by the Pennsylvania Public UtilityCommission (PUC or Commission) on March 1, 2007 at D-05MGT002, D-05MGT003and D-05MGT004, contained six recommendations in the Support Services chapter.BWG rated this functional area as needing minor improvement. In this chapter, threeprior recommendations and prior situations are reviewed and three follow-up findingsand one recommendation are presented.Prior Recommendation – Improve inventory turnover rates and eliminate excessinventory.Prior Situation – BWG found that inventory levels for each of the FE-PA Companieshad increased each year from 2003 through 2005, and recommended that the FE-PACompanies implement practices to reduce their materials and supplies inventories.Year-end inventory levels for the three FE-PA Companies combined had increased from$24.4 million in 2003 to $30.2 million in 2005. Inventory turnover levels in 2005 forMet-Ed, Penelec, and Penn Power were 1.81, 1.47, and 1.45, respectively, which werebelow the levels of the better performing Pennsylvania utilities. BWG believed thatFirstEnergy could increase its inventory turnover rates to 3.0, reduce inventory balancesby $5.2 million, and reduce annual inventory carrying costs by $522,000. BWG alsonoted that inventory turnover was not a FirstEnergy Supply Chain incentive objectiveand recommended that a Supply Chain incentive objective based on maintainingimproved inventory turnover rates (including inventory turnover rates for materials andsupplies inventory) be developed.As of December 31, 2005, Met-Ed, Penelec, and Penn Power had inventory withno issues since the implementation of the SAP, AG (SAP) system in 2003 of 34.7%,28.4%, and 18.8%, respectively. Parts with no issues or receipts since theimplementation of SAP in 2003 totaled $6.5 million (i.e., $3.3 million for Met-Ed, $3.2million for Penelec, and $8,670 for Penn Power). These amounts represented slowmoving or inactive inventory requiring periodic review to determine if the inventory wasobsolete (i.e., non-emergency stock) and should be sold for scrap. BWG suggestedthat the FE-PA Companies review the materials for which there have been no receiptsor issues since the implementation of SAP in 2003 and dispose of obsolete andnon-emergency stock. FirstEnergy estimated that the total value of both its obsoleteand non-emergency stock was approximately $300,000. The disposal of both obsoleteand non-emergency stock would have resulted in associated annual carrying costsavings of approximately $30,000.- 54 -