POLICY DOCUMENT INTRODUCTION...

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2 TABLE OF CONTENTS 1 POLICY DOCUMENT INTRODUCTION SCOPE OBJECTIVES Demand Management, Inventory Classification, Stocking Policy, Stock Take (Cycle Counts), Material Disposition, Material Reclaim OWNERSHIP AND RESPONSIBILITIES DEFINITIONS AND ABBREVIATIONS POLICY DOCUMENT INTRODUCTION 1.1 Policy Definition A Policy reflects Toronto Hydro-Electric System Ltd (THESL) position on issues and is something that must be adhered to by its employees. It provides interpretation for and influences decisions and actions. A policy differs from guidelines and procedures. Guidelines recommend the way in which a procedure is executed or the way in which a condition is managed. Guidelines allow flexibility for employees to make decisions a policy does not allow this flexibility. Procedures are more detailed methods and activities established for the implementation of established policies. A policy is what the company does or should do and procedures are how it carries out the expressions of its policy. Detailed procedures are not described in a policy document. 1.2 Policy Contents Among other things, a policy describes the objectives, scope, responsibilities and requirements that apply to the organization or departments that have been identified in a policy. A THESL policy facilitates compliance with internal or external standards or requirements, to meet its operating objectives and reduce risks. 1.3 To be effective and to maximize user acceptance, a policy should be comprehensive yet easy to understand and it should be well communicated and easily accessible to the user community. 2 SCOPE 2.1 This policy applies to all departments of Toronto Hydro- Electric System Limited. C2_T03_S01_SUPPLYAPPB chain INVENTORYMANAGEMENT_V01.DOC Page 2 of 6

3 3 OBJECTIVES General objectives of Executive and Management of the Demand Management Section in Procurement Department are to: 3.1 Understand the financial, operational and regulatory risks. 3.2 Implement the required controls to manage those risks with a control structure that provides appropriate evidence and assurance that the risks are adequately controlled. 3.3 Ensure compliance with applicable laws and regulations. Specific objectives of this policy which relate to Demand Management activities: 3.4 It is the intent that a general level of inventory be maintained to meet the demand of the construction and maintenance work programs and potential emergency situations. The level of inventory should reflect a balance between corporate customer service, efficiency of operations, inventory investment and management cost control objectives. 4 Demand Management, Inventory Classification, Stocking Policy, Stock Take (Cycle Counts), Material Disposition, Material Reclaim 4.1 Demand Management Shall ensure that inventory levels for materials are determined via accepted inventory control techniques and algorithms Shall maintain a perpetual inventory system Shall monitor and report corporate wide inventory transactions with the purpose of developing and maintaining appropriate performance measurement criteria which will be used to justify to senior management the inventory investment Shall ensure that inventories are maintained at levels which minimize the occurrence of stock-outs that cause work schedule delays. 4.2 Inventory Classification Standard (MRO) Stock is defined as: All materials which are used on a repetitive bases, where reorder algorithms can be applied, and which may be purchased in volume. As a basic guideline, all materials that are issued four or more times per year are defined as standard stock Non-Standard Stock or As required Materials is defined as: All materials that are needed for specific jobs and are not used on a repetitive basis. Non-Standard Stock materials are ordered on an as required basis, however, where the lead times are extensive, non-standard stock materials can be ordered if the users departments provide a written demand forecast MRO is defined as: materials that are required to meet reactive maintenance, repair, unplanned or emergency demands. This classification is divided into three subgroups: MRO Stock is based on the unscheduled material usage in Ellipse Reactive Maintenance Only (RMO) is defined as materials used for the maintenance of the Legacy Standards only and not to be used in Planned Capital programs Critical Spare is defined as materials held in reserve for used during System emergency/extended outage. C2_T03_S01_SUPPLYAPPB chain INVENTORYMANAGEMENT_V01.DOC Page 3 of 6

4 4.2.4 Standard (MRO) Stock stocking quantity levels shall conform to 4.3 Stocking Policy. 4.3 Stocking Policy All material inventory shall have quantities based on acceptable inventory control methodologies and techniques: Inventory levels shall not exceed three months future demand for Class A items, six months future demand for Class B items, and twelve months future demand for Class C items Where applicable, a 95% service level in calculating the appropriate ROP/ROQ stock level for each future planning period shall apply To accommodate special request for specific stocking levels above and beyond the calculated level, a written notification for each item identified as well as the recommended stocking level are required from the user departments Justification for Special request, RMO and Critical Spare Stock levels shall be reviewed at least annually. The review process will be initiated by the Demand Management Section of the Procurement Department 4.4 Stock Take (Cycle Counts) Stock Take and inventory reconciliation shall be a shared responsibility Demand Management shall identify the items to be counted and their frequency Stores personnel shall conduct the actual Stock Take (Cycle Counts) Demand Management shall report Stock Take (Cycle Counts) performance and reconcile variances The Manager of Procurement shall review the Stock Take (Cycle Counts) and value variances, and insure the appropriateness of the adjustments Stock Take (Cycle Counts) shall be scheduled daily Frequency of counts shall be based on the following minimum criteria: A material items 4 times a year B material items 2 times a year C material items 1 time a year D material items 1 time a year Items with count variances greater than 10% and/or value variance of greater than $1,000 shall be rescheduled for recount during the same month and before the month-end cut-off date. 4.5 Material Disposition Demand Management shall provide quarterly reports of DNP-Obsolete, DNP- Deplete, slow moving and non-moving inventory DNP-Obsolete are materials identified by Standards and Materials section that this item shall no longer be used in the system and shall be disposed DNP-Deplete are items identified by Standards and Materials section that this item shall no longer be purchasable but it can still be consumed in the System, criteria for disposal are as follows: No open requirements, and C2_T03_S01_SUPPLYAPPB chain INVENTORYMANAGEMENT_V01.DOC Page 4 of 6

5 No forecast for the next 12 months Non-moving inventory is based on the following criteria: No usage during the previous two years, and No MRO requirements, and No open requirements, and No forecast Slow moving inventory is based on all items which have inventory in excess of the following highest criteria: Two years usage based on the previous two years ROP/ROQ quantity, Open requirements Forecast Standards and Materials Section and other User Departments are to review the Slow/Non moving reports and make their recommendation(s) to either retain or dispose the materials Where the recommendation is to retain the materials, written justification must be provided together with a specific plan for usage of the retained material or a declaration of required MRO Stock Monthly, Demand Management will originate a Request to Scrap report. This report will be based on the DNP-Obsolete, DNP-Deplete, Slow/Non moving reports and recommendations for disposal received from other departments Annually, Demand Management Section will review the Obsolescence Budget in conjunction with Standards and Materials Section and User Departments. 4.6 Material Reclaim (Transformer, Protector, Switchgear, Switch, Pole etc.) Reclaimed materials are used materials removed from the field because of various reasons but are still in good working conditions Based upon recommendations and guidelines specified by Standards and Materials Section, commodity classes such as transformer, protector, switchgear, switch, pole, etc. are being reclaimed back into inventory after they have been tested good for reuse Reclaimed materials are to be returned into the warehouse inventory using predetermined process and value as per guidelines from the Finance Dept All reclaimable materials are to be processed and returned to inventory in a timely manner Demand Management Section is to keep track of all items reclaimed into Inventory for audit purposes Refurbishment to reclaimable items are only acceptable if the cost is 50% or less of a new unit. 5 OWNERSHIP AND RESPONSIBILITIES 5.1 This policy is owned by the Procurement Manager and will be managed by the Demand Management Supervisor. 5.2 The Procurement Manager is responsible for: C2_T03_S01_SUPPLYAPPB chain INVENTORYMANAGEMENT_V01.DOC Page 5 of 6

6 Ensuring that this policy is comprehensive, clear and current. Ensuring that this policy is implemented and communicated to the departments and staffs that are impacted. 5.3 The Demand management Supervisor is responsible for: Reviewing this policy annually, on year-end. Immediately communicating any exceptions or violations of this policy to the Controller for assessment of the impact to the financial statements. Communicating any proposed policy changes to the Procurement Manager for approval by the end of January. 5.4 All staff impacted by this policy are required to adhere to his policy. 5.5 All revisions to the policy must be prior approved by the Vice President, Asset Management. 6 DEFINITIONS AND ABBREVIATIONS TERM or ACRONYM RMO ROP ROQ MRO DNP DESCRIPTION Reactive Maintenance Only Reorder Point Reorder Quantity Maintenance Repair Operation Do Not Purchase C2_T03_S01_SUPPLYAPPB chain INVENTORYMANAGEMENT_V01.DOC Page 6 of 6