Recommendation: Authorize the City of Burlington s continued participation in

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1 Page 1 of Report TO: Community Services Committee Transit Department SUBJECT: The Metrolinx Transit Inventory Joint Procurement Project Update Report Number: TR File Number(s): Report Date: January 31, 2011 Ward(s) Affected: All Date to Committee: February 16, 2011 Date to Council: February 28, 2011 Recommendation: Authorize the City of Burlington s continued participation in principle in the Transit Inventory Joint Procurement Project led by Metrolinx; and, Authorize the Mayor and City Clerk to sign the Inventory Procurement Governance Agreement dated January 2011, subject to the satisfaction of the City Solicitor; and, Direct the Director of Transit to report back on the outcome of the Inventory Procurement Request For Proposal (RFP) with recommendations regarding the City s continuation in this project. Purpose: Address goal, action or initiative in strategic plan Establish new or revised policy or service standard Respond to legislation Respond to staff direction Address other area of responsibility This report has been prepared to provide updates on the present status of the Transit Inventory Joint Procurement Project led by Metrolinx; and, request that the Mayor and City Clerk be authorized to sign the Inventory Procurement Governance Agreement prepared by Metrolinx with the participation of nine (9) municipalities (including Burlington) and GO Transit; with the anticipated outcome of reducing Transit s on-hand parts inventory and reducing the annual transit parts general ledger value.

2 Page 2 of Report Reference to Strategic Plan: Financial Management and Excellence in Government Transit Background: The cost of operating transit systems continues to rise each year. In 2008, the transit parts expenditure for eight (8) municipalities in the Greater Toronto and Hamilton Area (GTHA) was $16.6 million, accounting for approximately $0.19 cents per revenue kilometre traveled. These municipalities currently possess $12.4 million in parts inventory, in addition to carrying $0.5 million in shrinkage and expenses related to obsolete parts. Annual obsolesce cost varies depending on fleet retirement cycles. Maintenance costs have increased substantially over the years with the introduction of new technologies and government mandates (e.g. emission control equipment, full accessibility). A transit system can expect to spend $10,000 annually per bus replacing and servicing parts. When operating as an independent purchaser, receiving or accessing parts in a timely manner can be challenging. Municipalities purchase in small quantities; therefore, they are in a weak bargaining position when negotiating prices and delivery dates. There are also instances where the supplier is unable to supply parts due to their supply chain. With emphasis being placed on reducing traffic congestion and greenhouse gas emissions, pressure is being placed on transit systems to expand service within and across municipalities while attempting to minimize operating costs. In the Fall of 2008, Metrolinx conducted a survey of transit systems across the GTHA to determine if there would be any interest in pursuing a joint procurement relating to the bulk buying of parts and supplies, and inventory management. As a result of the survey, nine (9) transit systems - Oakville, Burlington, Hamilton, Mississauga, Brampton, Durham, York and non-gtha transit systems 1, London and Grand River (Kitchener, Waterloo, Cambridge) showed interest in the program. In the spring of 2009, a steering committee was created from the nine (9) systems and Metrolinx staff to develop and issue a Request for Information (RFI) document. 1 London Transit and GRT (Kitchener, Waterloo and Cambridge) requested to be included as active participants in the joint inventory procurement project.

3 Page 3 of Report Since April 2009, Metrolinx has been working on a joint procurement inventory strategy. It has conducted three field studies to develop an operating strategy that can be built upon from the experience of systems currently engaged in the practice. The cities visited were Toronto Public Works (May 09), Rochester Transit (May 09), and Chicago Public Works (August 09). Metrolinx has continued to communicate with these agencies and has since obtained RFPs and bidder lists to learn about the challenges and critical success factors that may be associated with this project. Benefits to Municipalities: By participating in this project, transit systems will be able to reduce inventory-carrying costs by minimizing the number of parts pooled on site. It will also reduce transaction costs by utilizing one monthly billing statement from the supplier in lieu of multiple billings from the multiple vendors that we currently procure from. The overall parts cost for OEM and Non-OEM parts will be lower and vehicle out-of-service time will decrease by requiring the third party to have these parts readily accessible. There will be objective standards to monitor the third party s achievement of Part-on-Hand performance ratios. Moreover, stakeholders can expect improved shop productivity and inventory management. Overall, participation can reduce inventory cost, devaluation risks, inventory shrinkage, parts obsolescence and improve the transit revenue-to-cost ratio. Benefits to Metrolinx: As a crown agency, Metrolinx is mandated under legislation 2 to engage in joint procurement with municipal stakeholders to reduce costs. Using the information gathered, Metrolinx issued a (RFI) in the fall of 2009 on behalf of the participating systems. The review of the RFI indicated that there is the potential for savings of 10% to 30% in the purchasing of parts and supplies (OEM 3 and Non-OEM 4 parts). 2 See Section 5(b) of the Metrolinx Act, OEM Part (Original Equipment Manufacturer) is defined as a replacement part made by the manufacturer of the original part.

4 Page 4 of Report As a result of the information received from the RFI, it was mutually agreed by all parties to proceed with the development of a Request for Proposal (RFP) to be issued in the first quarter of With the information received from the RFI and the participating parties, Metrolinx staff developed a Cost Benefit Analysis Model illustrating the potential savings based on percentages and time. This model consisted of three (3) groupings: Best Case, Conservative and Worst Case. A cost benefit analysis was completed for Burlington Transit by Metrolinx staff using Burlington s actual inventory numbers (refer to Table 1.0). Table 1.0 illustrates the existing General Ledger values, the Estimated General Ledger values using the Cost Benefit Analysis Model,, the Parts and Supplies Expensed and the Projected Savings Using the Metrolinx Model for the period of 2006 to As of July 2010, GO Transit has joined the procurement group as an active participant. A meeting of the participating systems and Metrolinx was held on January 17, 2011 to finalize the RFP and the Governance Agreement document. A draft copy of the Governance Agreement has been forwarded to our Legal and Finance departments for review. The Joint Procurement of Transit Inventory Management Services (TIMS) RFP will be issued in March As part of the (TIMS) RFP there have been several options suggested ranging from the supplier managing and controlling the entire inventory process to providing parts and supplies as needed. Also, as part of the RFP, all of the options include an opportunity for the municipality to sell its current inventory less obsolete (scrap) parts to the third party supplier at book value thereby reducing the municipality s general ledger value. If the existing 4 Non-OEM Part is a replacement part made to replace the original part or be a substitute part.

5 Page 5 of Report inventory is purchased by the third party, the inventory can remain on site to be depleted by the end user and only being billed for the parts and supplies used at the book value(no mark-up). Or, the third party supplier may choose to distribute the inventory to other end users within the group. This can accelerate the reduction of the on-hand inventory for any of the participating parties. Municipalities may elect to sell off any obsolete parts using their own resources or have the third party negotiate on their behalf through their larger parts distribution network. Staff will report back to Committee with the RFP results and recommendations. If the City chooses to participate in this inventory procurement process, staff will report back to Committee following the first year experience. This process will not restrict participating systems from still participating in current bulk purchase plans or specialized unique one source part purchasing (e.g. Halton Co-op). Metrolinx and municipalities have had previous success partnering in joint procurement projects. In 2007 Metrolinx implemented a joint bus procurement project starting with six (6) municipalities participating increasing to sixteen (16) municipalities in Over the period 2007 to 2010 a total of 361 forty-foot diesel powered low floor buses, 32 thirty-foot diesel powered low floor buses and 11 forty-foot hybrid low floor buses were acquired. Burlington Transit has purchased 27 forty-foot diesel powered low floor buses through this program. This project has collectively saved countless staff-hours related to: researching products RFP development RFP issuance and bid evaluation production inspector on-site at vehicle manufacturer during the build process In addition, each transit system has been provided training, specialized tools and reduced bus unit costs through the bulk buying process.

6 Page 6 of Report Discussion: Metrolinx will be issuing to all of the participating municipalities or commissions, a Governance Agreement to be signed to allow continued Participation in Principle. This agreement provides for any municipality or commission to continue participating in the project or to Opt Out without penalties after the RFP assessment and prior to the awarding of the contract. A copy of the Governance Agreement has been forwarded to the Legal and Finance Departments for review. Once the document has been approved by the Legal Department, it will be brought forward to the Mayor and City Clerk for their signatures thereby permitting the City of Burlington to continue to participate in principle. Upon completion of the evaluation of the bids received, staff will report to Committee with the results and recommendations. If the City participates in the inventory procurement program, staff will report back to Committee following the first year experience. Metrolinx, in concert with the Transit Inventory Joint Procurement Team, has prepared a RFP document to be placed on MERX 5 in early March The Governance Agreement must be signed prior to the issuances of the RFP if the participating systems wish to continue to participate in principle in the Transit Inventory project. Options Considered: N/A Financial Matters: The approved 2010 Transit Maintenance Operating Budget included $436,500 for the purchasing of parts and supplies for both conventional and handi-van maintenance repairs. The 2010 parts and supplies budget was reduced by $20,000 to reflect the potential savings based on the projected initial start-up of the project in Q3 of Based on the field studies conducted by Metrolinx and the information that was gathered from the RFI, annual savings in the range of 10% to 30% could be realized from the purchasing of existing OEM and non-oem parts and supplies presently used. Using Burlington s five (5) year average of the General Ledger values of the On-Hand Inventory from Table 1.0, and an estimated 75% reduction of the on-hand inventory parts and supplies that Burlington presently carries, would result in a reduction to the on-hand Inventory and the general ledger value from the present annual average of 5 Merx TM is Canada s leading electronic tender service, a source for both Public and Private sector tenders.

7 Page 7 of Report $523,505 to $130,876 annually. 6 The 2011 proposed Current Budget includes a $20,000 reduction in parts and equipment to reflect the potential savings based on a start-up in Q The current Parts Coordinator s job functions would be altered through the reduction of the physical on-hand inventory levels. There would be fewer inventories to track on a daily basis; however, the volume of parts and supplies being purchased and dispensed would remain the same. The daily activities of ordering, receiving, creating work orders, charging out parts and supplies to work orders will remain unchanged. The ordering and delivering process, plus the monthly billing would become more streamlined by dealing with one third party for the bulk of the purchases. Overall the manageability of the systems parts and supplies should result in extending the timelines for the need for additional staff as the system expands. Using Burlington s five (5) year Parts and Supplies Expensed average from Table 1.0 and the estimated average annual savings percentage of 17.5% 7 on parts and supplies as per Metrolinx s field studies and RFI information that was gathered, it is projected that Burlington would realize an annual average savings of $96,396 in the purchase of parts and supplies. Burlington could realize a total savings of $289,188 from the purchase of parts and supplies through the bulk buying process over the initial first three years of the contract. TABLE 1.0 Transit Inventory Year General Ledger Value of On-Hand Inventory (Fleet & Handivan) Actual Estimated Value 8 Parts and Supplies Expensed (Fleet & Handivan) Projected Savings Using the Metrolinx Model (Average annual savings of 17.5%) 2006 $671,965 $167,991 $439,512 $76, $532,525 $133,131 $506,926 $88, $596,301 $149,075 $661,282 $115,724 6 The value represented is an approximate annual value illustrating the potential reduction in the inventory levels that would be carried by Burlington Transit on site. 7 Average of 17.5% derived from 10 to 15% on OEM and 15 to 30% on Non-OEM. Based on averages provided from the Metrolinx Briefing Notes. 8 Based on a 75% on-hand annual inventory reduction if used.

8 Page 8 of Report 2009 $454,631 $113,657 $639,250 $111, $362,103 $90,526 $507,198 $88,760 Total $2,617,525 $654,380 $2,754,168 $481,980 Five Year Average $523,505 $130,876 $550,834 $96,396 Total Financial Impact: As part of the Joint Procurement Inventory Project, a Contract Administrator would be hired through Metrolinx to be the main contact for all of the parties involved. This person would be responsible for overseeing the contract, dealing with issues, coordinating training, negotiations and audits. The costs to finance this position would be borne by all of the participating systems, while Mertolinx would provide office space and clerical support. The Participation Fee will be outlined in the Master Agreement between Metrolinx and the participating parties. This fee will be equal to 1% of the value of the parts and supplies purchased through the project supplier, plus applicable taxes to cover the cost of the Contract Administrator for the first year term. Other then the annual Participation Fee to be outlined in the Master Agreement, no additional costs would be borne by the participating parties. Following the completion of the first year, the participation fee will be reviewed and set annually by the Joint Procurement Steering Committee. The set value will be no less than 0.5% and no greater than 1% for each subsequent year of the contract. 9 As an example, using the average annual Parts and Supplies Expensed from Table 1.0, the first year estimated fee payment to Metrolinx by the City would be $5,508. This estimated annual charge to Metrolinx would be offset by the annual savings that could be realized, which for Burlington in this example is equivalent to 0.056% of the estimated Average Annual Savings as seen in Table 1.0. Source of Funding: The method of payment for the Contract Administrator will be set out in the Master Agreement. This is presently being reviewed by the Inventory Procurement Steering Committee. Possible suggestions to fund this position are: Annual billing by Metrolinx at the end of each term (one year). A set base fee added to the monthly billing of the parts and supplies purchased. 9 The specific terms of payment of the Participation Fee will be outlined in the Master Agreement.

9 Page 9 of Report Other Resource Impacts: N/A Communication Matters: N/A Conclusion: Burlington Transit staff is participating on a Joint Procurement Project in concert with nine (9) other transit systems, led by Metrolinx, for the purpose of determining the feasibility of bulk buying and third party management of fleet parts for distribution. An information document (RFI) was prepared and issued in the spring of The results of the document were reviewed and assessed by the project team to determine whether the group should continue to proceed with the project. The results of the document were favourable and it was agreed by the Project Team that the project would continue and the RFP would be developed. This RFP is tentatively scheduled to be issued in early March 2011, with the intent to award a contract in May 2011, with a phased in implementation to start in the Q3 of Of the participating systems involved, Burlington Transit and Oakville Transit would be the first two systems to start the implementation process. As part of issuing the RFP, all participating municipalities or commissions are required to sign a Governance Agreement with Metrolinx to allow our Participation in Principle. This agreement allows for any municipality or commission to participate up to the awarding of the contract. Each participating municipality may Opt Out without penalties after the assessment of the RFP prior to the awarding of the contract. Staff will report back to Committee with the results from the evaluations by the project team of the bids received with recommendations. If the City chooses to participate in this inventory procurement process, staff will report back to Committee following the first year experience. Respectfully submitted, Rick Baltzer Donna Shepherd Transit Maintenance Project Coordinator Director of Transit (905) Ext (905) Ext. 7763

10 Page 10 of Report Appendices: Notifications: (after Council decision) Name Mailing or Address Approvals: *required Committee Disposition & Comments Council Disposition & Comments *Department City Treasurer General Manager City Manager To be completed by the Clerks Department 01-Approved 02-Not Approved 03-Amended 04-Referred 06-Received & Filed 07-Withdrawn 01-Approved 02-Not Approved 03-Amended 04-Referred 06-Received & Filed 07-Withdrawn