Report 97018.1 Summary - November 1997

Los Angeles County:

Departments Can Improve Purchasing and Warehousing Practices

Results in Brief

Los Angeles County (county), which has experienced serious budget shortfalls since fiscal year 1991-92, could reduce its spending by improving its inventory management and warehousing systems. During this review, which is one of an ongoing series of audits required by the California Government Code, Section 30605, we found that the county does not have access to sufficient information that would allow it to consolidate further its purchases and take advantage of volume discounts. In addition, county departments could manage their inventory and warehouses more effectively, and they have not consistently used cost-saving direct deliveries from vendors to users. Further, some departments are not managing purchases carefully and are circumventing county purchasing policies. For some purchase orders we reviewed, vendors received late payments, departments split purchase orders (a practice that results in higher administrative costs for the county), and departments exceeded their delegated purchasing authority.

Our audit focused on the county's purchasing and contracting practices and revealed the following areas needing improvement:

· Because it lacks comprehensive purchasing information, the county cannot analyze purchasing patterns at all departments, identify areas in which it can consolidate purchases, or identify commodities that the county could standardize for the purposes of cost savings.

· The county has not yet resolved issues related to a group purchasing contract that its Department of Health Services (health services) is anxious to complete. Although health services is working toward reducing the cost of medical supplies by developing a contract with a purchasing organization, it has not yet consulted its medical staff about future limitations in the selection of drugs and supplies, and the county has not analyzed the contract's effect on costs to other departments.

· As the county's purchasing agent, the Internal Services Department (ISD) is not functioning as effectively as possible because its staff spends time processing purchasing requisitions that departments could handle themselves if the county delegated greater purchasing authority to the departments.

Additionally, we evaluated whether the county has responded to a countywide warehousing review private consultants performed in August 1996. To assess this, we reviewed the warehouse operations at the Los Angeles County Fire Department (fire department), the Department of Public Social Services (social services), the Probation Department (probation department), and the Department of Public Works (public works). Our evaluation disclosed the following conditions:

· In general, the county has not yet taken significant steps to address the recommendations in the consultant's report.

· The county continues to incur significant, unnecessary warehousing and inventory carrying costs because of inadequate management procedures and a failure to use existing, cost-effective distribution systems.

· The four departments we visited cannot manage inventory effectively because the computerized systems that generate materials management information do not routinely produce basic performance measures.

· The inventory management systems at three of the four departments do not fully integrate the materials management, purchasing, and accounting functions. Consequently, the departments duplicate effort, resulting in higher costs.

· The departments we visited do not regularly calculate, track, or report the cost and performance data for their warehouses.

Finally, to determine if departments comply with county purchasing requirements, we examined purchase orders and contracts at the fire department, social services, the probation department, and public works. During our review, we noted these weaknesses in the ways departments have managed purchases and in departments' compliance with county policies:

· The fire department did not obtain the necessary approval before allowing two consultants to incur significant costs on its behalf.

· Because public works did not properly manage two of five purchase orders we reviewed, the vendors received late payments.

· In one instance, the fire department circumvented the contracting authority given to it by the county's board of supervisors.

· The probation department and social services exceeded the purchasing authority given to them by the ISD, without obtaining ISD approval, as required.

· The probation department, social services, and the fire department split purchase orders and thus bypassed the county's purchasing policies.

Recommendations

To improve its management of the purchasing process, the county should take these actions:

· Continue its efforts to implement a new purchasing management information system that will track the county's purchases in detail.

· Perform more analyses before health services enters its contract with the group purchasing organization that would provide drugs and medical supplies. These analyses should include an assessment of the contract's effect on the county as a whole.

· Through the ISD, increase the level of purchasing authority it delegates to departments.

To reduce its costs for inventory management and warehousing, the county should do the following:

· Reduce inventory levels and then combine storage facilities where possible. To do so, the county should regularly evaluate the turnover rates for all commodities and then remove obsolete or excess items from stock.

· Take advantage of existing next-day delivery contracts as well as those that include direct delivery to users. In addition, the county should expand its use of such contracts to include additional commodities.

· Enhance departments' materials management information systems.

To use county funds as economically as possible, departments should manage purchases prudently. Specifically, each department should take the following steps:

· Obtain the required approvals before allowing consultants to perform work on its behalf.

· Ensure that its staff completes purchase orders accurately and promptly.

Agency Comments

In its response to our audit, the county generally agreed with our recommendations. In fact, the ISD and the auditor-controller are evaluating a management information system that will capture comprehensive purchasing data and automate much of the purchasing process. Also, the county board of supervisors has directed its Quality and Productivity Commission to make recommendations to improve the county's inventory and warehousing practices. Finally, the auditor-controller has recently expanded its departmental compliance reviews to ensure compliance with purchasing and contracting policies.


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