Fleet Inventory Processing' ,, _ ___,.-
BUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division
TO: Jorge M. Gonzalez, City Manager
INTERNAL AUDIT REPORT
VIA:
FROM:
DATE:
Kathie G. Brooks, Budget and Performance Improvement Director
James J. Sutter, Internal Audit~
September 10, 2010
AUDIT: Fleet Inventory Processing
PERIOD: July 1, 2009, through October 23, 2009
This report is the result of an audit performed on the Fleet Inventory Processing, in accordance to
our Audit Plan. The Fleet Management Division under its Warehouse Operation unit is responsible
for ordering, stocking and issuing automotive parts required for the operation and maintenance of
the City's fleet of vehicles and equipment.
INTRODUCTION
The Fleet Management parts warehouse includes a large storeroom for large/bulky parts and
excess/reserve parts, and a small storeroom for the most frequently used and more sensitive
equipment parts. Warehouse employees receive and issue the parts needed to service City
vehicles and equipment from this small storeroom area. The facility also has a shop supplies and
consumables area where mechanics find items that are not stocked under inventory control.
The parts warehouse is restricted to warehouse employees, their supervisor, and Fleet Management
administrative personnel; keys are required to access the storeroom areas. Fleet mechanics go to
an open access area where the storeroom service window is located to request and obtain the parts
they need. There are four closed circuit cameras located on the open access area and inside the
small storeroom. The cameras are monitored in the Fleet Management Director's office and the
images are digitally recorded.
The warehouse inventory stocks the most frequently used parts for the service and maintenance of
the City's vehicles and equipment. Many of the parts used for the service and maintenance of the
fleet are non-stock, when they are used less frequently or if they have a higher cost. When the
purchase of inventory parts is necessary, stock and non-stock, a warehouse employee prepares the
order on the Faster System before it is placed with the vendor. The Faster system is a stand alone
computer software utilized by Fleet Management for inventory control of automotive parts,
mechanics labor, as well as general asset management and fuel consumption tracking. When the
parts order is received from the vendor, the warehouse employee checks the units received and the
pricing according to the bill of sale. Once the order is verified, the parts are changed from ordered
to received in the Faster System, which automatically places them in inventory. Invoices are
approved for payment by the Fleet Analyst and forwarded to Finance for payment.
The Fleet Management Director indicated that the re-order point process for stocked parts in
inventory is currently being re-evaluated because of the non-performance of warehouse activities by
former warehouse personnel, who did not properly reflect purchases and issuances of inventory
parts. This took place in the early part of 2009 and resulted in personnel changes, inventory
adjustments, and increased supervision. It has taken several months to adjust inventory records
and some write-offs have been required. The Director also indicated that stock levels have been
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Internal Audit Report
Fleet Inventory Processing
September 10, 2010
reduced to prevent over stocking.
The distribution of warehouse parts begins when a work order is opened for repair service or
scheduled maintenance of vehicles and equipment, or when warehouse personnel identifies the
need to re-order parts. A work order is initially prepared by the Fleet Service Representative (FSR)
in the Faster System upon a vehicle complaint/request for service form completed by the person
bringing the vehicle for service. A technician is assigned to evaluate the needed repairs and/or
perform the required service work. For parts needed, the technician comes to the warehouse and
identifies what the work requires. If a non-stock part, a form is completed and the purchase order
placed; if the part is in stock, the warehouse employee enters the information in the work order, pulls
the part(s) from the storeroom and gives it to the technician. The part number(s) is also entered on
a warehouse log sheet and signed by the technician as evidence of receipt. When parts issued are
entered on the work order, inventory levels for that part are automatically reduced in Faster.
When the technician completes the work, the FSR is notified and vehicle keys are returned. At this
time, the FSR changes the work order status to Ready or Finished, depending whether notification
that the work is completed is necessary, or if the vehicle is returned to someone waiting. A copy of
the vehicle complaint/service request form is given to the individual receiving the vehicle. At the end
of the work day, a Fleet Shop supervisor reviews work orders in Finished status for parts and labor
charges and changes the status to Closed. For repairs and service requests considered to be
"major" in nature, the area/department requiring the service is notified by email of the estimated
costs before the work is actually performed.
Parts used along with labor charges as reflected in the work order, are included in the charge-back
amounts reported to Finance on a monthly basis and posted to departmental general ledger
accounts. Non-stock parts charges are based on the cost at the time of purchase, while stock part
charges represent an average cost based on the last three purchase prices paid for the part. Fleet
Management applies a 20% mark-up to the cost of both non-stock and stock parts to cover
overhead expenses. For stocked parts, the Faster System calculates an average of the cost for the
last three purchase prices in the history of the part. The mark-up percentage is analyzed annually
based on (A) the total of warehouse employees' salary and benefits and overhead expenses for the
warehouse location and (B) the cost of parts, tires, etc. issued. For example, the 20% mark-up was
arrived at by (A+ B), where A= $140,000 and B=$700,000.
The annual physical inventory for fiscal year 2009 was delayed due to the implementation of a new
bar code/scanning system with PDA (personal digital assistant) units. We were also informed that
the parts labels used on the storage shelves had not printed correctly and the PDA scanners could
not read the part numbers correctly. Since the PDA technology was being used for the first time to
perform physical inventory counts, the label printing problem had not surfaced earlier, thus a new
printer had to be obtained and all storage shelves re-labeled. The physical inventory was started on
October 23 and concluded on October 26, 2009, resulting in 1 ,528 distinct parts active in its
inventory, 31,054 items in stock, and a value of $163,990.
Purchases for parts are charged to the Inventory Purchase Warehouse general ledger account
(51 0-4500-000482) under the Fleet Management Fund. During the year, the Fleet Division charges
user departments on a monthly basis for parts used. For the fiscal year 2008/09, $690,700 out of
$695,725 (99.27%) was charged out to the various City departments. While the $5,025 difference
not charged out had a negligible impact on the Fleet Management Fund, the fund still had an
operating loss of $1,586,268 (inclusive of deprecation charges of $3,237,442). Similar operating
losses existed in prior fiscal years resulting in the Fleet Management Fund's Net Assets balance to
decrease to $8,535,794 as report in the City Comprehensive Annual Financial Report for the fiscal
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Fleet Inventory Processing
September 10, 2010
year 2008/09.
OVERALL OPINION
As a result of our testing during the audit we were able to determine that the Fleet Management
Division generally maintains an acceptable level of internal controls over the parts inventory
warehouse. The warehouse premises and the inventory of parts appear well organized for an
efficient warehouse operation. Parts inventory quantities are kept at reasonable levels and parts
used are charged back to the respective departments requiring service and maintenance of their
vehicles and equipment. However, our testing also identified some deficiencies in reference to the
following:
1. A special refurbished radiator kept in stock because of the difficulty to obtain was not included
in the Faster System inventory of parts.
2. As a result of the physical inventory counts, 143 parts (9.4%) were found to have differences
between the physical inventory counts and the parts inventory levels recorded in the Faster
System. There were 70 part numbers where the system count was over the physical counts
and 73 parts where the system count was under the physical counts. The over results indicate
that parts are missing from the inventory because they may have been issued as part of a
work order but not reduced from system records, or they were removed from the warehouse
unauthorized.
3. Most of the policies and procedures for the Fleet Management Warehouse are in draft form
and in general were not properly dated. We noted other specific deficiencies among the
policies and procedures that require updating.
4. The large storeroom in the parts warehouse does not have any security camera coverage on
the gate/door leading to a dock area next to the waterway.
Additional details regarding the above mentioned and other areas in need of correction have been
provided on the Findings, Recommendations, and Management Responses section of this report.
PURPOSE
The purpose of this audit is to determine whether the Fleet Management Division maintains an
adequate level of internal controls over the parts inventory warehouse to ensure these are properly
safeguarded, and the receiving and issuing of parts is accurately recorded.
SCOPE
1. Review the adequacy of documented operating policies and procedures to ensure the efficient
and effective management of the Fleet parts warehouse.
2. Review the process of purchasing and distributing inventory parts to ensure there is proper
segregation of duties.
3. Select invoices of inventory parts purchases and work orders where these parts are issued
from the warehouse to evaluate if these are accurately and timely recorded in the Faster
System. Determine the adequacy of these processes and their supporting documentation.
4. Select charge-back transactions for Fleet replacement parts and trace the accuracy and
posting to their respective general ledger accounts.
5. Verify that warehouse inventory items are stored in an orderly manner, clearly labeled, and
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Internal Audit Report
Fleet Inventory Processing
September 10, 2010
properly safeguarded.
6. Confirm that adequate procedures were used for conducting the year end inventory in an
efficient, effective and timely manner to ensure an accurate count.
7. Confirm that the year end inventory results accurately reflect the final inventory valuation as
determined by the physical count and that this is communicated to the Finance Department.
FINDINGS, RECOMMENDATIONS, AND MANAGEMENT RESPONSES
1. Finding -Parts Inventory Test Count
We performed a parts inventory test count by selecting 101 distinct parts (6.6%): 53 parts with
the highest cost/unit and 48 with the highest stock value based on the number of parts times
the unit cost. Our sample was selected from the Faster System's Fleet Warehouse Inventory
listing of "active" part numbers as of 1 0/23/09; the same day the physical inventory was
started. The warehouse inventory population consisted of 1,526 parts, which included 29,999
items. Of the parts selected by high unit cost we found part #2-4372025, a refurbished
radiator that reflected zero items in stock on the inventory listing. This is a special and
expensive part that was difficult to obtain when a replacement was necessary, thus Fleet
decided to refurbish it at significant savings and keep it in stock, but it was not entered to the
Faster System.
Recommendation
We recommend that all parts stocked in the warehouse be included in the Faster System
inventory records. This would facilitate locating it as part of the inventory in the Faster System
when the time comes to repair the vehicle again, and adding to a work order for charge-back
to the department.
Management's Response
Part #2-4372025 [radiator] was refurbished in April of 2008 and placed on a shelf without
being properly placed into the inventory. As a result of the 2009 inventory, the part was placed
into stock. All parts being stocked in the warehouse whether new, used or refurbished, are
now being put into the Faster Inventory System.
2. Finding -Physical Inventory Differences
We reviewed the results of a comparison made by Fleet Management between Faster System
inventory records and the PDA (personal digital assistant) inventory counts. This comparison
showed initial differences in stock quantities that were subsequently verified by a second count
made by the warehouse supervisor to determine if differences were real or if the PDA counts
or Faster System records were incorrect. The recount cleared many of the discrepancies; but
there were still differences for 143 of the parts. These consisted of 70 part numbers where
Faster System records were over the physical counts and 73 parts where system records were
under the physical counts. It should be noted that approximately 54 (38%) of the 143 parts
were hoses, wires, lubricants, etc., which are not stocked or issued in exact units but rather
dispensed in approximate lengths and volume.
The over results indicate that parts are missing from the inventory because they may have
been issued as part of a work order but not reduced from system records, or they were
removed from the warehouse unauthorized. The lack of accurate recording of parts physically
removed from inventory in a work order has an impact in the cost recovery during the charge-
back process to departments. The under results reflect that parts purchased and received
may not have been entered into the Faster System. The net results for the over/under
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differences in inventory levels is estimated to be approximately $1,269 worth of parts that need
to be added to the Faster system.
Recommendation
We recommend that Fleet Management Administration emphasizes to its warehouse
personnel the importance of accurately and timely recording transactions in the Faster System
for parts received and issued. The methodology used for dispensing and estimating length
and volume of parts not issued in exact units should be evaluated to reduce the quantity
discrepancies. We further recommend that work orders completed be verified the same day
parts are issued to ensure they are properly recorded and charged-back to the departments
requiring their use. Periodic test counts should be made of selected part numbers, in a
rotating basis, to ensure inventory transactions are being properly recorded and accounted for.
Management's Response
Fleet Management agrees with the recommendations.
The current warehouse team is very aware they are to stock sufficient automotive parts to
maintain a high level of service for our customers. The inventory is being continuously
monitored and tracked, as to which items are 'moving' and which may soon become obsolete
and must be returned. The warehouse staff has recently placed measuring devices as well as
log sheets in close proximity to parts which are not issued in exact units (ex: wire, hoses and
sash cord). This will help to ensure better accuracy and reduce discrepancies. The Fleet
Service Representative and Operations Supervisor are reviewing Work Orders on a daily
basis for accuracy. Fleet has implemented a cyclical inventory which is currently in the fourth
cycle and reconciles the inventory daily based on purchases and issues of all parts.
3. Finding -Policies and Procedures
We reviewed the policies and procedures for the Fleet Management Warehouse, which
included: Physical Inventory Pre & Post Preparation, Fiscal Year End Inventory on Inventory
Day Instructions, FasterCS Fiscal Year End Inventory Process, and Special Orders. All of the
policies and procedures were provided in draft form, except for the one on Special Orders, and
in general were not dated, or did not indicate the year. We also noted the following procedure
specific deficiencies:
a) Physical Inventory Pre & Post Preparation: includes several references to the Internal
Audit Department inventory procedures that are no longer applicable.
b) Fiscal Year End Inventory on Inventory Day Instructions consists of procedures for
Inventory Counter, Prepare the PDA (personal digital assistant) for Inventory, PDB
(program database) Converter, and Fleet Analyst. We noted that the Inventory Counter
procedure describes instructions for inventory counters in teams of two; however,
although two counters were used they worked independently.
c) The Special Orders procedure references a form used for this purpose, but some of the
information on the form provided does not correspond with the procedure.
We also requested the policies and procedures used for the daily operations of the parts
warehouse, but only received PDF files of the Faster System manual for Parts Processing and
Parts Inventory.
Recommendation
We recommend that Fleet Management perform any necessary updates to the policies and
procedures of the Fleet Management Warehouse, in order to complete and formalize these
documents. All procedures should reflect the most recent revision with month/date/year. In
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Internal Audit Report
Fleet Inventory Processing
September 10, 2010
addition, Fleet Management should develop basic procedures for warehouse personnel on the
internal processes to be followed for parts inventory transactions. These procedures should
be used in conjunction with the Faster System manual.
Management's Response
Fleet Management recently purchased Hand Held bar code scanners in an effort to become
more efficient conducting inventories. Fleet will be updating the inventory procedures to reflect
the use of PDA's, cyclic inventories and daily reconciliation of parts purchases and issues.
Per the recommendation, the warehouse staff will be updating basic Warehouse procedures
and develop additional procedures for material handling as needed to reflect the current
operation. All procedures will include revision dates.
4. Finding -Warehouse Security Cameras
We observed the security maintained over the parts warehouse areas and found that the large
and inside storeroom areas are restricted by key access to warehouse personnel and Fleet's
administration. The area is monitored by four security cameras; two are located on the wall of
the unrestricted access area and two on the small/inside storeroom on the wall leading to the
large storeroom. Monitors for these cameras are located in the Fleet's Director's office and
images are digitally recorded. However, we noted that the large storeroom also has a
gate/door leading to a dock area next to the waterway, which does not have any security
camera coverage.
Recommendation
To provide adequate security camera coverage to all entrances and exit points of the parts
warehouse, we recommend that a security camera for the gate/door leading to the dock area
be installed.
Management's Response
Securing the warehouse rear doors in the dock area of the waterway has been extremely
difficult. Fleet is currently pursuing additional camera coverage per the recommendation.
Fleet will consult with Property Management and the Fire Department for additional solutions.
EXIT CONFERENCE
An exit meeting was held to discuss the audit report and to solicit management responses noted
above. Attendees were Andrew Terpak, Joyce Dickerson, James Sutter and Luis Lopez.
Management responses were received shortly thereafter. All were in agreement with the contents of
this report.
JJS:LL:II
Audit performed by Luis Lopez, Internal Audit Contractor
F:\obpi\$AUD\INTERNAL AUDIT FILES\DOC09-1 0\REPORTS-FINAL\Fieet Inventory Processing.doc
cc: Andrew Terpak, Director, Fleet Management Division
George Fisher, Fleet Analyst
Patricia D. Walker, Chief Financial Officer
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