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1.1 INTRODUCTION TO MATERIALS MANAGEMENT________________ Materials are the key resource in an industrial enterprise; no production is possible without materials. Materials also form a major constituent of the cost of the product and, therefore, proper control over their procurement, storage, issue, movement and consumption is necessary. Materials management exactly does this. Material Management according to Bethel and others, is a term used to connote "controlling the kind, amount, location, movement and timing of the various commodities used in and produced by the industrial enterprise." It involves all activities concerning materials right from the time the need for the materials is established until they are issued to production. Materials management covers all aspects of materials and their supply, which are necessary for converting raw materials into finished products. It is thus concerned with planning and programming of materials (material planning), market research for purchase (purchase market research), procurement of materials and capital goods (purchasing), receiving, store keeping, warehousing, inventory control, packaging and packing of materials, materials movement, disposal of scrap, surplus and obsolete materials. (Fig. 1.1).
Waste Management FUNCTIONS OF MATERIALS MANAGEMENT JDisposal of plus m aterial
Fig. 1.1: Functions of Materials Management Importance of Materials Management Materials productivity has a significant and direct effect on a company's profitability (i.e. Return-on-Investment). Rate of return on investment is the ratio of profit to capital which
Introduction to Materials Management
in turn (for the purpose of analysis) may be split into its two basic constituents profit margin and capital turnover ratio. (Fig. 1.2).
Rate of Return on investment (R.O.R.) P = Profit C = Capital S = Sales
X Fig. 1.2: R.O.R. and its constituents Two basic ways to improve R.O.R. are (a) Increasing profit keeping the capital constant Profit is the lifeline of an organisation. Good profits help everybody. Profits give shareholders a dividend. Profits give employees their wages, job security and all that goes with it. Profits give the company the capital to buy materials, machines, tools and other inputs for its operations. It enable a company to expand, which brings in greater job opportunities, and replace old machinery that has rendered its share of service. Profits help the company to improve quality of life (i.e. make buildings, roads, community centres, schools and dispensaries while providing drinking water) around it. Profits, therefore, is a must since in its absence there would be no investment, no machines, no companies and no products. Profits, when balancing the books is treated as negative cost, yet in reality it is the "cost of staying in business." Profit is the first test of management effectiveness. Fig. 1.3 suggests the areas of control to improve profit.
Unit sold (S)
Unit price (P)
Unit cost (C)
Assuming what is produced is sold i.e. S=N
Fig. 1.3: Profit and its constituents (i) Increase units sold (S): Sales and production must be evenly balanced to ensure that whatever is produced is sold, failing which the company will end up with unsold stocks. "If the Production Department put out 3000 sewing machines, its Sales Department must per force sell the 3000 units, otherwise another crop of ills will come up: storage costs are loss due to deterioration." (ii) Increase production (N): Production can be increased either by dupl icating resources (e.g. adding another identical production line) or by better management of existing resources (i.e. by improving productivity). The duplication of resources requires extra capital, which depends on the company's financial position, while improvement in productivity is within the control of the management. (iii) Increase unit price (P): Price is generally a function of demand and is controlled by the forces of supply and demand. A company operating in a buyer's market may find it impossible to increase the price, thus leaving us with the second factor to deal with, namely cost. (iv) Reduce unit cost (C): Reduction in cost is something which is within the control of the company. The total cost of a product consists of three main constituents:
Introduction to Materials Management
material cost, labour cost and overheads, the material cost being the major portion of the total cost. In the Indian context, materials constitute more than half of the cost of production in most industries and projects. In some industries, 60 to 70 per cent of the total production cost is due to materials. This makes Materials Management the biggest single area with tremendous scope for cost reduction. A well co-ordinated Materials Management Programme may lead to around 20% reduction in cost. (b) Reducing Capital '
An alternative to increasing profit to improve ROR is to reduce capital. Capital can either be fixed capital or working capital, which, in a manufacturing firm, is generally tied up in the proportion of 60 : 40. The fixed capital - capital deployed in fixed assets like land, buildings, plant and machinery, jigs and fixtures etc. - is fixed anyhow and hence a little can be done about it. This leaves us with the working capital. The study of this portion of the capital reveals that a little over 80% of the working capital is locked up in inventory (i.e. raw materials, work-in-process, finished goods, spares etc.), which can be released if proper materials management techniques (i.e. scientific inventory control, JIT, MRP etc.) are employed. Costs involved in the Management of Materials
:•».-.. ' ; . f
The various costs involved in the management of materials are as follows: • • • Basic cost of materials - cost paid to the supplier as price of goods. Government levies and taxes - cost paid to the supplier towards Government levies and taxes, namely excise duty, sales tax, octroi etc. Ordering costs - cost incurred in effecting purchasing, such as cost of tendering, stationery, postage, visits to the suppliers' plant to expedite delivery, cost of receiving, inspection and bill payment, including cost on staff. Inventory carrying costs - cost incurred in maintaining inventory such as interest on capital locked, losses due to deterioration and obsolescence, insurance premium, storage and preservation expenses etc. Packaging and packing cost - cost incurred in packaging and packing of the products.
• • • •
Material handling costs - cost incurred for movement, storage and making supply to the indentor. Freight cost - cost incurred in movement of materials from suppliers' works to buyer's works. Insurance cost - cost incurred in providing adequate insurance cover to the materials in transit and in storage. Wastage during receipt, storage, production etc. - cost of losses due to defects in design, poor quality of material, improper storage methods, improper issues, rework i and rejection during manufacture etc. The primary objective of any organisation is to reduce the above costs so that the cost of material is the lowest.
Objectives of Materials Management
There are ten objectives of Materials Management: a) b) c) d) e) f) g) h) To maintain a steady flow of materials to ensure uninterrupted production. Any disruption affects cost of the product. To achieve economy in cost of materials by adopting cost reduction techniques like value analysis, variety reduction, JIT, MRP etc. To ensure consistency of quality by providing right materials, of the right quality, in the right quantity and at the right time. To reduce inventory investment through scientific inventory control techniques. To improve corporate image by maintaining good buyer-seller relations. To maintain goods records of purchase, stores, traffic, etc. to eliminate the possibility of corruption. To preserve/conserve materials in stock so that losses due to pilferage, deterioration, obsolescence etc. are kept at minimum. To reduce operating cost by minimising/eliminating wastage and improving productivity of materials.
Introduction to Materials Management
i) To improve competitive strength of the firm by producing the best quality products using quality materials at the lowest possible cost. Fig. 1.4 below lists the objectives of Materials Management.
Elimination/ minimisation of wastage of materials • ^
Speedy disposal of surplus materials
Improving competitive strength
Goods records •^ Speady flow of materials
Preservation/ conservation of materials
( Dbjectives of materials management
Economy in cost of materials
Improved corporate image through goods buyer seller relationships
Lower inventory investment
Consistency of quality
Fig. 1.4: Objectives of Materials Management Integrated approach to Materials Management To improve materials productivity and get the most out of every rupee invested in materials, it is essential to follow a well co-ordinated and integrated approach towards the various areas that involve decision making with respect to materials. For best results, all activities related to materials must be placed under one department viz. Materials Management department. The activities as in Materials Management are as follows: • Materials planning - Ascertaining the needs of the users well in advance, translating sales projection into production requirements and making realistic estimates of various items of materials required, their quantities and the time that it is required. Make-or-buy decisions - Deciding the items that are to be produced at the home plant and the items to be procured from outside sources based on relative economics.
the acceptability or otherwise of materials.Utilising various cost reduction techniques such as value analysis. in order to reduce purchasing cost and save on foreign exchange. Distribution of materials -Arranging the fastest and the most efficient supply to the indentors. Ancillarisation . variety reduction. Import substitution .Materials Management Purchasing -Arranging uninterrupted supply of raw materials. lodging claims for loss of materials and damages in transit and recovery thereof. critical path analysis.Developing indigenous sources of supply for imported materials and parts. with a view to improving material productivity. Transportation -Arranging the must cost effective and efficient transport for incoming and outgoing materials.Developing small scale captive sources to manufacture parts and components required by the company. selecting and developing new sources of supply for improving quality and reducing cost. .. Developing new sources of supply .Inwarding of materials and deciding.Maintaining optimum investment in inventories and at the same time ensuring uninterrupted supply of materials required for production. methods improvement etc. Inventory control . components and consumables to meet the production target. parts. using proper methods of preservation. Receiving and inspection . line-of-balance. learning curve. with the help of quality control/production/maintenance/others. and reducing insurance cost. » Waste Management .Locating. JIT. MRP etc. Insurance Management -Arranging adequate insurance cover for materials in transit and in storage. > Materials cost reduction and cost control . It also includes measures such as design reviews. providing the right kind of storage. Storage . obsolete and scrap materials -Analysing and selecting the most economical channel to dispose of whatever is surplus or not required.Taking physical custody of materials. Disposal of surplus.Minimising materials waste by identifying the causes for rework/rejection/scrap of materials. providing proper security against pilferage/ theft/malpractices and taking steps to minimise wastage and storage losses. transportation models.
The materials department should be placed as a top management function. so it is called organising. irrespective of their number. on account of large scale purchasing. since all the purchase contracts and related decisions are being taken by one department. for which a clear internal structure of the department and working relationships of the various jobs is a must. Centralised arrangement refers to the procurement of the requirements of all the departments of the firm or of all the plants. to .5 Fig. Typical organisation structure under this type of situations would be as shown in Fig. proper organisation structure is a must and it is one of the top management functions. The merits of this set up are as follows: f) Consistency in buying policies. Status of the department Status of the department refers to the placement of the department in the structure of the company.Materials Management Effective participation of employees is possible only when they clearly understand their roles (positions). Organisation structure for the Materials department involves decisions regarding the status of the department in the company. responsibilities and authority.5: Material department being considered top management function Degree of Centralisation The department may have either a centralised or a decentralised system of working.. by a central purchase organisation. ii) Economy in buying due to better bargaining on price and terms and conditions with vendors. 1. 1. degree of centralisation and the internal structure of the department. headed by a Senior executive reporting to the Chief Executive/Managing Director. for effective working of the people. reduction in transport costs etc. Thus.
Decentralised arrangement refers to the system of procurement of requirements of the different divisions (or different plants) by local buying sections vested with all the powers of a purchase department. " • ' . vi) Reduction in handling and storage costs due to centralisation of receiving inspection and storage.e. *< -. each attached to the division (or situated at the plant) concerned. . Both centralised and decentralised buying. iv) Economy in maintenance of records in the purchase (few purchase indents). deliveries and performance of items to the concerned departments. have their own merits and demerits. quantity and variety of items to be purchased) 11 . The most common concept. receiving and inspection (fewer receipts) and accounts (fewer payments) departments. (ii) Since local buyers are in close contact with their respective divisions. since one department handles all purchases. as discussed above. v) Low inventory investment.Unit 1 Introduction to Materials Management iff) Uniformity in purchase records. vii) Performance of specialist functions by non-specialists. The internal structure of the Materials department depends on i) Complexity of operations (i. • . The merits of a decentralised set up are as follows: (i) Decentralisation enables individual buyers to react rapidly to changes in the requirements of the divisions/plants to which they are attached. they can render greater assistance to them by providing information on probable prices. '. viii) Avoidance of irritation of the vendors at having a number of contacts with the company. Cm) A local buyer under the decentralised system is under the control of the senior executive of the division/plant and executives can be held responsible for the production loss due to failures attributable to the buyer (since the executive concerned is in-charge). therefore. is to have a compromise where both centralised and decentralised buying concepts exist together.
sm all m edium or large setup) in) Single or multi-plant/multi division. if purchases are small and not very complex (Fig. may be combined with purchasing. A . traffic etc. Fig. if purchases are large and varied (Fig. store keeping and traffic .e. Greater degree of functionalised sub-division is employed. receiving. Internal structure in a sin gle p lan organisation The general rules are as follow s: • • Materials related activities like store keeping.7).1.6). 1.6: Organisation showing receiving. 1.Materials Management if) Size of the com pany (i.
with a centralised agency that will (f) co-ordinate the activities and directing policies of the local buyer.Acombination of the centralised and decentralised concepts. with a few or no common items. each division has its own separate materials department under the control of the head of the division.II (Imports ) Buyer . Semi-centralised structure . Under this setup. This works better if the various division of a company manufacture diversified products.III (Raw materials) Buyer -V (Press parts) Fig.Unit 1 Introduction to Materials Management goods & MRO) (Capital al ( i r ^ i Buyer -IV (Supplies) i r -I Buyer . Multi-plants/multi-divisions organisations structure The general rules are as follows: • Centrali sed structure is preferred if the company has different manufacturing divisions or closely located plants.7: Organisation structure showing greater degree of functionalised sub-divisions B. while local buyers place orders against the contract and buy miscellaneous items from local suppliers. (ii) undertake contract buying of important materials. • • (i ii ) u n d e rt a k e m a r k e t r e s e a r c h o f a ll d i v is . 1. Each division has its own purchase manager/buyer to co-ordinate the activities of the division and all buyers in turn are answerable to the head of the Materials department.
8.) Materials Manager (Plant B) Materials Manager (Plant A) Materials Manager (Plant C) Receiving & Storing Inventory Purchasing Traffic Materials handling Buyer I Buyer II Buyer III Fig. • • Scheduling and planning orders for purchase. 1. A semi-centralised setup is shown in Fig. 1 r Managing Director ' General Manager General Manager (Personnel) 4 ^ General Manager (Materials) J General Manager (Marketing) *"- 1 General Manager (Engg. 14 .8: Semi centralised set up Responsibilities of different divisions of Materials Department. Developing a master production schedule. in the right quantities. The respective functions of the materials department of a medium-sized firm are detailed as under: 1) The Material Planning division is mainly concerned with assurance of materials in the right quality. 1. at the right price and at the right time.Materials Management Decentralised set up is preferred in organisations having more than one plant division geographically located at different places in the country. The various responsibilities of the division are as follows: • Determining net requirement of materials by considering sales budget and inventories on hand.
Pre-delivery follow up and shortage chasing.Unit 1 Introduction to Materials Management d e Co-ordination with purchase. Co-ordination with inward section including timely return of defectiveM materials a back to suppliers. • Ensuring service to customers by giving prom pt .. . n Disposal of surplus. n flt The main responsibilities of this function are as follows: t .. stores and production to identify deviations and l undertake corrective actions. g Maintaining the com pany's image am ong suppliers. v 2) The Purchase Division responsible for the purchase of goods of right e is quality. Floating enquiries.. i Acting as a link between the company' s finance departm ent and the suppliers n for timely payment/settlement of suppliers' bills. : . processing quotations. at the right tim e and price and from the right source. i • M aintaining records of materials receipts and shortages. in the right quantities. i Endorsing suppliers'invoices for paym ent. a Arranging discussion m eetings between the suppliers' representatives and the i company's officials. n Processing suppliers' requests for price increases. selecting and developing qualified sources of supply. r Specific i responsibilities include e • Locating. . conducting negotiations and releasing t purchase orders. • • • • • • • • 3) The Inventory control divisionconcerned with controlling inventories at the c is various stages of production. • • • Scrutinising purchase indents and selecting appropriate method of s buying. including price t negotiations. obsolete and scrap m aterial. without affecting the continuity and efficiency of o production.
inuity of productive operations. • • Fixing inventory levels. 15 . Ensuring econom y in purchase by determ ining the optim um quantities to be stocked or purchased.
smallest transit time etc. best care of goods. parcel post. 6) The Receiving division is mainly concerned with verification of goods. scrutinising and auditing freight bills for payment. • filing claims against carriers for shortages and insurance companies for any damages and losses during transit. with respect to correctness of papers. production and traffic departments of the company.Materials Management 4) The Materials handling division is mainly concerned with transport of materials from one place to another. ensuring right materials at the right time and right place. within the company i. air etc. quality and delivery schedule.) on the basis of lowest total charge. supervising the company's transport and ensuring its effective utilisation in collecting/delivering materials from/to transporters' godowns. The main responsibilities of the traffic division are: • selecting the right kind of shipping service (rail. Location of materials handling equipments at appropriate place. Co-ordinating with the stores. protection of goods during transit and ease of handling. • preparing a route-wise rate chart. providing instructions for packaging and packing to guarantee the lowest freight cost. thereby assisting the purchase department in arriving at transportation costs and the sales department in quoting shipping costs to the customers. The various responsibilities of this department are as follows: Selection of right mode of materials handling. Its responsibilities include verification of correctness of paperwork and appropriateness of supply. • • • • 5) • • • preparing bills of lading (contract between the company and the carrier). • • attending to customers' instructions and complaints relating to transportation. • tracing missing consignments and expediting shipments wherever required. The Traffic division is mainly concerned with the arrangement of economic transportation of incoming and outgoing materials. steamer. road.e. Ensuring smooth movement of materials from one place to another. .
. - . • • • Keeping a record of each item received and issued.. delivering accepted materials to appropriate stores. . for any damages or quantity discrepancy. verification of quantities against suppliers' packing slip/delivery advice slip and notifying discrepancies.. t • • Receiving and issuing materials. so as to make him know his broad ef responsibilities how they correlate to his peers. • • • • • 7) TheStoring division mainly concerned with proper storage of materials. .Unit 1 Introduction to Materials Management * • e n s ur e n o m aj or a ct iv it • • in warding of the consignment through proper documents such as GRR. • Arranging materials in such a way that they are easily traceable and approachable. and Job descriptions • avoid overlaps and conflicts. offering materials to quality control for verification of quality. a ul . . obsolescence. ' • I t y is o v er lo o k e d b y Inspecting stores on their receipts.< . . returning all changeable empties to the suppliers. • Providing information on surplus and obsolete materials on periodic basis. ° ° -•••' • . Taking precautions to avoid pilferage. . Job descriptions of key position in the M aterials Department The next logical step after preparation of organisation structure is to prepare job d descriptionfor each incumbent in the department. if any. ' > . is preservation materials and issue of materials. Its responsibilities include of I • Keeping the stores/stock in proper order. notifying indentors and purchase regarding receipt of materials. ••:' . deterioration. . returning defective materials to the suppliers. . Giving information about stocks to the concerned people. .. theft.
• make each individual accountable for specific tasks.t. 17 .
store materials canbe classified broadly into direct materials and indirect materials. > Draw an organisation chart for the materials department of a large scale organisation.Materials Management ' A c t i v i t y D" ".3 CLASSIFICATION OF MATERIALS _____________________________________________________________ _____ A manufacturing or a service organisation generally requires large numbers of items. 1. < . • . nonconsumables etc. work-in-process. consumables. • • . • • " • * ' " " • • ' • • ' • -• .planning.9 shows the classification on the basis of conversion process. if each one of them is handled separately. Classification on the basis of stage of conversion process Inamanufacturing organisation. finished parts (bought out parts and works made parts) and finished goods. Materials may be classified as per the following classification: I. Direct materials. . is a must. 1. is a must. Fig. . in turn. If . accounting . can be further classified into raw materials. • • • .becomes difficult (if not impossible). Handling of such items . therefore. some sort of formal classification. therefore. Some sort of classification.•• •. Since an item can be placed into more than one class depending upon the criteria used. . electrical gadgets. • . Everybody is familiar with classification of domestic articles into clothes. . kitchenware. Classification of materials is the process of grouping of items into a few categories. based on a set criteria. storage. since concentration of effort according to class system is more efficient and effective compared to diluted effort corresponding to individual items. procurement. grocery. furniture. : . .
They are the basic materials from which thecompany's parts/products are manufactured. forgings are the raw materials for an automobile producer and vehicles are its final product. Classification on the basis of nature of Materials This is the most common criterion used in classification of materials. sheets.Unit 1 Introduction to Materials Management Store Direct Materials 1 Indirect ] J Raw Materials 1 Work-in process i Works made parts 1 1Purchased parts Standard (bought out parts) after being processed and assembled I Special I F in ish ed P ro d uFig.) for automobile firms are the raw materials. cotton for textile mills. lime. 19 . billets. fruits for canning industry. plates etc. cloth for dress makers. sheets etc. rolled bars and billets are the raw materials for a forge shop while forgings are its final product. timber for furniture makers. Based on this criterion. For example pig iron. materials may be classified into the following categories: 1. For example. polythene granules for the producers ofplastic goods and steel (bars. Raw materialsare the basic materials which have not undergone any conversionsince their receipt from suppliers. The products of one manufacturer is usually the raw material for another. turpentine and spirit for paintmanufacturers. Raw materials are different for different industries.9: Classification of stores cts on the basis of conversion process II.) is the final (or finished) product. 1. manganese and carbon are the raw materials for a steel mill while steel(rolled bars.
almirahs etc. kerosene. after a careful scrutiny/analysis. films etc. chairs.g. etc. are Milk. medicines etc. Being are hazardous. stools. pencil. paper. refill etc. j) • • 20 k) Perishable materials materials which are short-lived and decay easily. They require large storage space. fruits. liquid. vegetables. They require to be stored. i) Inflammable items materials which are highly susceptible to fire. are typical examples of perishable materials. careful handling/storage. since they involve risks. as they get easily damaged or bruised while in storage. they require to be stored farther from the main store with complete firefighting equipment as standby. Many a chemical and rubber part are also perishable because of their limited shelflife. as they are usually bulky. lubricants. eggs. cotton waste. paints. benches. Consumables material s which either cease to exist or change their shape are during the manufacturing process and cannot be used for the second time. Typical examples of inflammable items are petrol. Typical examples of consumable items are coal. as a record of their issue to the user departments'on loan'. tablets. that undergo certain process according to a devised formula. Such materials require to be stored in temperature controlled rooms to . stationery items (e. preserved and issued very cautiously. coke. • maintenance of proper records of their repairs. Some sort of register requires to be maintained.) >*-h) Chemicalsare substances in the form of powder. renewals and replacements. carbon paper. Typical examples of chemicals are acids. Typical examples of such items are tables. Furnitureare the movable items of a house or a place.Materials Management 2.
). etc. jars. metal containers such as cans/barrels etc. barrels.pr ol on g th eir lif e.g.g. saw dust etc. grease) and containers (e. drums or cans). pa per shreddings. Typical examples of empties are wooden cases (boxes.) metal containers (e. corrugated boxes. pa pe r. glassware such as glass bottles/jars/tubes/ampules etc. straw. protective coating (e. crates etc. plastic containers. Emptiesare used packages which have been scrapped after use. .g. bottles.g.). glasswares (e. wax. g.).. wooden containers such as wooden boxes/crates etc. l) P m) ac ka gi ng m at eri al s ar e m at eri al s th at in cl ud e wr ap pi ng m at eri al s (e.
pins. clips. glass bottles. as under. erasers etc. cotton waste. tools such as hacksaw/bandsaw blades that need regrinding. fuses. drums. lubricating and cutting oils etc. General office supplies such as blotters. o) p) q) r) Supplies are also called indirect materials. Others require to be stored in heaps in stockyards to be burned or disposed of by auction. lamps. Supplies. Oils and greases such as kerosene oil. gas. Supplies include materials used in running the plant or in the making of a company's products but do not themselves go into the product. Unserviceable materials are items that have outlived their life or gone out-oforder permanently or damaged so badly that they cannot be repaired. ink and inkpads. Classification on the basis of usability of materials Materials may be classified on the basis of usability. Electric supplies such as cables. sand paper. candles. jute twine etc. or their repair is economically inadvisable. include: (a) Miscellaneous consumable stores such as brooms. switches. n) Abrasive materials such as emery cloth.Unit 1 Introduction to Materials Management Some of these empties can be reused or recycled. pencils and refills. files. solder etc. Serviceable and Unserviceable Materials Serviceable materials are items that have gone temporarily out-of-order and can be put back into use after repairs (service). III. carboys. boxes. jars. hoses. (bj Welding. 1. cleaning powder. Shipping containers such as bags. toilet paper. as h fr o m a fu . cloth waste. pr oc es s re je cti on . therefore. soldering and tinning materials such as electrodes. emery graphite etc. 9. sealing wax. carbon papers. tins etc. Typical examples of unserviceable m at eri al s ar e w or n ou t/ br ok en to ol s. nibs. transformer oil. etc. emery belts. shades. cutouts. Typical examples of serviceable materials are chucks/fixtures requiring reconditioning. st ee lc hi ps fr o m m ac hi ne s.
rnace or boilers etc. 21 .
dies etc.g. Dead stock is the term used in the government departments.). machinery (e. classified as per the nature of the item.g. 3. Dead Stock Items Dead stock items. grinders.). office equipment (e. also called capital equipment. tables. Such materials are manufactured by different suppliers and collected and turned into a final product by the company's production department.g.g. g$ Activity E. Typical examples of semi-finished materials are: • Machined castings procured from foundries. milling cutters.g. shapers. welding sets etc. chairs. use etc.). Discuss four approaches to Material categorisation. taps.) and other items which have definite life and cannot be written off before the expiry date of their life. verniers. Semi-finished and Finished Materials Semi-finished materials are items in a partially completed condition of manufacture and need some further processing before they are ready for sale/shipment to the customer. reamers. trolleys. measuring instruments (e.) material handling equipment (e. Finished materials on the contrary are items that have been manufactured in complete form by the production department and are ready for sale. 4. thread gauges. typewriters. milling machines. and therefore cannot be profitably used.Materials Management 2. fork lift trucks. pallets. 22 . are the furniture (e. • Parts procured from suppliers on which certain operations are to be carried out at the company's own plant.g. Obsolete Items Obsolete items are items that have gone out of date because of new invention in design. lathes. etc. tools (e. duplicating machine. drills. micrometers. conveyers etc. ring gauges etc. almirahs).
transportation. sales. size of the firm and multiplicity of plants/divisions. purchasing. receiving and lubric storekeeping. im preserving/conserving m aterials. issue. to serve their needs efficiently and w ith m inim um cost to the com pany. a proper organisation structure is a must. maintaining good records. disposal of ants. are M aterials are key resources in an industrial organisation. inventory investment. M aterials productivity has a significant and direct impact on a company's profitability. cotton waste. receiving.4 SU M M A R Y exam ples Classification of materials is the process of grouping of items into a few categories. Classification of materials is required to devise purchase. accounting evaluation procedures comm on to materials in and item s different groups/classes. nery achievingeconomy in cost of materials. coversall those activities which concern procurem ent. materials economics and waste management. materials. thereby giving the department a status equal to that of production.5 KEYW ORDS _________________________________________________________ __ Consum ables . The Materials department in firms manufacturing multiple products or requiring high precisionitems or procuring numerous diverse items. reducing operating cost and im proving the com pany's competitive strength. Typic al 1. of the or consu usability of materials. It covers activities like materials planning. The M aterials department is a service department and it must have continuous interactionw ith other departm ents. M aterials M anagem ent coal. mable inspection. proving corporate im age. either onthe basis of stages of conversion process or the nature of materials. surplus and obsolescent materials. The organisation structure of a department indicates three things: (i) Status of the department in the organisation Degree of centralisation and (iii) Internal structure of the (ii) department. m aterials handling.Unit 1 tim e. should be placed directly under the M anaging Director/Chief Executive. inventory control. finance etc. The internal structure of the department depends on the quantity and variety of items to bepurchased. storage and issue of coke. 1. storage. statio The main objectives of materials management are: maintaining a steady flow of materials. Introduction to Materials Management For effective working of the people. reducing item s.Consum ables are the materials which either cease to exist or change their shape during the m anufacturing process and cannot be used for the second . ensuring consistency of quality.
economic analysis. may be split into its two basic constituents.) Ordering costs . which. Material management . market analysis. cost of receiving.________ Ql. transportation analysis etc. Give a typical organisation structure of a company manufacturing a single product. including cost on staff. cost of tendering. location. "Materials constitute the most fruitful area for cost reduction.Materials Management .g.Cost incurred in maintaining inventory e. in turn. suppliers' analysis. Materials research . lead time analysis. (a) Describe briefly the classification of materials. profit margin and capital turnover ratio for the purpose of analysis.Raw materials are the basic materials which have not undergone any conversion since receipt from suppliers. formal and continuous analysis of all factors affecting the function of materials management (e. movement and timing of the various commodities used in and produced by the industrial enterprise. What is Materials Management? What are the broad functions of Materials Management? Q2. Raw materials . price analysis. losses due to deterioration and obsolescence.Systematic.Controlling the kind. visits to the suppliers' plant to expedite delivery. insurance premium. What do you understand from Classification of materials? Why is it done? In what different ways can materials be classified? Q6. They are the basic materials from which a company's parts/products are manufactured. (b) Classify the following materials giving reasons for the same: (i) Tyres used by scooter manufacturing company . postage. Q3.The ratio of profit to capital. stationery.Cost incurred in effecting purchasing e. storage and preservation expenses etc. interest on capital locked up. amount.6 SELF-ASSESSMENT QUESTIONS__________ .g. Inventory carrying costs . inspection and bill payment. Return on investment . What is meant by decentralisation of purchasing? Why is decentralisation generally disapproved by the management? Q5." Discuss.g. 1. Q4.
e. shortage of storage facilities. receiving stores and primary (inward) inspection. Lack of Materials Planning • causes ill-planned purchasing (i. bought out parts and others and ensuring their availability in the right quantities. • • Factors Influencing Materials Planning Materials Planning is influenced by two major factors s) t) External factors Internal factors External factors (or also called macro factors in economic terminology) include: i) National Economy fi) Price Trends iii) Credit Policy iv) Direct and Indirect Taxes v) Foreign Exchange Regulations vi) Import Policy 28 vii) International Market viii) Business Cycle . leads to unwanted emergency orders which are usually processed at high cost. thereby increasing manpower requirement. deterioration and obsolescence of stocks etc. over ordering or under ordering) of materials.Materials Management 2.1 INTRODUCTION TO MATERIALS PLANNING____________________ Materials Planning is a scientific way of determining the requirements of raw materials. Underordering causes stockouts and leads to partial utilisation of facilities. increases workload of the purchase department. Over-ordering results in over investment and unproductive use of working capital. at the right time with minimum capital lockup.
materials substitute.) AM Delegation of power xi) Communication system xii) Management policy towards stocking xiv) Buyer-seller relationships xv) Company's financial position xvi) Company's corporate image ^ A c tiv ity A . Mention five external factors and 5 internal factors which affect the material planning. etc. 29 .Unit 2 Materials Planning Internal factors (also called micro factors) include: """" '*T i) Corporate objectives * "''"" • »* ii) Technology available iii) Market demand and supply iv) Procurement lead times v) Rejection rates (both in the incoming supplies and during manufacturing) vi) Working capital available vii) Inventory norms vi) Storage facilities k) Nearness to sources of supply x) Information data (suppliers.
description. The Bill-of-Materials provides details such as part number. 1 below summarises Materials Planning techniques.1 : Materials Planning Techniques Material group A. material specifications etc.2 TECHNIQUES OF MATERIALS PLANNING _ _____ Techniques of Materials Planning may be classified into two groups: i) Materials Planning Techniques for Direct Materials i) Materials Planning Techniques for Indirect Materials Materials Planning Techniques for Direct Materials may be further classified into two subgroups i) Techniques for High Value Materials ii) Techniques for Low Value Materials Table 2. is a document generated at the design stage.-•• i) Past Consumption Analysis Technique ii) Exponential Smoothing in) Inventory Control Bill-of-Materials Bill-of-Materials (BOM). It details the structure of the product by dividing the final assembly into major assemblies. Indirect Materials iv) Inventory Control ->•••' -••. and the sub-assemblies into parts. Table 2.Materials Management 2. the major assemblies into sub-assemblies. . The individual parts are listed in the manner in which each part is assembled. quantity required. Direct Materials a) High Value i) Bill of Materials/Explosion charts ii) Materials Requirement Planning iii) Inventory Control Technique b) Low Value B. also called part lists or building lists.
Materials planning using the Bill-of-Materials technique may be explained with the help of the chart drawn in Fig. Bill-of-Materials of products Bill-of-Materials of products ftExplosion chart Forecasting Product Requirements • Moving Average or • Exponential Smoothing or • Regression Analysis or • Decomposition of the time series Total requirement of materials Delivery schedule Order placing and procurement Fig. The requirements are adjusted after considering any rejections during manufacturing.U n it 2 M aterials Planning * For determining the requirement of materials. 2.1. raw materials for works made parts) with the help of its Bill-of-Material.g. An explosion chart may be prepared for a single end-product or a group of end-products. 2. The explosion chart of a group of products is drawn from a series of Bill-of-Materials of the products and it provides the total requirement of the components for all the products. each product is split (product explosion) into its basic requirements (e.1: Materials planning using BOM 31 . The quantity required per item is multiplied by the quantity of the product to be produced to arrive at the total requirement of each item. boughtout parts.
it is important to be familiar with the following terms and tools: . The manufacturing cycle for the finished product is long. MRP. It utilises the master schedule for the end product (a master schedule shows the quantities of each end product to be produced in each period of the planning horizon). Material requirement planning (MRP I) is particularly useful when one or all of the following conditions are present: • • • • The final product is complex and is made up of several levels of assemblies that have many common part and sub-assemblies. inventory management and production control.Materials Management 2. depending upon the manufacturing schedule. Terminology of MRP I The vocabulary of MRP I is composed mostly of terms from MRP. The demand for the products is considered independent. product structure for determining requirement of sub-assemblies. is both inventory control and a scheduling technique. Utilising these data bases in a series of steps. but once the sales requirements are either known or forecasted. However. The demand for the products is known and it is better to make specific procurement/manufacturing plans (especially when the products are expensive). the quantity of raw materials and components required to make the products can be calculated. parts and raw materials required over the product horizon to meet the given end product schedules. parts and materials. components and raw materials (both common and unique to the products) procurement/manufacturing lead times and inventory status of products sub-assemblies.3 MATERIAL REQUIREMENT PLANNING (MRP) _____________ Material requirement planning (MRP) is a scientific technique for planning the ordering and usage of materials at various levels of production and for monitoring the stocks (inventories) during these transactions. it draws up the timings of procurement/manufacture of all the sub-assemblies. The procurement lead times for components and raw materials are relatively long. MRPI MRP I is based on the concept of independent and dependent demand. since orders may not necessarily be related to others in terms of customers and quantity. To understand MRP I. therefore. This dependent demand condition is served by MRP I.
time period wise quantities based on feedback from the sales force. of which it is a part. An item which is a component to the parent at the previous level becomes a parent for the constituent parts. This is done level by level.3: Levd 33 .Unit 2 Materials Planning i) Master production schedule ' A master production schedule is the backbone of an MRP system. ii) B ill-of-M aterial Bill-of-Material. derived from the above sources. also called product structure or assembly parts list. An illustrative example is given in Fig. A master schedule gives the product-wise quantities to be produced over the planning horizon. which is called parent.3 below: Fig. 2. shows the immediate components required to produce one unit for each item. 2. management decisions to alter quantities. time period wise quantities forecasted from time series analysis. describes how a product is made from its component parts and assemblies. It contains the information for identifying each item of the assembly and the quantity required per assembly. The modular concept of bill-of-material. The master schedule is prepared from inputs that include: • • • • time period wise actual quantities taken from the sales orders on hand. to smoothen out peaks and valleys in capacity utilisation. which is most common.
the low level coding of components of the Bills-of-Materials of product X (Fig. Based on the above principles. accordance with low level coding). The basic rules for this are • a finished product is placed at level 0 • • • • the components of level 0 parent and not common to any other sub-component are assigned level 1 the components of level 1 parent.Materials Management H i) Level Coding Each Bill-of-Materials is assigned a level code accruing to its linkage from the end product.e. 2.4 below. 2. are placed at level n the components of a particular level which are common to the sub-component at some level are assigned level according to its linkage to the sub-component (i. are placed at level 2 the components of level 2 parent.3) is shown in Fig. which are not common to any other sub component. Level 34 . which are not common to any other sub component.
.4: Bill-of-Material according to low level coding Product X is classified as a level 0 item. since it is not used as a component in any other product. 2.34 i) Fig.
Similarly.3) are required by week 40 and this manufacturing stage has a lead time of 2 weeks then components. Time phasing in MRP is the same as activity sequencing in critical path analysis or stage lead time concept in line-of-balance. because it is also required for 1*11 sub-component H. B and C must arrive at the workstation by week 38. I) Component B is assigned level 4. & Activity B. based on past experience/negotiations. 35 . even though it is a component of level 0 parent. For boughtout parts and raw materials. Lead time is vital for MRP. Lead times for works-made-parts are similarly assumed to be known and have the added advantage of being controllable. Similarly. A. they are placed at level 1.* Lead time is the time that elapses between issuing a replenishment order and receiving the material in stores.U n it 2 M aterials P lan n in g '' ii) Components A and Care the items of a level 0 parent and is not used in any other sub-component. even though it is component of level 1 parent. Assume 100 units of product X (Fig. since time phasing of components for purchase/manufacture depends on their lead time. if A has a lead time of 3 weeks then sub-components D and E must reach their workstation by week 35 and so on. '•« iv ) L ead tim e • . 2. Prepare a Bill of Material for your computer. l because it is also required for sub-component J. component D is assigned 5 I level 3. the lead times are assumed to be known.
The gross requirements are obtained from one or more of the following sources: • • • • Time period wise actual quantities taken from the sales orders on hand. Master production schedule is the key to MRP. Management decisions to alter quantities derived from the above sources to smoothen out peaks/valleys in demand. Step 1: Determine the aggregate requirements of finished products The aggregate quantity represents the gross requirement of a product over a given period. Step 2 : Determine the net requirements of finished products The gross requirements obtained in step 1 are adjusted by the available inventory of the product to obtain net requirements . Time period wise quantities forecasted from time series analysis. Step 4: Explode the Bill-of-Material and determine gross requirements For each assembly. It spells out the different products to be manufactured over the given span of time. of which it is apart. Step 3 : Develop a master production schedule From the net requirements for each time period as determined in step 2.Materials Management The steps of Materials Requirement Planning MRP I is composed of a series of twelve steps. a structured Bill-of-Material is available and it contains the information to identify each item of the assembly and the quantity required per assembly. 36 . A master production schedule expresses the overall plan of production. a master production schedule is prepared. That is Net requirement = Gross requirements . Time period wise quantities based on feedback received from sales force.Inventory available.
it needs to be ordered/manufactured. Step 7: Adjust requirement for scrap allowance Depending upon the criticality of the dimensions. the next logical step is to schedule it. Step 5 : Screen out B and C category of items Step 6: Determine the net requirements of items The gross requirements of an item obtained in step 4 is adjusted for the "stock on hand" and "stock on order". . the percentage loss is kept in the file so that it may be automatically added when the item is being ordered. it does the computation for next level and so on).e. If the part is a purchased item. At times. Acomputer software computes the requirement of parts on a level-by-level basis (i. there may be some rejection during manufacturing. which needs to be accounted for so that the correct numbers will be available for assembly. the purchased quantity is adjusted for expected losses in scrap.Unit 2 Materials Planning • V. In a computerised MRP system. manufacturing cycle time is taken into account and (to that extent) the item is offset for delivery. This is usually done by estimating the percentage of loss and adding it to the net requirement when the item is being ordered. Of course. the order would be placed and this would conclude the procedure. ' 4 The gross requirement of each part is ascertained by multiplying the net requirement of the assembly on the master schedule by the quantity required of the part per assembly as given in the Bill-of-Material. Step 8: Schedule planned orders Once the quantity of an item is determined. While scheduling. it may be found that the item is over stocked and does not require to be replenished. The offset information on the item can be had on item record for ready reference. At times. on completion of first level.
manual computation takes lot of time and creates a lot of delay. components and raw of materials from an input of orders demand forecast. It will be. the entire assembly is not exploded at one time but it is done level by level. Regular follow up is necessary. particularly when gross to net requirements are being computed down through the levels of a complex assembledproduct. That is. Step 12: Maintain the schedules W riting the orders is no assurance that the product will be delivered on time. Step 11: W rite and place the planned orders After the requirement of each item has been determined. The materials requirem ents planning com puter software generates tim e period wise requirem ents assemblies. each level of explosion is followed through steps 5 to 7 and the steps are repeated again and again until the entire assembly has been exploded through all the levels and the quantities of items determined and time phased. Expediting may be required in som e cases. and The computer functions in the following manner. itevaluates the due dates and comm unication to the replanner if the due date needs tochanged.therefore. their purchase orders/work orders can be printed in the form of a computer printout. Step 10: Aggregate requirem ents and determ ine order quantities Some of the items may be common to a number of assemblies at various levels.Unit 2 Materials Planning Step 9 Explode the next level : As mentioned in step 4. wrong to place on order each tim e an item appears during explosion but wait the demand is developed after the entire assembly of each until product has been exploded then aggregate the demand so that just one order and can be placed. be . If the material is on order. sub-assemblies. It takes a master schedule. until the product is ready to be delivered to the customer. checks up the availability of material in the inventory file and tells the planner when and how much material is to be ordered. i i Computerised System of M RP I Since the amount of computation involved in MRP I is extensive. after all the previous steps have been completed. looks up the bill-of-material in its own file to determine what material is required to manufacture the product in the schedule.
v) Offsets requirements considering lead times. gross requirements. quantity of item per component and component source code (purchased/manufactured). quantity of component per sub-assembly. 2) Bill-of-Materials (or Product structure) File This file contains all the sub-assemblies. 4) ii) Determines net requirements of finished product. It contains information such as product description. quantity on order. item code. date of receiving order. customers description. sales order release date. vii) Provides a review of planned orders and adjustments to the planned orders. product code. iv) Plans order size. component code. item description. standard cost. penalty clause etc. l product code. sub-assembly code. vi) Maintains and updates the requirements plan. product description. components and raw materials in hierarchial fashion and these are coded. These data are sales order code. 3) Inventory Record File (Item Master File) This file contains the item code. . item description. delivery date." Input files and reports The different types of input files and reports are as follows: 1) Master Production Schedule File (Order File) This file gives the overall plan of production of each of the final products. safely stock. viii) Provides "control by exception. scheduled receipts.Materials Management The MRP computer software programme does the following: i) Determines gross requirements of finished product. The order file contains data which are generated in the sales department after receiving orders from the customers. inventory on hand and planned order release. in) Determines net component requirements. storage location of the item. component description. lead time.
Input specifications for issue of transactions are item code. T h e in p u t sp ec ific atio n s o f p ro c ess c a rd file are w o rk o rd e r co d e . p ro d u c tio n s ta rt d a te . p e rc e n ta g e u tilis a tio n o f s c h e d u le d h o u rs n d c u m u l a t i v e a v e r a g e p e r c e n t a g e u t i l i s a t i o n . item code. . s c h e d u le d h o u rs fo r o p e ra tio n . m a c h in e id le tim e d u e to n o o p e ra to r/m a te ria l/ c r a n e / p o w e r/w o rk lo a d /re c o n d itio n in g /m a in te n a n c e . quantity received. p r o d u d e s c rip tio n .p o n e n t c o d e . s u b -a s s e m b ly d e s c rip tio n . dm a c h i n e c o d e . Input specifications for receipt transactionsare purchase order. 41 . item description. quantity issued and date of issue. s e q u e n c e o f o p e r a ti o n s . vendor description. . m a n u f a c t u r i n tgimeea. Inventory transaction file stores all receipt and issue inventory transactions and is used to update the inventory record file. p r o c e s s s e r i a l n u m b e r . ct c o m p o n e n t s e ria l n u m b e r. quantity rej ected. p r o c e s s com d e s c r i p t i o n . * a £ > A c tiv ity C . i n s p e c tio n r e p o r t e tc . I t i s d e v e l o p e d a n d m a i n t a i n e d o n l y f o r w o r k s m a d e p a r t s . item description. 5) Process Card File T h is f i l e c o n ta i n s t h e l is t o f o p e ra ti o n s . p ro d u c t c o d e . Stock records m ust be updated regularly and withoutany time lag. a c tu a l h o u rs fo r o p e ra tio n . vendor code. quantity accepted. T h e in p u t s p e c ific a tio n s fo r th is file a re m a c h in e c o d e . l 6) M a c h i n e U t i l i s a t i o n C a r d F i l e T h is file c o n ta in s in fo rm a tio n g e n e ra te d fro m d a ily p ro d u c tio n s re p o rts /jo b s c a rd s re c e iv e d f ro m s h o p s a n d h e lp s in lo a d in g a n d s c h e d u lin g .:. : . L i s t th e i n p u t s f o r M R P «. m a c h in e c a p a c ity (in h o u rs ). m a n u f a c t u r i n g le a d t i m e e t c . date of delivery of item and date acceptance of items.U nit 2 M aterials ning P lan 4 ) Inventory Transaction File The accuracy of in ventory transactions is an im portant pre-requisite to an effective M RP I system.f.
2. MRP II is also called closed-loop MRP. It acts as a planning and scheduling system.Materials Management 2. detailed scheduling and dispatching. purchasing. which determines the manufacturing resources (materials. which converts the demand forecast into output requirements and the necessary production programme.6. master production scheduling and capacity requirements planning. which does not take into account the capacity required to execute the plan. Thus. the execution functions come into play. purchasing and finance by adopting a focal production plan and one unified data base to plan and update activities of all functions. which takes into account the orders on hand and sales forecasts. plus anticipated delay reports from the shops and the vendors.4 MRP II (MANUFACTURING RESOURCE PLANNING) ________________________________________________________________ ' MRP II is a computer based system designed to synchronise all the aspects (not just manufacturing) of the business and thereby overcome the limitations of MRP I. Further. Production planning. According to the American Production and Inventory Control Society. personnel. capacity etc. purchased parts.) to meet production . once the planning phase is complete and the plans have been accepted as attainable.e. w) Resource planning." Elements of MRP II A typical MRP IT system involves flow of information and activities as shown in Fig. engineering. They include the shop floor control functions of input-output measurements. "Manufacturing Resource Planning is a system built around materials requirements planning and also including the additional functions of production planning. money. linking manufacturing with sales. MRP II serves as an excellent tool that can help the organisation in implementing its master production schedule by balancing production possibilities and capacities with demand forecasts and drawup plans to provide the materials resource required. master plan) where required. The feedback loop is used to ascertain whether sufficient manufacturing capacity exists to execute the proposed master schedule and effect adjustments in the manufacturing plan (i. The essential elements of the system are as follows: u) v) 42 Demand forecast. follow-up and control etc. The term 'closed loop' implies that not only is cdch of these elements included in the overall system but also that there is feedback from execution functions so that the planning is kept valid all times.
pr og ra m m e. .
Unit 2 Materials Planning t pl an s. ts of x) M aster Production Schedule (MPS). 4. nt Detailed material and capacity plans. resource planning and rough-cut s m capacity T he planning processes. sets out the detailed which or schedules for providing materials and capacity as derived from materials requirement y plans and detailed capacity planning. Rough-cut capacity planning. determ ines the net w hich requirem ent of are: components and raw materials by taking into account the requirement of products as • In per the master production schedule and the availability of inventories of subve assemblies. M R P II M aterials R equirem ent Planning. which checks whether capacity available is B en efi roughly • adequate to meet the production programme. The plan is allowed to proceed only if capacity is re available. which specifies the components and materials required toadvanta produce ges of an end-product or assembly. y) Bill-of-Materials. which monitors production against the plan and pr feedback data to enable updating of master production schedule and capacity and materials ov plans. otherwise. • Im Shop floor control. components and materials as per inventory records. The MPS is drawn by S yste integrating demand forecasting. cti Shop order and purchase order release. the master production schedule is revised to suit available du capacity. ed Purchase and inventory control. production planning. sets the production and which on purchasing activity in motion. monitors purchasing against the which plan and ca feedback data to enable updating of master production schedule and materials z) aa) bb) cc) dd) . which is the final schedule of the M RP periodwise quantities of specific products to be produced.
shflow • t Better financial planning Im p ro ved u tilisation o f m achines 43 .
Materials Management • • Better customer service Greater effectiveness of management and supervision • Team work Disadvantages of MRP Systems The MRP systems has the following disadvantages : • • • High initial cost of software Large amount of data required High accuracy of data i nput jSf Activity D : State five elements of MRP II in a large scale organisation.5 SUMMARY Materials Planning is the determination of the requirements of materials and ensuring their availability in the right quantities at the right time. It is influenced by a large number of . •: 44 2.
external ls Planning include: Bill-of-Materials/ Explosion charts. . the computer is a great boon. Inventory Control. Materials Requirement Planning (MRP I) is a scientific technique for planning the ordering and usage of materials at various levels of production and monitoring the stocks during The techniq these transactions. Materials Requirement Planning and (MRP). MRP I is both an inventory control and a scheduling technique and is ues of particularly useful when the final product is very complex and is made up of several levels Materia of assemblies which have many common parts. internal factors. Past Consumption Analysis Technique etc. Since the computation involved in MRP is extensive.
It uses the same data for a common data base. marketing. the quantity of raw materials and components required to make the products can be calculated. purchasing. resource planning. bought out parts and others and ensuring their availability in the right quantities. by adopting a focal production plan and one unified data base to plan and update activities of all functions. 2. materials requirement planning. purchasing and finance. It details the structure of the product by dividing the final assembly into major assemblies. major assemblies into sub-assemblies. The main elements of MRP II system include demand forecasting. detailed capacity planning. shop orders and purchase order release. A master schedule gives the product-wise quantities to be produced over the planning horizon. 45 . rough cut capacity planning. at the right time with minimum capital lockup Material Requirement Planning: MRP is a scientific technique for planning the ordering and usage of materials at various levels of production and for monitoring the stocks (inventories) during these transactions MRP I: MRP I is based on concept of independent and dependent demand. and sub-assemblies into parts Level Coding: Each Bill-of-Material is assigned a level code accruing to its linkage from the end product. This dependent demand condition is served by MRP I. The demand for the products is considered independent. Unking manufacturing with sales. finance.U nit 2 M aterials P lanning MRP n is a closed loop MRP that includes material planning along with capacity planning. engineering. since orders may not necessarily be related to others in terms of customers and quantity. MRPII: It is a planning and scheduling system. shop floor control and purchase and inventory control. Master Production Schedule: A master production schedule is the backbone of an MRP system. once the sales requirements are either known or forecasted. Materials Planning: Materials Planning is a scientific way of determining the requirements of raw materials. engineering. However. Lead Time: Lead time is the time that elapses between issuing replenishment order and receiving the material in stores.6 KEYWORDS Bill-of-Material: Bill-of-Material (BOM) is a document generated at the design stage. master production scheduling. shop floor control. inventory management. production planning. depending upon the manufacturing schedule. purchasing etc.
at the right time and at the right price. locating and selecting a supplier. negotiating price and other terras of contract and following up with the suppliers until receipt of delivery. materials account for over 60% of the cost of the product. purchasing must be given status equal to that of other major functions (i.Materials Management 3. receiving and incoming inspection and disposal of surplus. In the paint industry. g) b) Escalating cost of stockouts Lack of continuity in the availability of materials seriously affects all major companies. A few important reasons for the change in emphasis are as follows: a) Higher cost of goods and services Raw materials.1 INTRODUCTION TO PURCHASING "Purchasing is the procuring of materials. A small one percent saving in material cost can offer benefit equivalent to an eight to nine per cent rise in sales volume. or the source may have the capability to supply goods of right quality and in the right quantities but he may not supply at the right price or at the right time. tools. production. inventory management and control. purchasing was regarded as one of the activities of Production Management. The term procurement covers a much broader area and includes the functions of purchasing. in the right quantities. sales and finance). Now it is being considered too specialised an activity to be treated as line function. maintenance of the machines. therefore. growing competition and continual escalation in the cost of inputs. components and services account for a significant . stores (or supplies) and services required for the manufacture of a product. obsolescent and scrap materials. and uninterrupted running of the manufacturing plant in a manner that guarantees the marketing of the company's products in the quantities desired. It can damage the profitability of the company and lower employee morale. Although the terms 'purchasing' and 'procurement' are used interchangeably. can result in a substantial saving for the company. in fact. traffic and transportation." Purchasing in essence is the task of buying goods of right quality. at the time promised and at the competitive price consistent with quality desired. The term purchasing covers the functions of identifying and communicating the need for an item. they are. Many a progressive management has already realised that in the context of changing business conditions.as much as 50 to 70% -proportion of the company's total expenditure.e. materials planning and budgeting. different. Effective purchasing. The growing importance of purchase Traditionally. The buyer may have a source who is capable of giving quality product but he may not have enough capacity to meet quantity requirements in time. Financial 50 .
codification. variety reduction. vendor rating. It is. critical path analysis. Design and the other departments. economic lot size. in fact. purchasing is no longer just a commercial activity it is a technocommercial activity. line of balance. No organisation can afford to invest such a big part of its capital in the stocks. surplus disposal. pre-purchase value analysis. spares etc. retention £ of good suppliers. e ) C hanging nature of purchases Today. It is essential for the middle and senior management ' *'' personnel in the purchase department to have a good knowledge of these techniques. More and more technical persons are being inducted into the purchase department and they. f) P rofessionalisation of M aterials function Like the other branches of industry. price negotiations. purchase system design etc. inventory control. 51 . Further. standardisation and variety reduction. Purchasing. With increasing competition. around 80% of the working capital is locked up in inventory of raw materials. import substitution. is becoming difficult and hence the function of buying is becoming challenging. indent control. Abulk of these stocks can be reduced and unnecessary capital lock-up can be avoided if purchasing is made efficient. especially these days when the cost of borrowing money is as high as 12%. the development of many management concepts. finished goods. learning curve. The old concept of a supplier being dependent upon the buyer no longer exists. work-in-progress.U n it 3 P urch ase M anag em ent: A n O v erv iew loss due to stockouts of materials in mass/flow production units. in today's context. the capital distribution between fixed and working capital is normally around 60:40. purchase budget. d) P urchase is not a m ere act of buying Purchase is not a mere act of buying. naturally. such as ABC analysis. c ) H igher presen t day cost of capital In a firm. expect better treatment like their counterparts in Production. a much broader concept. value analysis and vendor rating have had an impact on purchasing. includes a wide range of related activities such as market research. »i g ) C hanging concepts of buyer-seller relations The buying scene also has undergone a major change. process industries and in capital intensive units is very high. codification.
i) To maintain continuity of supply to ensure production schedule at minimum inventory investment. by procuring *| materials which best suit the product and the purposes for which they are intended. vi) To advise on probable prices. no doubt. is the biggest spending department and literally the "custodian" of the company's purse. A saving on the other hand is repetitive saving. viii) To enable the company to maintain a competitive position and earn a fair return on its investment. Also. Almost 50 to 60 per cent of a company's income is spent on materials. value analysis and cost reduction programmes. sales volume equal to ten rupees or more is required which implies that a rupee saved is equal to a ten rupee sale. Every 52 g) . but considering the scope for saving company's money it should be looked upon as a profit centre. iii) To ensure the production of goods of better quality. The purchase department is a cost centre. development and estimating departments. unlike in sales. at a competitive price. supply of tools and services of the right quality. vii) To create goodwill and enhance the company's reputation for fairness and integrity through dealings with the suppliers.Materials Management Objectives of scientific purchasing The objectives of scientific purchasing include the following: i) To procure at a competitive price the required materials. a rupee saved is not a rupee earned. in almost all the companies. Purchase as a Profit Centre The purchasing department. deliveries and performance of items under consideration by the design. The very fact that the purchase department is responsible for such a high percentage of company's money highlights its role in the profit-making potential of the company. variety reduction. in the right quantity and at the right time. iv) To suggest better substitutes to materials which are currently being used. v) To render assistance in standardisation. a sale is one time sale. Moreover. with a view to lowering cost and maintaining quality of the products. To earn a rupee.
effective purchasing can make a tremendous impact on the profitability of the firm. lalto upee .2 FUNCTIONS OF THE PURCHASE DEPARTMENT___________________ The functions or the duties to be performed by the purchasing department may be classified asunder: OSt /very ion rity nits nent ny's efor ntial gthe Dver. State any five advantages of scientific purchasing. J S $A c tiv ity A .SS Unit 3 Purchase Management: An Overview 4 rupee saved goes straight to profit. ry 3. Therefore.
scientific purchasing is governed by five welld) Selection of suppliers known parameters known as the basic elements of scientific purchasing or the "5 R's of e) Follow-up with suppliers for timely receipts of materials buying. an exercise which method of buying b) Search for suppliers may be called scientific purchasing. however. Scientific purchasing.Primary Duties (1) f) Performance evaluation and feedback g) Disposal of surplus. obsolete and 'scrap materials' 3. To ensure this.3 ELEMENTS OF PURCHASE MANAGEMENT a) Receipt." These include: . scrutiny of purchase indents and determination of Purchasing is the most important function of Materials Management. is not mere procurement c) Acquisition and analysisneeded materials at the lowest price but procuring materials in a way that minimises the of of suppliers' proposals overall cost of the product.
market conditions." Besides these factors.Materials Management 0 Right Quality fi) RightQuantity in) Right Price iv) RightTime v) Right Source Constituents of each element 1) Right Quality The quality of a product is measured in terms of its design. materials. mechanical and electrical properties. also influence the decision of right quantity. The technique for determining the right price involves: . sampling plans may be used. consumption. workmanship. 3) Right Price Right price does not mean the lowest price but the price which minimises the overall cost. review system: optional replenishment and review system: compulsory replenishment help to provide broad guidelines. samples etc. review period: compulsory replenishment) varies and it equals the difference between the maximum level less the sum of "stock on hand" and "stock on pipeline. Quantity decisions are influenced by 'replenishment methods' and 'buying methods.' Replenishment methods such as re-order level. commercial standards. Two distinct but closely inter-related aspects of quality are 'Quality of design' and 'Quality of conformance. lead time.e. order quantity under the first three replenishment system is fixed and is generally me economic order quantity. However. purchased items. heat treatment. performance standards. To determine the quality of conformance of purchased items. There are different methods of providing quality specifications and these include brand or trade names. quality of design refers to the quality specified by the company's design department. 2) RightQuantity Right quantity is another important parameter in buying. in the form of specifications while quality of conformance refers to the extent to which the goods and services purchased complies with the laid down specifications. surface treatment. the re-order quantity under the fourth system (i. blue prints. Right price is not easy to determine. For example.' In the case of. chemical composition. two-bin-system. source of supply (indigenous or foreign) etc. etc. though the same might have been modified in the light of constraints. manufacturing processes.
veri fy rec eiv ed qua ntiti es and pre par e nec ess ary doc um ent s. Time required by the buyer's receiving department to collect materials fro m the tran spo rter' s god ow ns. It implies the time at which the goods requested should be received while lead time refers the time that elapses between the communication of the need for the item by indentor to purchase till the time the item is actually received and made available for consumption. select and develop qualified sources of (supply including agreement on contractual terms). which is used when there are limited vendors. Time required by the supplier to fill the buyer's order (i. time required by the supplier to manufacture goods). 4 ) R ig h t T im e Right time and lead time are closely related. Transit time for the purchase order to reach supplier. The buying department has the sole responsibility of developing lead time information for all items and make it available to those concerned . which is employed to determine the price of the item with high labour content.Unit 3 Purchase Management: An Overview • I negotiation. Basic elements of lead time are: • • Time required by the indentor to communicate requirement to purchase.e. Transportation time for the goods to reach the buyer's destination.mainly Planning and Stores . which is followed in public sector organisations to identify the lowest potential bidder.so that they indent requirements well in advance and avoid the need for rush purchases. • learning curve. 9 • tender system. Time required by the supplier to route the buyer's order through administrative channels. Time required by the purchaser to locate. • Ti m e re q ui re d b y th e b u ye r's • • • • • . when the time available to make purchase is short and/or when the items belong to fixed price category.
inward inspection to verify the quality of goods. 55 .
Right source also requires the analysis of transportation costs. at the right time and at the right price.1: Major Cycle activities of Purchase I . Right Source Only the right source can give goods of the right quality.•••• .Materials Management " '. as shown in Fig. Purchasing is not merely "buying to satisfy the indentor 's requirements" but "buying goods of right quality. • 5) Time required by the main stores to take possession of the goods.• ••. along with the basic price. 3." Purchase cycle consists of eight major activities. in the right quantities. deposit them in appropriate bins and update stock cards. items to be brought from dealers and items to be purchased in the open market. at the right price and at the right time. 3. J & >A c tiv ity B .4 PURCHASE CYCLE Purchasing activity plays a vital role in all the firms in general and in the manufacturing firms in particular. in the right quantities. Right source aspect requires decisions regarding the classification items to be purchased directly from the manufacturers.1 Establishing the need for procurement Order preparation Purchase market Scrutiny of the purchase indent research Receiving & Inspection Storage & record keeping Follow up with vendor Invoicing & payment i Fig. State the five elements of Purchasing. to make the choice between a distant supplier and local supplier. 3.
o f . .m a te r ia l a l s o c a lle d p a r ts lis t o r b u il d in g lis t i s y e t a n o th e r d o c u m e n t w h ic h o r m s t h e b a s i s f o r t h e p u r c h a s e d e p a r t m e n t t o t a k e a c t i o n . T h e i n d e n is s c r u ti n i s e d t o s e e w h e th e r t i) i t i s s ig n e d b y th e a u t h o r i s e d s ig n a t o r ie s in o r d e r t o a v o i d i r r e s p o n s i b l e p u rch ases. T h e in d e n t m a y b e r a is e d e i th e r b y th e p l a n t e n g in e e r .o f..a v a i la b ili ty o f th e ite m in s to r e . vi) t h e q u a n t i t y s h o w n a g a i n s t t h e i t e m i s c o r r e c t l y a n d c l e a r l y w r i t t e n . c b) B i l l . iv) w h e t h e r q u a l i f i e d a n d d e v e l o p e d s o u r c e s a r e a v a i l a b l e o r n o t . is a fo rm a l re q u e s t m a d e to th e p u rc h a s e d e p a rtm e n t to p u rc h a se m a te ria ls o r se rv ic e s sp e c ifie d th I re in . f ir m 's in v e n t o r yn t r o l s e c t i o n .c u . T h e n e e d is c o m m u n ic a te d to th e p u rc h a s e d e p a r t m e n t t h r o u g h a f o r m a l d o c u m' P n tr c h l lseed I n d e n a ' B r l l o f e u aa t oi M a te r ia l'. a ls o c a lle d p u rc h a se re q u isitio n . n 2. v) l a s t s u p p l y o f t h e s t a t e d i t e m i s c o m p l e t e d o r p e n d i n g . A p u r c h a s e in d e n t o r ig in a te s e ith e r f r o m th e n.o . S cr u tin isin g P u r ch a se In d en ts A ll in d e n ts re c e iv ed in th e p u rc h a se d ep a rtm e n ts m u st b e sc ru tin ise d fo r a c c u r a cayn d c o m p l e t e n e s s o f q u a l i t y d e s c r i p t i o n . T h e in d e n ts f o r n o n . I t a ls o p r o v id e s w r i tt e n in f o r m a t i o n r e g a r d in g q u a n ti t y s p e c i f i c a t iotim e w h e n r e q u ir e d e tc .r e m e n t . p r o d u c t i o n c o n t r o l d e p a r t m e n t o r f r o m o n e o f co t h e o p e r a t i d e p a r t m e n ts . T h e n e e d f o r p u r c h a s e o r ig in a te s in o n e o f th e f ir m 's o p e r a tin g d e p a r tm e n ts o r its in v e n to ry c o n tro l s e c tio n .Unit3 Purchase Management : An Overview E le m e n ts o f P r o c u r e m e n t C y c le 1. a r e f i l l e d i n b y t h e o p e r a t i n g d e p a r t m e n t s . T h e p u r c h a s e i n d e n t s f r o m t h e i n v e n t o r y s e c t i o n o r s t o r e s a r e g e n e r a llf o r ite m s o f r e g u la r u s e ( s to c k ite m s ) . . th e ng m a i n te n a n e n g i n e e r . T h e e d o c u m e n t s e rv e s a s a n a u th o rity to th e p u rc h a s e d e p a rtm e n t to g o a h e a d w ith th e » " p u r c h a s e a c t i v it y . h) it is r o u te d th r o u g h s to r e d e p a r t m e n t to c e r tif y n o n . T h i s i s f d e t a i l e d ti h e c h a p t e r o n M R P .M a t e r i a l B ill. t h e o f f i c e m a n a g e r o r a n y o t h e r r e s p o n s ib l e p e r s o n a u th o r i s e d ce t o f o r w a rad r e q u e s t . E s t a b l i s h i n g a n d c o m m u n i c a t i n g t h e n e e d f o r p r . a) P u r c h a s e I n d e n t P u rc h a s e in d e n t. T h e s c r u t i n y o f th e i n d e n t s i s a r o u t i n e a c t i v i t y o f t h e p u r c h a s e d e p a r t m e n t . iii) t h e d e s c r i p t i o n o f t h e r e q u i r e d i t e m i s w r i t t e n c o r r e c t l y a n d c l e a r l y .s ta n d a r d y i t e m s . w h ia rhe n o t c a r r i e d i n s t o c k .
review of available information (source register.Materials Management 3. Make short list of possible sources Obtain quotations statement Is there an annual contract for it? Is this a regular item? Was last supplier satisfactory? Prepare comparative statement Select supplier Is it time to check the market? Finalise terms of contract Evaluate performance Fig. catalogues. Market Research and Selection of Sources of Supply The next to follow after the scrutiny of the indents is the stage of market study and selection of the sources of supply. general information. This stage involves segregation of items into item groups.2: Flow chart of guidelines to select a supplier . as per the following flow chart. 3. quotations received previously from potential sources/traders/manufacturers) and selecting potential source(s) of supply.
the accounts department. Follow up has become the foremost function of buyers. A purchase order is ?| a formal document (a written commitment) prepared by the buying department on behalf of the company to authorise (request) the supply of the goods and services in the quantities. m) It helps the buyer's accounts department in linking goods-receipt-reports with supplier's invoices and preventing duplicate payments. if) It helps the buyer's receiving department to verify that the materials received are in accordance with those ordered.U nit 3 Purchase M anagem ent: A n O verview 4. A written purchase order serves the following objectives: i) It gives full and complete details of the materials to be supplied. iv) It serves as a future reference for placement of orders. 59 . 5. thereby avoiding ambiguities. Vendors. Copies of the purchase order are sent to the supplier. at the time and at the price specified in the document. the reference file and the follow-up section. be it a small manufacturer. Purchase follow-up is required in two stages: pre-delivery follow-up and shortage chasing. a trader or a supplier at a distance. the indenting department. A purchase order. Follow-up with Suppliers Follow-up is the function of seeing that the suppliers effect deliveries on time. Pre-delivery follow-up enables the buyer • to make alternate arrangements (i. the next step is to authorise the selected supplier to supply material. request other supplier for early delivery) if it is expected that the supplier will fail in his delivery commitment. The placement of an order cannot be considered complete until the acknowledgement of the purchase order is received from the vendor. in fact.e. Pre-delivery follow-up is intended to remind the supplier of the due date and obtain advance information of expected delays. the receiving department. which is done by placing the purchase order. is a legal document and serves as an evidence of the contract between the buyer and the seller. O rder Preparation Having selected the source of supply. take little initiative in delivering the goods on time.
. The original copy of the delivery challan is retained by the receipt department. r Typical methods used are: i) phone call to local suppliers at a set period prior to due date. the function of receiving materials is generally looked after by the store department. The duplicate copy is stamped 'subject to physical count and inspection 'and is signed by the receipt clerk and is handed over to the supplier's representative. Receiving and Inspection The supplier.Materials Managem ent v/"' . on the promised date. mentioned in the purchase order.w r t ^ • to decide expedited routing of goods from suppliers. intimating whether the delivery will be made/or not. fills up the buyer's requirements and arranges for delivery of the materials in accordance with the instructions relating to the quantities. iv) regular visits. typed and signed by the buyer. The section or department that is entrusted the responsibility of receiving materials and getting them inspected is known as 'Receipt'or 'Receiving' department/section. particularly to new suppliers. mode of transport etc. to review progress. Materials to be delivered by the suppliers are received accompanied by the supplier's 'Delivery Challan'. iii) delivery confirmation cards to be returned by the supplier. 60 . 6. quantity on hand. on receipt of the purchase order. 'Delivery Note'or'Delivery Advice'in duplicate or triplicate. coverage for future period etc. time. The activities involved are as under: a) Receipt or collection of materials : Materials in the receiving department are received against a specific document. route. Shortage chasing is the universally accepted most vital part of the purchase follow-up Shortage chasing is initiated as soon as the due date is over. The nature of the follow-up and the level at which the follow-up is done depends on the criticality of items. availability of alternative sources. if) letters to outside supplier. In a small company. depending upon mode of dispatch and distance of the supplier.
part name. the person •. iii) Purchase order number. which gives the record of the material s receive d in the compan y cannot be made availabl e to differen t ii) the supplies are in accordance with the delivery schedule (i. from the receiving department takes out the copy of the relevant purchase order and verifies to ensure i) that the goods actually ordered have been received. part number. After verification.e. f f register called "Goods Receipt Register . excess supply is not received)." c) Pre par ati on of goo ds rec eip t rep ort s The goods receipt register. the receipt clerk makes the entry of the receipt materials in a .-.Unit 3 Purchase Management: An Overview rir b) Recording of receipt of materials '?! When materials are received with the supplier' s delivery challan. broad purchase categoryand so on are mentioned clearly and correctly.
indentor. written commu nication is preferre d. d) Intimation of receipt of material The preparation of GRRs. inspection of materials and distribution of the copies of the GRRs takes time especially when inspection involves metallurgical and/or performance checks. the receiving as well as inspection personnel may not know whether a particular material is required urgentl y. a good practice to intimate the concer ned depart m ents as soon as m ateria ls are receive d. It is.departments. Moreover. Therefore. A lthou gh commu nication can be made on the interco m. Receiptcum-Inspection Advice (RCIA) or Materials Inward Note (MEN). also called 'Goods Inward Note' (GIN). information from the goods receipt register is transformed to a document called 'Goods Receipt Report' (GRR). purchase or others who are concerned with the information. e) Ph ysi cal cou nt of the rec eip ted . therefor e. be it accounts. physical verification of the quantities.
61 .material The receipt department is not only responsible for taking possession of the incoming materials but also for their correct quantities. This implies that materials received require to be verified for quantities.
After verification of quantity.e. These are accepted and put to use after visual inspection of their packing and verification of labels or cases. code numbers of materials. whose cost is not justified are inspected at the vendor's plant.Materials Management While verifying the quantity. which includes all details about the delivery challan to the part or to the package. Critical items requiring use of specialised and sophisticated measuring instruments. Suppliers need to be notified regarding such discrepancies. Inspection of Goods All supplies are subjected to inspection and testing. number of packages received. Item group Department responsible f) if) iii) iv) v) 62 Raw m aterial B ought out com ponents G auges and m easuring instrum ents Standard cutting tools Special cutting tools Inspection departm ent Inspection departm en Q uality control Inspection departm ent Planning departm ent+Inspection departm ent . quantity received and date of receipt. Situations do arise when goods received are found to be short. These are detailed below: 9. an entry is made in the document called goods receipt report. name of the suppliers. depending upon the nature of goods. 7. This is done through a formal document called Discrepancy Note. and Conformance to performance. description of materials. The responsibility of inspection varies. Branded items or items with a trade name do not require detailed inspection. the receipt clerk has to attach a receipt tag. All remaining items (i. except those mentioned above) are inspected on receipt by the inward inspection at the buyer's works for one or more of the following checks: • Conformance to dimensions. prior to delivery by the vendor. The receipt tag also contains challan numbers. ft • • Conformance to materials specifications.
Scru tin y o f th e invoices Supplier's invoices. Invoicing and Paym ent R eceipts o f su p plier's in voice Normally. until the GRRs are received. The respective materials are sent along with the GRR. In emergencies. the goods are segregated into accepted/rejected or rework categories and only the fully accepted quantity is forwarded to the stores. where they are sorted out supplier-wise and temporarily filed. both the buyer and the supplier have a discussion and the supplier agrees to raise invoices after the receipt of goods receipt reports. The quantity is physically verified and entered in the kardex/ledger or bin cards and then issued. when the supplier supplies goods. stores personnel accommodate by issuing without storing the materials in bins.U nit 3 Purchase M anagem ent: A n O verview vi) Replacement spares \S) Supplies a) Empties b) Welding & soldering materials c) Stationery d) Consumable spares e) Capital equipment Maintenance department Dispatch department Production Stores Maintenance Plant Engineer Removal of the accepted and rejected materials The GRR is handed over to the inspection department or the concerned department. rejected materials are sent to the rejection store. The GRRs are then sorted out and all accepted GRRs are sent to the main store. however. However. The inspector or an authorised person from the department checks receipted materials and affixes a stamp ('Accepted' or 'Rejected') on the receipt tag. where they lie until they are collected by the supplier or sent back to the supplier. 9. 8. Then the duly signed and checked GRR is returned to the receipt store. S torag e an d R ecord K eep in g After inspection. Sometimes. The 63 . on receipt are sent to the accounts department. he immediately prepares invoices.
discount etc. tyres. An automobile firm for example requires to purchase raw materials. each invoice is allotted a serial number.. Items which do not form the company's product line are always purchased from outside. from identification of need to the receipt of invoice.5 MAKE OR BUY DECISION No firm can manufacture each and every item of its product." Effecting payment The purchase journal is reviewed periodically (may be weekly) and the cashier is informed of the invoices which are due for payment.Materials Management accounts department also maintains a control register. Journal entries . The price. Prior to its entry in the purchase journal." A purchase journal is a register wherein invoices are entered supplierwise (i..e. Arithmetical calculations are also checked to ensure correctness of the invoiced amount. 3. It is neither possible nor desirable. from others. wherein all GRRs are serially entered as they are received from receiving stores. Activity C : f List all the documents used for purchasing. 64 Items which require specialised technical knowledge or procurement of special equipment are generally sub-contracted. forgings. A small firm. while quantity is checked against the GRR. Verified invoices are entered in a purchase register called "purchase journal. . for example. normally gets its items heat-treated. a few pages are reserved for each supplier).. The invoice is then stamped for the verification. are verified against purchase order. which is called "JE No. Linked up invoices (invoices linked with GRRs) are taken up for verification. transport/carriage charges. countersigned by the authorised person and is passed for payment. Cheques are drawn to effect payment on the due dates. bearings etc. castings. sales tax...
W e have to bear in mind at item that the the costs which influence make-or-buy decisions are just the incremental home costs . interest on investment. the insurance and buyer's property taxes.the plant. incremental fixed compa cost and ny carrying cost of raw materials and work-in-progress. The decision whether to make the item at them the with home plant or buy it from outside vendors is referred to as 'make-or-buy decision. cost of raw materials. incremental administrative overheads. depreciation. Some suppliers req may not uir give quality items. costs which will be incurred if the part currently being made is purchased d) or vice versa. transportation cost. or Vi ff) Availability of production capacity: The bulk of cost associated with make a make-orthe buy decision is the cost of production capacity. te octroi source and sales tax. some may not ship as per promise and som e others em m ay not Purchase M anagem ent: A n O verview . either The locate cost of alterna buying an item should include purchase price of the part. bring The exclusion of the above categories of items leaves the firm with items pressur which e on require to be manufactured to its design either at the home plant or to be purchased from outside suppliers. Thus. incremental s of receiving supply and inspection cost etc. direct labour. appropriate should allowance for machining and work spoilage.U nit 3 I supply unless surface coated (zinc plating. incremental procurement cost and carrying cost. or galvanizing or phosphating) from outside vendors to buyers get the benefit of low price. The cost of making an item should include the estimated calls. Qu gg) Supplier's perform ance: A situation may arise when the item s currently ant being ity purchased from outside needs make-or-buy investigations. idle time and other risks of doing business.' their Factors influencing M ake-or-Buy decisions freque nt The following factors generally influence make-or-buy decisions: visits or ee) Cost analysis: Cost analysis refers to the determination of the cost to make an teleph item one and cost buying it.
discourage small orders as they (small orders) tend to push up their 65 .ent: Quantity requirement is another factor which influences make-or-buy decisions. Suppliers. A company generally prefers to make an item if the quantity required per year is fairly large and buy it if its annual requirement is small. on the contrary.
The buyer having failed to locate such a supplier may thus be forced to make the item at the home plant though it would have preferred to sub-contract it. when such parts are in manufacture. The following data need to be collected and analysed: . Cost analysis for 'Make-or-Buy' decisions Cost analysis refers to the determination of the cost of making an item and the cost of buying it. ii) More than one supplier policy: More than one supplier policy refers to a buyer's decision to manufacture the part that it requires at the home plant and buy the rest. the buyer can get immediate feedback from his assembly benches about the defects in the critical dimensions. Fluctuation in demand-rise in sale or fall in sale can be better met by purchasing more quantity in case of the former or less quantity in case of the latter. may arise when the company virtually fails to locate a satisfactory suppler who can process the buyer's small quantity. A complete and correct assessment of the various elements of cost is essential for making sound economic decisions. A buyer generally understands the intricacies of his parts better than his vendors. The buyer knows better when the supplier's demand for revision of rate is to be accepted or rejected.Materials Management manufacturing costs. Moreover. A firm which is situated in an area populated with a variety of ancillaries is more prone to "buy from outside" than a firm which is isolated from such amenities. therefore. Cost stockouts due to increase in consumption or delay in delivery can be prevented by processing larger lots at the buyer's own plant. hh) Quality requirements: A company's product may comprise certain parts which are quite difficult to manufacture to buyer's quality specifications. Such quick feedback is not available to the vendors. A situation. Such a policy offers following benefits The buyer can use supplier's rate as yardstick to measure the profitability of his operations. g) Physical location: Physical location can exert a considerable influence on make-orbuy decisions.
however. boring.) payable to the workmen engaged on the ol job. The jigs and fixtures once made maintain their ui re accuracy only for certain quantity. end pieces etc. co st kk) Labour cost: Labour cost implies the wages and costs of other benefits of (Providend to fund.S. bonus. This in cost.I. However. after which a new set of jigs and s to fixtures be .. E. if the raw ad material e. say 'n' pieces.Unit 3 Purchase Management: An Overview Particulars Departm ents from which the inform ation originates Purchase Purchase or sub-contracting Purchase/Production Planning & Control Production Planning & Control Production Planning & Control Production Planning & ControlIndustrial Engineering Costing/Industrial Engineering Industrial Engineering Inspection & Quality Control Raw materials Landed cost of the item being subcontracted Weight of raw materials/castings/forgings Weight of finished component Present utilisation of company's facilities Method of manufacture (Route Sheet) Set up times and operational times Machine hour cost and labour hour cost Tooling Average % spoilage The analysis is based on the annual requirements of components against the following re q elements: ui jj) Raw m aterial: The raw m aterial cost includes the cost of raw m aterials less re value to recovered due to the sale of scrap like turning. is supplied to the vendor free of cost. be The raw m material cost is considered towards the cost of making. requires to be considered only when additional labour force g needs to th be employed while production capacity is available. gratuity etc. the cost of such material also requires T to be he added to the cost of purchasing. us re ll) Tooling cost: Jigs and fixtures generally require to be m ade if the item is q to be machined at the home plant.
to requires to be considered separately as tooling cost toward 'cost-to-buy. when an item is purchased from outside vendors. certain special cuttingtools (broaches. The cost of such tooling.) and jigs and fixtures require to be supplied the vendor free of cost. therefore.amortised over 'n' pieces and the annual cost of tooling requires to added to 'cost to make. hobs.' 67 .' At times. shaping cutters etc.
Set-up cost is the 'preparation cost' of the machines and it varies. h) Capacity cost: Capacity cost implies the cost of capacity rendered idle if the item currently being manufactured is purchased. The procurement cost is the cost of raising a purchase order and processing the deliveries from the vendor(s) and it varies. This is the area where. Buy 68 . transport cost. depending upon the frequency of receipts of the item from the vendor(s). nn) Recoupment cost: Recoupment cost implies the setup costs (if the item is to be manufactured at the home plant) or the procurement cost (if the item is purchased). depending upon the number of production runs in a year. octroi etc. The cost of such operations requires to be considered separately towards 'cost to make. oo) Outside operations cost: The item manufactured at the home plant may require subcontracting of certain operations such as rough blanking. plating etc. These costly errors can be avoided by keeping a single fact in mind that the costs which influence make-or-buy decisions are just the incremental cost . mistakes occur.' pp) Purchase cost: Purchase cost includes the price given to the vendor.Materials Management mm)Overhead cost: The bulk of cost associated with a make-or-buy decision is the cost of production capacity. sales tax. JS$ Activity D: Discuss the relative benefits of Make Vs. packing and forwarding. Such a cost requires to be added to "cost to buy".the costs which will be incurred if the part currently made is purchased or vice versa. heat treatment. most often. excise.
g$ Activi ty E. . State the costs conside red for Takeor-Buy decisio n in a large scale manufa cturing industr y.
69 . quantity requirements. 3. at the right time. Purchasing: Purchasing is the procuring of materials. stores (or supplies) and services required for the manufacture of a product. inside operation cost. Different elements of costs. Procurement cycle encompasses eight major activities performed by an organisation. These five essentials of scientific buying are usually labelled as the 5R's of buying. in the right quantity. experiences an increase in the demand for its existing products. Scientific procurement is the purchase of goods of right quality. Cost analysis: Cost analysis refers to the determination of cost to make an item as well as cost to buy it.6 SUMMARY Jt Scientific purchasing involves buying goods of right quality. inventory carrying >t.7 KEYWORDS ________________________ . at the right price and from the right source. availability of capacity. The various factors what influence Make-or-Buy decisions are cost analysis. quality requirements. maintenance of the machines and uninterrupted running of the manufacturing plant in a manner that guarantees the marketing of the company's products in the quantities desired.Unit 3 Purchase Management: An Overview 3. Purchase Cycle: It is the sum total of all the activities from the initiation of the need for the material till the usage of material and payment to the supplier. capacity cost etc. Make-or-Buy investigations are generally necessary when a company introduces new products. more than one source policy. They include (i) Establishing and communicating the need (ii) Scrutiny of the purchase indents (iii) Market study and selection of the source of supply (iv) Order preparation (v) Follow-up (vi) Receiving and inspection (vii) Storage and record keeping and (viii) Invoicing and payment. outside operation cost. purchase cost. procurement cost. tools. Only a right source can meet these requirements of the buyer. between receipt of the purchase indent until payment to the supplier. finds the performance of its existing suppliers unsatisfactory or finds the cost of present practice of buying/manufacturing apparently high. also influence Make-or-Buy decision. suppliers' performance. at the time promised and at the competitive price consistent with quality desired. Make-or-Buy decisions generally concern items required for the company's own design. in the right quantity. physical location etc. tool cost. at the right time and at the right price. which are so crucial in every purchase transaction. overhead cost.
it must be honoured.Materials Management 4. but once a commitment is made. Essentials of Buyer-Seller relationships The essentials of good buyer-seller relations are: • • • • • • Both buyer and seller must realise that strong and healthy business relationships are important for the growth of their respective firms. Each party must strive hard to discharge its obligations under the contract honestly and faithfully. co-operation and understanding should replace hostility and suspicion. Both must realise that their respective organisations can benefit from the progress of the other. At times. The buyers and seller are the two wheels of the industry. Too frequently buyer's revise their schedule for the items ordered on the supplier. procure additional . Each party should try even beyond the contractual terms to satisfy needs of other. What does a buyer expect? a) Timely deliveries without constant follow up Timely deliveries is the essence of a good buyer-seller relationship. Mutual trust. For smooth running. Each party should have the full appreciation of each other's viewpoint. Every buyer and seller must realise that the growth of the respective firms depends on the goodwill and good relationship between the two. Buyer and seller relationships are at the optimal level when the supplier supplies goods of right quality. Good planning backed by sound progress chasing can help on-time delivery.1 INTRODUCTION TO BUYING Buying is a process which is balanced on 2 wheels. at the right price. must exercise care while making a commitment. therefore. be it that of the buyer or that of the seller. in the right quantities. the industry requires cordial relationships. Every buyer must realise that success of his firm depends on how good his suppliers are and similarly every supplier must realise that his firm's prosperity depends on the prosperity of his buyer's company. nonconformance to delivery commitments make the relations tense and too frequently take the relationship to a state of non-repairs. and at the right time and the buyer understands the problems of the supplier and ensures that the supplier's firm makes profit and growth. The seller. Such amendments require the supplier to frequently reallocate factors of production.
c ) Short lead tim e in em ergency Thirdly. A supplier who can do this time and again is sure to find favour with the buyer. The threat on the part of supplier to hold supplies until a favourable price decision is given by the buyer spoils the relationship. but to send the request and give him time to him to process the request. g ) A dequate after sales service The supplier must provide adequate after sales service. work over-time.g. But this luxury should not be availed of frequently. Xerox machine. d ) D efect free supplies The fourth requirement of a buyer is the consistency in the quality of the goods received from the supplier. the supplier must advise the buyer in advance of the expected failures in the delivery commitments and ask for some more time. which a buyer expects from his supplier. is not to bring pressure for a price increase when the cost of inputs goes up. split-up planned batches.). In such a situation. which tend to push the job off its delivery date. b ) A dvan ce com m u nication in case of expected failu res in delivery Manufacturing is never smooth sailing. The buyer expects the supplier to follow document discipline. He may expect his supplier to entertain his occasional rush orders when the (buyer) is in difficulty. Such an advance communication usually enables the buyer to seek help from other suppliers or at least be prepared for the worst. a buyer wants occasional special favours. f) Correctness of paper work Though a small requirement. correct paperwork is very important. fax machine. PBEX board etc. Frequent rejections in the supplies usually cause bitterness and spoil vendor-vendee-relationships. Supplier can always accommodate the buyer's occasional request by keeping his planning flexible or having a little extra capacity to meet such occasional requests. He must have trained 75 . increase sub-contracting etc. The buyer expects the supplier to do the paper work correctly. particularly in case of office equipment (e. Aplain "no" can spoil the buyer-seller relationship. e ) Ability to hold on price The fifth thing.U n it 4 B u yin g P olicies materials. Some delays and interruptions do crop up.
to enable them to reach a stage where they can self certify their products. tool cost. What does the supplier want from the buyer? a) Long term business agreements Sound buyer-seller-relationships envisage a long term relationship which alone ensures quality and reliability. and the supplier should be given the rates which are truly due to him. efforts should be made to move to an open order system. including quality management of their processes. In fact. labour cost. At times. so that the suppliers can gear up their production. Buyers may develop new sources to affect cost savings but they must avoid cancellation of orders on old suppliers. Vendors must be told months in advance what the company will need and how much. Prices should be discussed by breaking down cost into various elements like raw material cost. wherein the requirements are conveyed four to six months in advance. 76 There are many occasions when a supplier approaches a buyer for a price increase due to factors beyond his control. At that time. the vendor may require to be provided with anything from technical and quality inputs to financial support. cost savings but it does affect the assurance of supply. profit etc. h) Transparency at the vendor end If the buyer treats his vendors as an extension. he should have easy access to suppliers' input costs etc. the supplier's request should be | . b) Long term hand holding Vendor relationships should extend beyond technology and team work. d) P ricing Pricing is one of the most sensitive areas and sometimes leads to a situation where relationships get strained.Materials Management maintenance staff and maintain adequate supply of spares at his end. c) Sharing information on future plans Sharing information about the production plans of the company is another facet of long term relationship with vendors. Delayed response and poor after-sales-service spoil good business relationships. B oth together must find out ways to reduce cost. Frequent changes of vendors may enable the buyer to have . Vendors' requests for premature payment or on account payment) at the time of dire needs should be attended to promptly.
in the interest of both the buyer and the seller to find out ways to avoid rejection. inspection facilities etc. should be avoided. to the extent possible. technology. 77 . . ^ A c tiv ity A : List seven things that you. unless they are compelling. Rush orders. ' • ' " . The buyer must help his suppliers in design. therefore. strikes. . as a buyer expect from a seller. for which major responsibility rests with the buyer. be it fall in demand. It is. Rejection affects the supplier's cash flow and the buyer's production schedules. Sudden cancellation of an order creates problems for the vendor to fill up the capacity created due to the cancellation. h) A voidance of unnecessary rejection Any rejection that takes place either at the supplier's plant or at the buyer's plant adds to the cost of the item. each buyer must ensure that once the material has been supplied and accepted. the buyer should ensure that payment to the supplier is not held up for want of necessary paperwork or due to breakdown of communication. For a good buyer-seller relationship. whatever the reason. lock-outs. For this. •' ' * ' ? : . The supplier must be given a fair opportunity to justify his case for an increase in price. payment is released to the supplier on the due date. • g ) M inim isation of unscheduled deliveries and rush orders The buyer must keep his requests for unscheduled deliveries at its minimum. e) Timely payments Payment is yet another sensitive area which sometimes affects the relationship. f) Non-cancellation of orders The buyer should not resort to cancellation of contracts.Unit 4 Buying Policies scrutinised by the buyer patiently. manufacture and in consistency of quality of products by providing necessary assistance in the form of training. seller's failure of deli very commitments etc. which is ultimately passed on to the buyer.
4. Competitive bids are generally not obtained. rr) purchases are made to cover immediate requirements. large quantity may be purchased.2 METHODS OF BUYING The buying department of a company is responsible for providing goods and services required by the company at the least cost to the company. though. as a seller. expect from the buyer.Materials Management Activity B : List five things that you. at times. . 78 tt) the terms of contract are negotiated. Hand to M outh Buying Hand to mouth buying also called "buying according to the requirements"refers the frequent purchases of an item in small quantities. as there is no sufficient time. Factors influencing selection of Buying Methods A number of factors influence the selection of a buying method. ss) quantity purchased is generally small. to The important characteristics of hand to mouth buying are: qq) purchases are made only when the demand arises. They are: i) Nature of the item . The request to procure may be received either from the stores department or from one of the functional departments. ii) Regularity of its demand iii) Quantities required iv) Susceptibility to price variations The different buying methods are as follows:1.
w hose prices are expected to fall in the nearfuture. are some of the examples of this group w w )the im m ediate requirem ents of a stock item caused either due to a delay in delivery from regular suppliers or due to an increase in consumption xx) the im m ediate requirem ents of items. v) Acceptance of sub-standard goods in em ergency. because of w h ich they are purchased w h en th ey are n eeded fo r defin ite consumption. in) Possible interruptions of production schedules because of m arket shortage of materials at the time of need. •*• ' f . Responsibility of the buying departm ent The effectiveness of the buying department depends on their connections with vendors. so that they fill the buyer's order without taking advantage of the situation. special building materials. The selected vendors must be known for quality. Suitability of the method This methods apply to uu) item s required for prototypes and for products under developm ent vv) item s w hich are used infrequently and would not be required to be stocked. M achine tools.U nit 4 B uying Policies Advantages of the m ethod i) Lower inventory in vestment / a) Low carrying charges iii) Reduced deterioration and obsolescence of materials iv) Lesser losses from price declines. office furniture etc. D isadvantages of the m ethod i) Comparatively higher price due to urgencies and loss of quantity ii) discounts. Along list of vendors is generally necessary. reliability and integrity. iv) Higher clerical costs due to frequent purchases. Possible losses occasioned by an upw ard m ovem ent in prices.
while the supplier is assured of business. ii) The buyer is assured of supply of goods. if) The supplier is given the estimate of the procurement needs covering a mutually agreed period of time.g. forgings. . Scheduled Buying Scheduled buying is the process of procuring an item in staggered deliveries according to the delivery schedule furnished to the supplier by the buyer. 2. called open order) is placed with the supplier. It is a common practice to give 2-3 months confirmed schedule and 2-3 months tentative schedule. castings. items produced to the buyer's design and requiring long lead time to manufacture. Suitability of the system Scheduled buying is best suited for • • • 80 items of regular use such as cutting tools. in) Fresh delivery schedules are given to the supplier prior to the completion of the previous schedule. Advantages of scheduled buying i) Both the buyer and the seller enjoy the savings resulting from regularity of production and smaller inventories. cotton waste etc. The salient characteristics of scheduled buying are as follows: i) A purchase order covering annual requirements (alternatively a purchase order without specifying the order quantity. packing materials like wooden boxes and thermocole sheets.) and need a lot of storage space. while the buyer can plan his requirements of finance.Materials Management yy) the procurement of replacement spares ' zz) items which have a limited shelf life and are not stocked for fear of perishability aaa) items which are bulky (e. lubricants etc. iii) The supplier can effectively plan his factors of production. proprietary items from suppliers who insist on long-term schedules. Fresh schedule supercedes the previous schedule.
Price expectations. Some important characteristics of speculative buying are: . T h e im p o rta n t c h arac te ristic s o f fo rw a rd b u y in g a re a s fo llo w s: b b b )P u rc h a se s a re m a d e to c o v e r p ro d u c tio n re q u ire m e n ts fo r a c o n sid e ra b le p e rio d c cc ) Q u an tity p u rch a sed is g e n e ra lly la rg e d d d )T h e atm o sp h e re is u su ally fav o u ra b le fo r n eg o tia tio n e e e ) P u rc h a se s a re m a d e w h e n th e p ric e s a re lo w .Unit 4 Buying Policies 3 . 4. if design changes occur. Speculative Buying Speculative buying refers to the buying of large requirements of an item. F o rw ard B u y in g F o rw a rd b u y in g re fe rs to th e p ro cu rem en t o f su ffic ie n t q u an tity o f a n item in a d v an ce o f its n e e d a n d a t a tim e w h e n th e p ric e s a re lo w (a n d /o r e x p e c te d to rise ). as purchases are usually consolidated security against shortage .r.-. T h e b u y e r a lso g e ts a d isc o u n t o n larg e pu rc hase s.»f!. A d v a n ta g e s o f th e m e th o d Forward buying results in • • • • lower purchase price greater margin of profit on finished goods saving in procurement expenses. may result in a major financial loss to the firm. Large scale obsolescence may result. • • Inventory holding charges are considerably higher. s Disadvantages of the method • • Such a buying may not serve the needs of the production department entirely. when its price is low with the intention to sell a bulk of it at a higher price for speculative profits. if not realised.
5. preparing comparative statements. According to Spriegal. "Contract buying is the purchasing made under contract..Materials Management fff) Purchases are in no way related to the compay's production programme. of needed materials. Contract Buying Usually. jjj) The buying department usually finds sufficient time to secure competitive bids and negotiate terms of contract. distance and the mode of transport. fortnight. despite market fluctuations. The term contract buying is applied to those special contracts which call for deferred delivery over a period of time. An item which is not required for production may be purchased. Some of these are listed below: i) It saves the company the trouble of inviting quotations. ggg) Speculative buying does not base decisions on quantity. placing of orders etc. Pros and cons of the method Contract buying offers a number of advantages over other methods. the delivery of which is frequently spread over a period of time. The cycle time between two consecutive receipts may be a week." Some important characteristics of contract buying are: hhh) Contracts are given to suppliers for a large amount of future requirements or for a certain period (say a year). usually formal. such as forward buying or buying as per requirements. which otherwise will be necessary every time the items are required. a month or any period considering the value of requirements. The quantity purchased is thus generally high and is as much as the company finance can permit to buy. iii) The buyer needs to keep very little working stock and safety stock. iii) Quantity received per occasion is generally small. This reduces the procurement expenses. This 82 . if) The buyer's company is assured of regularity in supply. Its single aim is to make speculative profits. all purchases are by contract.
iv) Prices and other terms of contract are generally favourable to the parties involved.r e d u c e s c a p it al l o c k u p a n d t h e c o st o f c a rr y i n g i n v e n t o r y t o the barest minimum. .
which may include a specified method of determining price variations. enquire about price and buy from one w ho quotes the low est the other term s of contract being comm on to all. as he has an advance idea about w hen and w hat am ount he has to pay to his vendor. Alternatively. air conditioners. Service contract m ay be entered into to obtain periodical services such as servicing of typewriters. The records of the supplier are open to inspection on dem and. how ever. here the rate is fixed and not the quantity. 6. repairs or calibration of measuring instruments and gauges. Som e im portant characteristics of blanket orders are: kkk)A blanket order specifies the categories of item s covered by the order lll) The item s covered by the order generally have low unit value m m m M ore than one m iddlem an m ay be selected to avoid hold-ups in case of non ) availability of an item with one nnn)'M arket-price' is generally specified on the order. the contract autom atically com es to an end. Types of contracts Contract buying is of three types: • • R ate contract. As soon as the specified quantity is supplied by the vendor. are given. Som e indications of w the probable requirem ents.U nit 4 B uy in g P o licies v) The buyer can plan his requirem ent of finance. the buyer may contact vendors on phone. where the rate and the quantity both are fixed for the contract period. . w t Suitability of contract buying Contract buying is suited for the procurem ent of m aterials and production item s of regular use. ooo)T he supplier is given requ irem ents regarding w ho supplies and bills at th e 'prevailing prices less agreed discount' on the phone. usually a middlem an. filtering of oils etc. punching clocks. B la n k et O rd ers B lanket orders refers to the purchase of a variety of item s from a single source. Running contract. Service contracthere the various services are obtained periodically.
Competition in this system is altogether eliminated and price is fixed by mutual agreement. stationery. except when the supplier quoting the lowest price has questionable delivery time. ii) B ids on receipt are evaluated by comparison and the right supplier is selected. Types of tenders Tenders are of four types: i) Single tender refers to the system of tendering wherein the details of the requirements are communicated only to one firm. reliability or financial stability.000. ii) It eliminates possibility of favouritism.Materials Management Suitability of the method The method is best suited for general hardware. 50. fixed by the management as a policy decision. Lowest price is the criterion used. small cutting tools etc. 25. Advantages of the method i) Tender buying is the purchaser' s most important single tool for selecting a qualified supplier on the basis of competitive prices. Salient characteristics of the system are as follows: i) The buying department establishes a bidder's list and invites each bidder to submit bids (a tender or quotation is a written offer from a supplier to render a specified service or supply materials of the specified quality. Quotation from the sole selling agents of the manufacturers belong to this group. Private sector organisations too adopt tender buying. patronage and personal preferences. electrical supplies. quality. if the value of the purchase exceeds the prescribed limit. say Rs. Tender Buying Government departments and public sector undertakings in India follow this method of buying. Single tender system is used when there is only one supplier of the item.000 or Rs. at the specified price and within the specified item). 7. Disadvantages of the method Tender buying is costly and time-consuming and therefore used by private sector undertaking only when the value of purchases is high. .
' This method is used for items available in a particular w season only. d rrr) The market price is the lowest during the season. apples etc. publicising an enquiry.g. o oranges. la 8. the term 'open tender'. u ts qqq)The items covered may be small in size but they are required in large i quantities.Unit 4 Buying Policies 9. t h iv) Global tender is the system of tendering wherein the enquiry is advertised e in w the newspapers and trade journals of not only of the home country but also in . purchases that are both capital and technical. depending upon the rupee b to value of the order... Seasonal Buying c e Seasonal buying refers to 'buying of the annual requirements of an item d during its season.e. Therefore. 'advertised tender'. u p sss) Usually purchase are made directly from manufacturers/producers of the p goods. foreign countries and bids are received in response. o n iii) Open tender system is the system of tendering wherein the enquiry is advertised tr in the newspapers or periodicals or trade journals of the home country and bids a H.). Subii) Limited or closed tender refers to the system of tendering wherein an Contra enquiryis sent to a limited number of suppliers who are on the approved list cting of suppliers and bids are received in response. The decision concerning the number of suppliers to whom the enquiry be sent is usually laid down in S the 'buying policies' framed by the management. The firms in the private sector u usually send an enquiry three to eight suppliers. are received in response. The global tendero r system is k used for purchase involving huge investments such as procurement of plant and p machinery i. or n 'unlimited g tender' is used. Some important characteristics of seasonal buying are: it ppp)The items involved are available in a particular season only and thereforeh need a to be purchased and stocked in sufficient quantities till the next season n (e. However. the items e can be s purchased at the cheapest rates. in the public sector are not able to restrict firms the number of tenderers to eight. Since the system encourages unlimited ct competition by i _. registered suppliers require to be c All mailed a buyer's copy of the enquiry. sugarcane. Open tender system is used for items which are required in large is value and/or are difficult to procure.. .
lier to design peculiar to the main contractor for economic reasons or to augment the facilities of an existing 85 .
lower rate and better contract terms due to large purchases made possible by consolidating the requirements of individual stores. heat-treatment. done from outside because either it does not have the necessary manufacturing facilities or its present facilities are overloaded. The requirements of these stores can be satisfied by either of the following two methods: i) Each store to make its own purchase. iii) The CPO can contract directly with the manufacturers and obtain items as per specifications. Individual section stores may not be able to do this. Central Purchase Organisation A large firm in the public or private sector may have section-wise stores at different places. 86 . Sub-contracting is the hiring of another firm to perform some of the manufacturing operations or to furnish certain parts and sub-assemblies to be incorporated in the buyer's end product. thereby minimising the risk of malpractices.Materials Management manufacturer. in) The company gets certain operations like electroplating. if) The company concentrates on certain items of the assembly and buys others from outside. Types of sub-contracting Sub-contracting is of three types: i) The company makes some quantity of the final product and buys the balance from outside. 10. ii) The CPO can exercise strict control on consumption. This happens when the company receives big orders but is unable to supply the full quantity within the contract period. rough blanking etc. The advantages of central purchases are: i) The central purchase organisation (CPO) can obtain quantity discounts. It is this type of sub-contracting with which the industrial buyer is concerned. if) A central store to make purchases and supply material in turn to sectionwise stores.
87 . 11. State the type of buying method you would use for following items: i) Raw Material i) Spare parts for machines i) Raw material which is a commodity iv) Seasonal item v) Services like-Loading/Unloading vi) Repairs to motors in a large factory 4.U n it 4 B u y in g P o licie s iv) Malpractices by individual purchase officers. A formal document raised for the purpose is called 'rate contract. etc. etc. Typical examples of central purchase organisation are: State Road Transport Corporation (i.' & Activity C. Quality of the material cannot be ignored. This is not normally so. Co-operative Banks.3 BUYING FROM THE RIGHT SOURCE It is commonly believed that the best source is from where the buyer gets the material at the lowest price.) Nationalised Banks. It enters into contract with various firms for the supply of certain materials to the government departments during the year. GSRTC. Equally important are quantity and pricecriteria. Directorate General of Supplies & Disposal (DGS&D) The DOS & D is the Central Purchasing Organisation for the various government departments. There are several other aspects related to this problem. are avoided. who may have an understanding with the local dealers which could result in high prices for purchase. MSRTC. at an agreed rate.e.
financial. Source selection and source development is necessary for raw materials. investigating. These stages are: i i) Source requirement stage to identify the need for source selection and source development. his terms and conditions of supply may not match those of the buyer. 88 . vi) Trial order stage to carry out follow up with the supplier. until sample submission. defect analysis and defect prevention. spares or items produced to commercial standards. v) Techno-commercial discussions stage to discuss the technical aspects of the item and finalise the terms of contract of the trial order. iii) Source investigation stage to identify technical. Source selection and source development require time and efforts on the part of the buyer. managerial and quality assurance capability of the vendors and thereby generate data to serve as a basis for preliminary source selection. quality and services at the acceptable price to the company.Materials Management Situations are not uncommon when it is found that the source offering the right quality does not have the capacity for desired quantity or that the price quoted by him is much higher. ii) Source location stage to collect information on potential sources of supply. tools. right price be expected. items required to buyer's design or imported items. selecting and developing suppliers who can give acceptable delivery. iv) Preliminary source selection stage to narrow down the choice to those who are most likely to fulfil the requirements successfully. sincere efforts are required to select and develop sources for items required fora buyer's design. Stages in the source selection and source development process Source selection and source development is the systematic process of locating. right quality. A buyer can get many sources but good sources are difficult to get. including follow-up for pilot lot and bulk production lot. At times. Though the basic approach is the same. quantity. There are eight stages in the source selection and source development process of this category of items. Only from the right source right quantity. and in order to enable the buyer to achieve other principles of purchasing. The choice of the right supplier is therefore very important. sample validation.
The m ajor activities under each of the above m entioned stages of sourceand selection source developm ent are detailed below .lopm ent and ard s. and quality . the perform ance of the established supplier m ay fall short of expectations. since its installed capacity may seem inadequate to cope with the demand. It then becom es necessary to locate other sources. render assistance (if to required) and decide on future business w ith the vendor. A n established supplier m ay divert his ft interest to new areas that prom ise m ore lucrative and prosperous offers. New regulationstheay be in m form of curb on im ports/heavy duties on imported m aterial or restrictions on the m anufacture of goods under collaboration. im port substitution em erges as an im portant element in the purchase market. is bound to suffer adversely. All these result in a spurt of dem and for indigenous m aterials. case. choice chieve y. N eed for Source Selection and S ou rce D evelopm ent itigating. in such a . e) N ew regulations/directives The governm ent issues new regulations from time to time. ality and . right ion and vii) Sourceappraisal stage review perform ance of the vendor. viii) Source retention stage create necessary conditions. b) M arket conditions A su dd en in crease in th e d em an d fo r a pro d u ct w o uld po se a pro b lem fo r th e management. 8 9 . ich is the ired fo ra elopm ent Source selection and source development becomes necessary under the following situations: a) N ew products or m odification in existing products W hen new products are introduced and existing products are m odified. it becom es necessary to go for developm ent of sources w herever necessary. Consequently. w -up for pilot A d) D iv ersion/L oss of su pp liers' in terest d u e to m ore attra ctiv e offers Suppliers do not rem ain the sam e. The appraisal stage m ay require review of the earlier steps to search for a m ore satisfactory source. The supply. so that supplier sticks to to the company.Unit 4 Buying Policies ydoes ligher.s a basis for ose w ho are ts of the item • subm ission. ind source c) Supplier'spoor perform ance At tim es.
Such suppliers are normally given those items where i) the buyer is facing price. i) New plant location Economy in transportation cost and ease in follow up work are accepted as justifiable reasons for the dependence on local sources. iii) the buyer has already one good source but would like to have another source as a standby. But inspite of active cooperation from the buyer. Consequently. h) Reluctance of the existing supplier to expand . financial difficulties. ii) reduce inventory levels when the existing suppliers demand long delivery lead times. which may compel a buyer to explore new sources in and around the new plants. the supplier may not prefer the option to expand his business. j) Closure of the existing supplier The closure of the existing supplier due to labour problems. g) Emergence of new suppliers New suppliers may approach a buyer to convey their interest in the supply of items currently being purchased from outside or currently being manufactured at the company's own works. m .Materials Management f) Alternate source of supply Even though a company wants to depend on one reh'able source for its requirements of materials. new situations may arise because of the location of plants at different places. S) the buyer has failed to develop a good source earlier. disputes among the owners or any other reason compel the buyer to look for new sources. a buyer is under business compulsion to tap new sources for coping with the increased demand. it may adopt a pragmatic policy to develop alternate sources so as to :i) have insurance against failure of present suppliers to honour their commitments. delivery or quality problems with the existing supplier. Situations may arise when the buyer is fully satisfied with the existing supplier and wants him to expand to supply his enhanced requirements. However. iii) create competition and thereby secure price advantage.
b) T ra d e d irecto rie s Trade directories are publications listing suppliers against their products. Locating Suppliers) Before proceeding to select sources. The type of information can be obtained from any one of the following sources: a) O ld su p p liers i For a new item to be procured. which the buyer's company is interested in developing. g) Advertisem ent in m ass m edia All manufacturers of repute give wide publicity of their capability and achievements through advertisements in mass media like the radio. f) Trade exhibitions and trade fairs . At times. available prospective sources should be studied. Institute of Engineering (India). . TV.e. c ) Professional Institutes There are quite a few professional institutes in our country like the National Institute of Material Managers. There are good chances that one of the old suppliers would be able to give information on the new suppliers. etc. These institutes can advise on prospective suppliers from among their members. A regular study of these helps buyers in locating prospective suppliers. telegraphic addresses etc. newspapers and magazines. these directories also give other relevant information like suppliers' addresses. the old suppliers should be consulted.U n it 4 B uy in g P olicies *T < > Collecting Data on Prospective Suppliers (i. d) 'C lassified Yellow Pages' of telephone directories Another commonly known source of information is the "Classified Yellow Pages" of a telephone directory. e ) C irculars Circulars received in the daily mail can also provide information on the vendors of items. telephone numbers. One of the main purposes of such exhibitions and fairs is to promote sales and advertise a company's capabilities. 91 . All important manufacturers participate in such fairs and display their items.
. the aim is to identify possible sources and select potential sources which will be able to supply goods at competitive prices and meet a buyer's requirements for quality. condition 92 V S) . Evaluation of vendors. The proforma should seek the following information about the supplier: a) Address: i) Office ii) Factory iii) Telephone No.. the most common method employed is to mail a proforma to each potential source. quantity and delivery. « . Since the best source of information is generally the source itself. their life.may provide a long list of all possible sources. financial unsoundness and poor quality assurance capability are additional considerations for dropping some suppliers from the list. Managerial ineffectiveness. capacity. iv) Telex b) Ownership details ( ttt) Pasthistory uuu) Details of machines held. with a request to fill up the same and return it by a specific date. Investigating in Vendors' Capabilities (Part 1: Collection of Data) The preceding step .location of sources . In other words.Materials Management h) Salesmen '" ? - » . therefore. They must be pruned to weed out the technically incompetent. requires specific information that will enable assessment of the firm's capability in fulfilling its part of the contract. They not only give complete information about their own products but also highlight deficiencies of the products of their competitors. i) Company's personnel Personnel working in the other departments of the company often can give information about the suppliers. n Salesmen of manufacturers who call on the buyer are an extremely valuable source of information about suppliers and their products.
condition. their types. to ensure homogeneity in recording. Details of machines purchased in the last 2 years give indications of growth in the technical field. Workers skill can be found out on the shop floor by the team members by observing them when being taken around the manufacturing facilities during the visit. makes. Another method of securing information on the vendors' capabilities is to write in confidence to some of the firms which are using the materials supplied by the source under scrutiny.Materials Management in) Finance department iv) Quality assurance department The duties of the team are twofolds: i) The team verifies the contents of the first part of theproforma(itis worthwhile carrying the proforma along for verification). The findings of the team may be recorded in the second part of the vendor data form (Annexure A). . i) Manpower: The prospective vendor must have sufficient skilled. ii) Machines: The details of machines. rtf' 1 Investigating Suppliers'Capabilities (Part II) The information secured directly from the firm on the prescribed forms and observations of the team during their visits must assess a firm's capabilities in the following areas: a) Technical/production ability The technical capability of a source depends mainly on the quality and quantity of technical/skilled manpower and machines. life and the degree of accuracy they are capable of should be found out. Over and above. Discrepancy. semi-skilled and unskilled labour. The firm chosen for the purpose should possess a high level of technical proficiency in terms of human skills and machines. various points are discussed by members of the team to remove doubts and eliminate dark areas. if any. As long as they have some arrangements with other firms/organisations/institutions. iii) Drawing and design office: A good supplier should have a well equipped design and drawing office to carry out day-to-day work. fi) The team collects information given in the second part of the proforma. it should suffice. Small scale industrial units may not have this facility of their own. is recorded on the proforma.
p ro v id e th e b a sis fo r a p re lim in a ry se le ctio n o f th e su p p liers. e n s u rin g d e liv e ry o f d e sire d q u a n tity a t th e p re d e te rm in e d tim e . T h is re d u c e s th e r isk o f slip p a g e o f d e liv e ry d a te s b y th e v e n d o r.h e y s h o u l d h a v e a p o s i t i v e a t t i t u d e a n d a p o s i t i v e a p p r o a c h f o r T o v e rc o m in g d e la y s. and fund flow statements are quite useful in analysing the financial stability of the vendor d ) M a n a g e r ia l c a p a b ility W h ile a s s e s s in g a s u p p lie r . R e liab ility re fe rs to th e firm 's ab ility to a d h ere to a ll th e te rm s a n d c o n d itio n s o f su p p ly . A company with sound financial position is in a better position to absorb development cost. i t h a s b e e n f o u n d t h a t s m a l l c o m p a n i e s a r e b e t t e r s u p p l i e r s . e) L a b o u r m a n a g e m e n t r e la t io n s T h e b u y e r w ill o fte n fin d it b e n e fic ia l to u n d e rs ta n d la b o u r m a n a g e m e n t r e la tio n s a t th e supp lier's plan t. th e s tu d y o f a n o rg a n is a tio n is a ls o n e c e s s a r y . S iz e s h o u ld n o t e ith e r b e a c r ite r io n f o r e f f e c tiv e n e s s o r a n a s s u ra n c e o f s u p p ly .U nit 4 B uy ing P olic ie s iv ) ro o /ro o m r A w e U . follo w ed b y sy stem atic ev alu ation o f th eir cap ab ilities. Financial documents like balance sheet. T h e fo llo w in g c o n sid e ra tio n s a re im p o rta n t fo r n a rro w in g d o w n th\) sc o p e o f c h o ic e : e S iz e Q u ite o f te n th e b u y e r fa c e s th e d ile m m a o f s iz e o f th e o p e r a tio n s o f a s u p p lie r .e q u ip p e d to o lro o m is a n in d ic a tio n o fth e te c h n ic a lc z ^ a b ility o f th e su p p lie r. w i l l i n g to c o - . profit and loss account. A company which is financially weak can hardly be expected to keep its commitments.e . c) F in a n c ia l c a p a b ility Financial capability of the vendors is essential to ensure uninterrupted supply and quality of the product. sin c e a n o r g a n i s a t i o n i s w h a t i t s p e o p lh e a frier. b) Q u a lity a ss u r a n c e a b ility T h e e n d e a v o u r s h o u ld b e to f in d o u t th e fir m 's c a p a b ility fo r q u a lity a s s u r a n c e a n d re liab ility .m 's a b i l i t y t o d e l i v e r q u a l i t y g o o d s a t Te th e rig h t tim e a n d in th e rig h t q u a n tity d e p e n d s o n th e c a p a b ilitie s o f th e m a n a g e r s . Q u ite o f t e n . irre sp e c tiv e o f e x te rn a l a n d in te rn a l e n v iro n m e n ts i. P r e lim in a r y S e le c tio n o f th e S u p p lie rs T h e d ata co llected abo u t the v end ors.
Generally. manufacturers of repute should be given preference in case a buyer desires to have new equipments and new designs. Local sources are also economical due to reduced transportation cost. Hi) Location of the firm Local sources should be preferred. vi) Experience Suppliers having experience in manufacture of similar goods should be given preference over others. easy and effective. the best of the lot from the buyer's point of view should be selected. c) 96 vii) Firms known for business ethics It is unwise to risk dealing with suppliers who are known to have questionable ethics. ii) Type of supplier A buyer may have an option of selecting between the actual manufacturer and/or his selling agent or distributor or dealer. Direct contact with them has the advantage of better communication in the technical field. viii) . Obviously. quite a few large firms have the reputation of poor performance either due to their monopoly position or due to their carelessness and mismanagement. In our country.Materials Management operate with large companies. iv) General reputation of the firm "A known devil is better than unknown angel" is a wise saying. as communication with local firms is very quick. v) BIS coverage Firms on the approved list of Bureau of Indian Standards (BIS) should be given preference over others. Local distributors/agents are preferred when stores are required in small quantities.
or trade relations as it is often called. unless all other pertinent factors are clearly and unmistakably satisfied. should never be the primary basis for selection of a supplier. .Recipro city Reciprocity.
U n it 4 B u y in g P o lic ie s TC - . 3 D isc u ss io n s a n d n e g o tia tio n s are h e ld . is p ro v id ed to th e su p p lie r. in consultation with the supplier's representative. Tim e estim ates of activities are also entered into the netw ork. " w h a t a s s e m b ly it is in " . T h e in s p e c tio n c rite ria to b e fo llo w e d is d isc u s se d . n a m e l y t r a n s p o r ta ti o n . S o m e f i r m s a r e p e r p e tu a l d e fa u l t e r s . to know which activities are independent and which activities depend on the other. T h e b u y e r s h o u ld d o w e ll to c o n s i d e r h is o w n e x p e r ie n c e w ith t h e s e s u p p lie rs . O th e r te ch n ic a l a c ts d e ta ilin g " w h a tth e ite m is " . " w h ic h q u a lity c h a ra c te ris tic s g o v e rn p e rfo rm a n c e " e tc . w h ic h u ltim a te ly le a d to th e fm a lis a tio n o f a ' tr ia l o r d e r . to le ra n c e s p e rm itte d a n d s p e c ia l p ro c e s s re q u ire d . in d ic a tin g c le a rly th e ra w m a te ria ls u s e d . are d is c u s s e d b y th e re p re s e n ta tiv es . To arrive at the tim e schedule. C ritical path is used to identify the duration. " w h a tfu n c tio n itp e rfo rm s " . which gives the delivery date for the subm ission of samples. fin a lis e d a n d a p p ro v ed b y b o th th e S parties. d e li v e r y '' e t c . b) C o s t e s t i m a t i o n a n d q u o t a t i o n s s u b m i s s i o n T h e su p p lie r is n e x t as k e d to m ak e c o s t e stim a tio n a n d su b m it h is q u o ta tio n . c ) T im e schedule for subm ission of sam ples The buyer next prepares tim e schedule for subm ission of sam ples. P u rc h a s e o r d e r s a re r e l e a s e d f o r t h e t r i a l o rd e r. a r e a ls o f i n a l i s e d d u r in g n e g o t ia t io n s . V a r io u s o th e r a s p e c t s in c i d e n t a l t o p r ic e . This is followed by drawing a netw ork. T h e o rd e r q u a n tity o f th e tria l o rd e r is g e n e ra lly le ss th a n a m o n th 's re q u irem en ts. all major activities are recorded. th e ir su b -a sse m b lie s a n d '* c o m p o n e n ts. Technological relationships are established next. • ix) Past perform ance T h e re c o rd o f p a s t p e rfo rm a n c e p ro v id e s a n e x c e lle n t in s ig h t in to th e fir m 's p ro b a b l e fu tu re p e r f o r m a n c e . if a n y . Sample Validation The activities involved are as follows: - . T ech n o -C o m m ercial D iscu ssion an d T rial O rd er This includes the follow ing: a) T e c h n i c a l d i s c u s s i o n s b e t w e e n t h e r e p r e s e n t a t i v e s o f a b u y e r a n d a su p plier D e ta ile d sp e c ific a tio n s a n d d ra w in g s o f th e e q u ip m e n t.
After clearance of pilot lot. & Activity D. process planning. The inspection report carries unqualified disposition details like "accepted". c) Feedback on defects and defect prevention The inspection results of the sample pieces are conveyed to the supplier. first batch of the item on production basis). i \ Design a supplier selection plan for raw material for a medium scale industry. The pilot lot too is checked and tested as per detailed testing and inspection criteria. The size of the pilot lot depends on the type of equipment and quantity on order. be it design. At the time of this transfer. The job is then transferred to a regular supply cell. the stores should have in stock at least two months' requirements. Reasons where the samples are rejected are also specified.Materials Management a) Follow-up with the supplier until sample submission Buyer must follow-up with the supplier on a continual basis. materials procurement. Pilot Lot and Bulk Production Lot Trial Approval of the samples is followed by the production of pilot lot (i. d) Resubmission of samples Wherever samples are rejected. manufacture of jigs and fixtures etc. where they are checked for every quality characteristic.e. < 98 . The second sample lot too undergoes detailed inspection. b) Sample inspection Sample pieces received from the vendor are submitted for inspection. or "rejected". are started and completed on time. the production level is considered to be stabilised. so that different activities. the supplier is made to resubmit the samples after correcting the faults. bulk production commences for completion of the pre-production of a trial order. After successful execution of trial/pre-production order.
a supplier remain his loyal source. the source must li) be technically and financially very strong. Relationships are good when the buyer as well as the seller both try to satisfy the requirements of each other. (iii) have good employer-employee relations. computed on periodic basic. the buyer. I) eliminating vendors who repeatedly fail to meet the required standards. provides the basis for: i) comparing one vendor against the other and thereby helping decide the share of business for each vendor. in the right quantities. At this stage. To be able to do this. For this purpose. The buyer. (ii) have good administrative/managerial capability. 'delivery'. Right source is one who can give goods of the right quality. buyers employ some vendor rating systems. must take all the necessary steps to ensure that once developed. wherein vendor rating. 4. Each party must have full appreciation of the other's viewpoint. Each party must strive hard to discharge its obligations under contract honestly andfaithMy. The Quality Control department of the supplier must have a staff function thereby enjoying astatus equal to production.4 S O U R C E A P P R A IS A L The successful completion of trial order qualifies the vendor as a regular supplier.5 SUMMARY_______________' __________ Good buyer-seller relationships are necessary to achieve principles of scientific buying. the quantity to be ordered on the vendor depends on the expected performance measured interns of their ability to meet the requirements of 'quality'. Mutual trust. needs to determine the division of business among (he vendors. Management must be progressive.U nit 4 B uying P olicies 4 . Both the buyer and the seller must realise that their respective organisations can benefit from the progress of the other. at the right time and at the right price. i) holding discussions with the representative of the supplier and identifying the areas where the buyer wants supplier to improve. . 'price'.and 'services' of the buyer. Logically. co-operation and understanding must form the basis of every contract.
" Explain. with the intention of selling a bulk of it at a higher price.Materials Management 4. 4. Bids on receipt are evaluated by comparison and the right supplier is selected. Scheduled buying: Scheduled buying is the process of procuring an item in staggered deliveries according to the delivery schedule furnished to the supplier by the buyer. "The success of a Materials Manager depends on the buyer-seller relationships. usually a middleman. of materials needed. Why are sound buyer-seller relationships important? What can a buyer and a seller do to improve these relationships? Q3. Q2. usually formal.6 KEYWORDS Blanket orders: Blanket orders refers to the purchase of a variety of items from a single source.7 SELF-ASSESSMENT QUESTIONS________________________________ Ql. Hand to mouth buying: Hand to mouth buying also called "buying according to the requirements" refers to the frequent purchases of an item in small quantities. reliability or financial stability. Tender Buying: Tender buying is a process where the buying department establishes a bidder's list and invites the members to submit bids. except when the supplier quoting the lowest price has questionable delivery time. Contract buying: Contract buying is purchasing made under contract. quality. Speculative buying: Speculative buying refers to buying large requirements of an item when its price is low. for speculative profits Sub-Contracting: Sub-contracting is the hiring of another firm to perform some of the manufacturing operations or to furnish certain parts and sub-assemblies to be incorporated into the buyer's end product. What are the qualities of a good supplier? What will you consider while making a visit to the supplier's plant? . the delivery of which is frequently spread over a period of time Forward buying: Forward buying refers to the procurement of sufficient quantity of an item in advance of its need and at a time when prices are low. Lowest price is the criterion used.
.c o n tr a c ti n g a n d p u r c h a s i n g .. What different methods of buying are available to a buyer? Discuss each method for its suitability in a given situation. What factors influence a buyer in selecting his suppliers? Discuss briefly the steps involved in developing sources for machined items. Under what conditions should a firm practice the following methods of buying? i) i) i) Forward buying Hand to mouth buying Speculative buying •—•-•-— iv) G ro u p p u rc h a s in g v) S c h e d u le d b u y in g vi) C o n tra c t b u y in g Q 8 . disadvantages and responsibility of the buying department. Q6.. advantages.... What do you understand from source selection and source development? When is source selection and source development necessary? Q5.. Q7.__________ ft 101 .„ . D iffe re n tia te b e tw e e n th e fo llo w in g p a irs : v v v )F o rw a r d b u y in g a n d s p e c u l a t iv e b u y in g w w wC o n t ra c t b u y i n g a n d s c h e d u l e d b u y in g ) x x x )R a te c o n tr a c t a n d ru n n i n g c o n t r a c t y y y )L i m i te d t e n d e r a n d o p e n t e n d e r z z z ) S u b . ......U n it 4 B u y in g P o licies Q4..
Two distinct but closely related aspects of right price are right quality and right time. Therefore. ii) Quality requirements A higher price is usually demanded (and is paid) for the critical items. . it can be obtained at a lower price. give the buyer a leverage to negotiate for a better price. negotiated price. made at a very low price after long negotiations are deemed to be made at a poor price. But what is the 'right price'? Is it market price.1 RIGHT PRICE One of the primary functions of purchasing is to buy goods at the 'right' price. if the item is repetitive. fair price. on the other hand. at one time to another time and at the same time. Price varies from vendor to vendor. A cutting tool purchased from a new source at too low a price compared to the historical prices may not represent a good purchase if the tool does not give adequate life. competitive price. The right price assumes greater importance. etc. Right price must enable purchase of goods at the right time. For example • Delayed purchases-effecting delivery date and utilisation of plant. 104 • x) .Materials Management 5. lowest of the bid prices or lower-than-last price! Price is a dynamic factor. Right price must result in purchase of goods of the right quality. iii) Job life A higher price is normally charged for one time requirement since development. Factors Influencing Price A number of factors have a bearing on the determination of the right price of an item They are: i) Quantity requirements A higher price is usually charged when the quantity required is small. as it has a significant effect on the cost of the final product. loss of production. Bigger quantities. engineering and tool cost are recovered from one batch. standard cost price. right price is the price that must be paid to the supplier to obtain the goods of the right quality at the right time. However. since bu\r> have lesser options available compared to other items where many alternative source> are available. idle men and machines.
.U n it 5 Buying at the Right Price B u t w h a t i s n e g o t i a t e d a ffect on the . if the item is .ht time. since buyers ^native sources 2 development. Dilations are 2 of goods at ipared to the rive adequate tyto obtain the ce of an item.r . For [production. price. d y n a m i c a n d a t t h e A gger quantities. is.
. .-. ."" : '-•.i v ) D e l i v e r y t i m e Ti me av ail abl e to the bu yer ha sa ma jor inf lue nc e on the pri ce ch arg ed by the su ppl ier. A higher price is generally charged/paid when a buyer has limited time to wait and he has to create an urge in the supplier to supply or when the buyer has no time to locate other sources who can supply at a lower price. : v) Demand and supply condition The price of a commodity is conditioned by the forces of supply and demand.?.rt . higher price is required to be paid if the item is in short supply. The price charged by the supplier is generally competitive when supply of the commodity is more than its demand.' • r. On the other hand.
those produced to commercial standards cost less to buy than those produced to buyer's design.v i ) E x t e n t o f c o m p e t i t i o n Li mit ed co mp etit ion is ass oci ate d wit h hig her pri ce. while strained t relations make the supplier quote higher. wh ile wi der co mp etition enables buying at competitive rates. iii) Buyer-seller relationships Good buyerseller relations provide a good ground for negotiation. vii) Standard or non-standard materials Standard parts . thereby putting a restriction on both the buyer and . ix) Government restrictions Prices of certain commodities may be fixed by the Government .
B. Lo cal tax es in diff ere nt geo gra phi cal loc atio ns ma y be diff ere nt.R. . x ) T e r m s o f p u r chase * Some suppliers may ask for a higher unit price but give longer credit period./F. while others may ask the buyer to supply the tooling free of cost.O.the sell er. Some suppliers may quote F. while others may quote lower unit price but demand payment against delivery or through the bank. Cost of special tools may be included in the rate by some suppliers. while others may quote Exworks.O.
••< • stationery items like pencils. adjusting the size and timing of an order. typing papers.special prices This category includes item s w hich are required to m eet buyer's design.U n it5 B u yin g at the R ight P rice i) Comm odity prices This category covers com modities such as steel. ii) Industrial . negotiation w ith suppliers after careful scrutiny of cost and price analysis. taps. lead.standard prices This category covers a wide range of standard item s such as tl* • • cutting tools like drills. ream ers. continuous evaluation of low cost alternatives. m illing cutters. V -belts. . m achined com ponents. Different cost elem ents can be analysed and negotiated. Price can be calculated and verified by the buyer. rubbers. refills. The responsibilities of the purchase department include: • • • keeping abreast with market price fluctuations. hacksaw blades etc. rubber. oil seals. bearings. forgings. The salient characteristics of industrial prices are as follows: • • • The prices are based on the m anufacturing cost of the supplier. Typical exam ples of such item s are castings. tin. value analysis. to take advantage of favourable market. carbon papers etc. plastic mouldings and others made to customers' design. T he prices in this category are set by dealers in the organised m arket and prices invariably change sharply with changes in expectations of dem and and supply. copper. press parts. i) Industrial . cotton etc. erasers. which the buyer cannot influence. m achinery spares like electric m otors. The responsibilities of purchase department include: • • • • scientific source selection and source developm ent. o-rings etc.
ii) Old records For the items produced to buyer's design. The responsibilities of purchase department includes Simple commonsense method of buying to reduce lead time and to pay just the correct price. in order to negotiate better. bulbs. Old records. hardware like bolts. no price record is available. washers etc. ' ' ' ' ' • . . Salient characteristics of this type of purchase are as follows: v • • The prices are governed by the published price li sts of the manufacturers.Materials Management • • electric supplies like wires. iv) Miscellaneous: minor items This category includes a wide variety of non-stock low priced items from category (ii) and (iii). however. have a disadvantage: if the buyer has in the past paid a higher price because of urgencies or some other reasons. 1' Obtaining Price Information The price of an item may be ascertained by preparing a comparative statement with help of the information obtained from the following sources: i) Published price lists Catalogues and price lists of the suppliers are good sources of information on the price of the items produced to commercial standards. fluorescent tubes. Since prices are revised by the manufacturers from time to time. nuts. Since the items are required occasionally. 101 . ' . buyers must obtain the latest catalogues and maintain them correctly in the department. he is likely to pay a higher price even now. fuses.. shades etc. old records of the same/similar items usually serve as a basis for finalisation of rates. A wide range of discounts are offered by the manufacturers and middlemen. The responsibility of purchase department include: • • Raising blanket orders based on classification of items. Being aware of discounts allowed.
•. - '• '. on acceptance. . vi) Price of items similar in shape and size vii) Price of items performing same function vffi) Information from other buyers ix) Price being paid by the company's other plants/divisions \) Punished price indices 5 ."•"" '"Jr : ' Suppliers are contacted on phone and oral quotations are obtained from them. The selected supplier in the meanwhile is asked to confirm his quotation in writing so that formal (a written) purchase order can be raised i v )T e n d e r i n g Tendering is a purchasing procedure whereby prospective suppliers are invited to submit firm and unequivocal offers of price and other terms which. These quotations are compared and an oral order is given to the supplier whose terms and conditions are found to be favourable. .L 'n u 5 B u ying at th e R ig h t P rice i i i )T e l e p h o n i c q u o t a t i o n s . • • • . . •T. shall form the basis of subsequent contract. . v) Cost estimates prepared by the company's industrial engineering department usually provide a good idea of the target price. 3C O N S T I T U E N T S O F P R I C E ____________________________________ P ric e is a c o m p o s ite fig u re w h ic h c o m p ris e s i) B a s ic p r ic e i) D is c o u n ts i) G o v e rn m e n t le v ie s iv ) P a c k in g a n d fo rw a rd in g e x p e n s e s v ) E x c is e /C u s to m s D u ty v i) S a le s T a x v ii) F re igth t . .
5. (Refer Table 5. (Station of dispatch) l.O.Materials Management viii) Transit insurance ix) Expenses incurred in collection of materials from transporter godown (carriage inward) x) Materials handling xi) Clearing and Forwarding '• xii) Octroi etc. place of transfer of ownership rights) and as such it demarcates the legal obligations of the buyer and those of the seller. *j eeee)At site . £$ Activity C.R. (Destination) 110 dddd)Buyer's works . It also signifies that the price includes expenses up to the place as implied from the shipping term.4 SHIPPING TERMS AND THEIR IMPACT ON PRICE______________ A shipping term represents a particular place of delivery (i.O. trucking and retrucking etc. The elements mentioned above are only major cost constituents. Shipping term also highlights who (seller or buyer) runs the risk in the event of damage/loss of goods. also require to be added. Write down all the constituents of price for a refrigerator. expenses incurred in loading and unloading. Over and above these.e.R.1) The various shipping terms are given below: aaaa)Ex-works bbbb)F. cccc)F.
ffff) W or ks co nt ra ct .
H ow ever.R. (Station of dispatch) Seller's station Buyer's works Door delivery F. loss (if any) is to e seller's th ac co unt. R isk o f lo ss to th e se lle r (3) R isk of loss to th e b u y e r (4) Seller m ay provide facility but any dam age 1 F.(Station of dispatch) C ost of goods.1: Place of delivery as indicated by the shipping term Table 5. (Destination) Buyer's station :se. A n y d am age or loss of goods from the statio n of A n y d am ag e to goods w hile disp atch o nw ards is to th e the they are at his orks or w hile w in b u y e r's ac co u nt.1: Place of Delivery (Risk & Price) Shipping term (1) 1.1 shows the place of delivery for each shipping term. expenses upto thetransporter's godow n.O.R. if seller charges for the help.R. •dl Seller's premises Ex-Works F. 5. 5. transit toth e tra n sp o rte r's godow n. loading and unloading at the transporter's place. )be At site Delivery at site/store Works contract Ready for use Fig. Ex-works P ric e to in clu d e (2) C o st o f g o o d s in d e liv e ra b le sta te .O.O. or at tim e of the loadinginto the vehicle (even if it is beingdo ne b y tran sp orter) is to the seller's account . w hile loading and unloading is to buyer'saccount.U n it 5 B uy in g at the R ig ht P rice Fig.
I Cost of goods erection and commissioning 6. and the vehicle.. Buyer's Works 5. •. Cost of goods. insurance and Any loss or damage to the Any damage to the goods freight up to the security gate goods from seller's works to while taking them to the of the buyer's works. (Destination) Price to include (2) Cost of goods. in unloaded at the seller's transit. . . freight and insurance upto the buyer's Risk of loss to the seller Risk of loss to the buyer s fa (3) (4) • • a . unloading is to the buyer's account. . (PS. Any loss of damage to the freight and expenses and goods at the seller's works. insurance. has been notified) transporter's while loading into godown. and buyer gets notified) is to the seller's account '. !( i Seller needs to w I intimate the buyer). Road is safe for seller since it intimates while railway does not.Materials Management Shipping term (1) 3. .2 gives the responsibility of the buyer and seller for each shipping term . the buyer's works is to the stores and/or at the time of seller's account. Works Contract Any loss or damage to the goods until the entire work is completed fully is to the sellers' account 112 Table 5. F. Cost of goods. within the buyer's store/site. At Site U Any loss or Any damage or loss damage to the of goods while they goods while are at transporter's 1 they are at godown (after buyer station.O. . . seller's works.R. works including while unloading is to the sellers' account. during during transit movement to the buyer's (until they reach plant is to the buyer's buyer's station account. 4. risks until goods are transporters' godowns.
(ii) p a y in g fo r fre ig h t (iii) arrang ing fo r tra n s it in s u r a n c e . (iv ) sa fe lo a d in g inth e to v e h ic le ( A n y d a m a g eh ile w lo ad in ge v e n if tra n s p o r te r / r a ilw a y s is d o in g . S e ller is re sp o n sib le fo r (i) a n d (ii) a s a b o v(iii) e arran g ing fom o v e m e n t o f r g o o d s to th e tr a n s p o r te r s ' godown.Godown Sa le at sup p lier's place.F. 2. . it. (iv ) p a y in g o c tro i a no th e r d ta x e s (v ) a r ra n g in g fo r c o llec tio n o f m a te rials f r o m tr a n s p o r te r s ' g o d o w n .O. S e lle r to b e re s p o n s ib le fo r (i) k e ep in g th e m ate ria l in d e liv e ra b le s ta te (ii) in tim a tin g b u y er re g a rd in g d e liv e ry o f th e g o o d s .U nit 5 B uying at the R ight P rice Table 5.to is th e s e ll e r s ' a c c o u n t) B u y e r i s r e s p o n s ib l e fo r (i) arran g in g fo r tr a n s p o r t in c lu d in g l o a d i n g o n to th e v e h ic le a t su p p lie r 's w o rk s.R.(v i) p a y in g fo r th e lo c a l tr a n s p o r t in c lu d in g a t th e tr a n s p o r te r s ' g o d o w n .n Of dispaU :) (Free-u -Rail/Road) Sale is m ade on ra il/tru ck at the sta tio n o f d isp a tch .B u y e r is r e s p o n s ib le r all fo ac tiv ities referred to a b o v e ex c e p t (i).2 : Responsibilities of the buyer/seller under the shipping terms S h ip p in r m te g Meaning Responsibilities Seller Buyer (4) (2) (3) /e r s 's Ex-works/ Ex.(Stati.
11 3 .
It is. (Destination) Meaning (2) Sale is made at the station of destination Responsibilities Seller (3) Seller is responsible for (i) to (iv) as above (v) paying for freight (vi) arranging for transit insurance. At Site Sale is made at the place of storage — 6.O. Seller is responsible for (i)to(vi) (vii) arranging for movement of material from transporter's godown to buyer's works (i.5 NEGOTIATION Negotiation is a critical part of every purchase transaction and is the 'art of possible. Seller is responsible for (i) to (vii) : as above (viii) safe unloading at the buyer's designated place of storage Seller is responsible for (i) to (viii) : as above (ix) erecting and commissioning (i. in fact an art by which a buyer and a seller. upto gate of the buyer) (viii) paying octroi and other local taxes. Negotiation is the process of planning.R. Buyer's works (Door delivery) Sale is made at buyer's plant 5.e. reviewing. Some buyers feel that the only way to secure a concession from a supplier is to be intimidating and devious. 4. Works Contract Sale is effected after commissioning & erection — ready for use by the buyer) 5. analysing and discussing the information between the buyer and the seller.' Since one cannot get what one wants. to arrive at an acceptable agreement. This is not correct! True negotiation is not 'adversarial'but 114 (b) (c) . F. Buyer (4) Buyer is responsible for all activities referred above except (i) to (iii) -i Buyer is responsible for safe unloading of goods at his works and its storage.Materials Management Shipping term (1) 3.e. tend to resolve differences to reach at the precise terms of a contract. usually face to face. negotiation provides an opportunity to persuade the other party to do what one would like to have without demanding it.
U nit 5 B u y ing at th e R igh t P rice 'working together' to an agreement. When to Negotiate? Negotiation is generally desirable under the following situations: (a) L i m i t e d c o m p e t i t i o n N e g o tia tio n sh o u ld b e u se d w h e n th e n u m b e r o f b id d e rs is in a d e q u a te . packing and m ethod of transportation. • to agree on the common methods of inspection. nature and type of test certificates etc. discounts. • • • to agree on the liability for claims and damages. to discuss incentives e. to decide on the frequency of progress reports. . (b) T o o s h o r t a t i m e N eg o tia tio n is d esirab le w h en th e b u y er d o es n o t h av e su ffic ien t tim e to in v ite c o m p e titiv e b id s . time and place of inspection. Som e buyers look upon negotiation as a battle of wits or an art of m anoeuvring facts.g. • to agree on the delivery period. low value orders of non-recurring nature). i to agree on the payment terms.g. good negotiation is one in which both A real parties win something. p ersuade others to agree upon certain term s. bonus clause etc. (e. (c) Low rupee value of the order 115 Loiv rupee value of the order may not justify cost of inviting and evaluating competitive bids. This is w rong N ego tiation is essen tially an oppo rtun ity to analyse fa cts and . The objectives of negotiation are as follows: t to obtain a fair price for the specified quality of the item. • to decide on the packaging.
g.Materials Management (d) Lack of clarity of specifications Negotiation is desirable when specifications of the items required are not clear. (e) Fixed price items Negotiation is particularly useful for items of fixed price due to one or several reasons. e. • • •• • ••:-" * • Quantity discount Reduction may not be possible if the items involved are out of fixed-pricecategory. • Cash discount f A cash discount is a reduction offered by the supplier on his invoice value. collusion. What to Negotiate? • Rate * First and foremost. has been done by the supplier. Negotiation is desirable if the buyer has sufficient knowledge of the market. a skilled buyer can always secure concessions.. Having identified the areas. A detailed cost break-up obtained from the supplier usually gives the buyer an opportunity to find out the areas where the padding. . • Change in specifications Another option open to the buyer to secure a concession from the seller is to become the unique user of the item by changing one or more of the quality characteristics of his products. This is possible if the quantity required is very large. monopoly. if any.. • • • .... seller controlling multiple sources..• -. . for the prompt payment of his bills. governmental control etc.. 116 . The buyer under such a situation may obtain a price reduction for purchasing larger quantities of materials. A2. the buyer should discuss and negotiate the basic price quoted by the prospective supplier. availability of the items and an average price to be paid.5% cash discount though on its face value does not represent much money but actually it is slightly more than 40% of annual rate... (f) Knowledge of the market .
U nit 5 th e s e lle r 's T ran sp ort ch arg es "* * * •. th e i m o r e h e n e e d s t h e o r d e r . ev en fo r fix e d p ric e item s. l ik e l y to P rin c ip le s o f N e g o tia tio n s b eco T h e p rin c ip le s o f g o o d n e g o tia tio n a re a s fo llo w s: me adam • P r i o r k n o w l e d g e o f o p p o n e n t 's b a r g a i n i n g s t r e n g t h s h e l p s b u y e r t o p l a n ant h is and a p p ro p ria te n e g o tia tio n ta c tic s . n ego t wi • T h e s u p p l ie r's b a rg a i n in g s t re n g th u s u a l ly d e p e n d s o n t h e f o ll oia ten g for facto rs: term g g g gS e l l e r ' s n e e d f o r t h e o r d e r s : T h e l e s s e r a s u p p l i e r n e e d s t s e c o n t r a c t . T h e le a s t th a t th e b u y e r tre la c o n v in cth e s e l le r to b e a r a t l e a s t t h e tr a n s p o rt c h a r g e s to t h e b u y e r's s p n n t. H o w d o e s o n e j u d g e a s u pu rai b r 's n e e d pl el fo r e to o r d e rs ? T h e m o r e f r e q u e n tly th e s u p p lie r's r e p re s e n t a tiv e c a lls o n thhe b u y e r .. i t i s e q u a l t o r1e. ed A c t u a l l y . th a t V e n d o r 's i n v e n to r y th e buye T h e b u y e r m a y m a k e t h e s e l l e r a g r e e t o m a i n t a in a n in v e n t o r y a t t h e la tt e r 's r's p la n t . e v e n if th e b u y ehr e is a b le to y is m a k e th e s e lle r a g re e to b e a r p a c k i n g a n d fo rw a r d in g e x p e n s e s . n ts are P a ck in g a n d fo rw a rd in g ch arg es u rg e P a c k in g an d fo rw ard in g its elf is a b ig ex p e n se. b a rg S i t u a t i o n s d o a r i s e w h e r e t h e p o t e n t i a l s u p p l i e r n e i t h e r a g r e e s t oa in inu c e p r i c e red g c a n d o is to n o r p a rts w ith a n y o n e o f th e frin g e b e n e fits .t h e r e b y e f f e c t i n g d e l i v e r i e s t o t h e b u y e r 's p l a n t f r o m r e a d y s t o c k s . ) h the fav o g r e a t e r i s h i s b a r g a i n i n g s t r e n g t h . co m p an w i ll b e a b le to s a v e a s u b s ta n tia l a m o u n t.d u% t io n in p r ic e c o n s i d e ri n g 1 8 % a s t h e kannon u a l 5 c ws c o s t o f b o rr o w in g m o n e y .. e g th . O n e m o n t h o f e x t r a p e c r e d i t if v i e w c a s u a l l y d o e s n o t a p p e a r t o r e p r e s e n t m u c hie rm o n e y . P a y m e n t te rm s W he a A n o t h e r m e t h o d o f g e t t i n g b e n e f i t f r o m t h e s e l l e r i s t o s e c u r en c r e d i t f o r a s u p p lr i o d o f p e r i o de x te n d in g b e y o n d th e n o r m a l p e r io d . e l h h h hT i m e a v a i l a b l e f o r n e g o t i a t i o n : S h o r t l e a d t i m e s i g n i f i c a n t l y i m p r o v e s ) f B uyin g at the R ight Price . T h e n t. T h e s u p p l ie r's a n n u a l p ro fi t a n d l o s s a c c o mn t c a n u a ls o s g i v e s o m e id e a o f t h e s u p p li e r 's n e e d f o r n e w b u s i n e s s . re q u i A c c e p t a n c e soufc h a c o n d itio n b y th e s e lle r g iv e s th e b u y e r a b e n e fit e q u iv a le n t re m e to th a t o f p e rc e n ta g e in ventory carrying co st.
The mere knowledge that the buyer has failed previously to procure the item from others makes the new supplier quote higher and become inflexible during negotiation sessions. Good initial preparation can increase your chances of success Good initial preparation can produce positive results during negotiation. The supplier can be expected to act tough if he knows that • • • he is the only source of supply he is the only one who has the necessary raw materials and toolings his competitors will not show interest in such items Such a supplier usually does not show any interest in the contract and therebybuilds up pressure prior to consummation of the contract. When there are too many buyers in the market compared to the number of suppliers. Preparationinvolves information gathering. f) Knowledge of cost elements: smart supplier can readily judge whether A or not the buyer has adequate information on cost and price of the item. If he knows that the buyer has no knowledge of the item and its cost. team formation and being clear about . jjjj) General market conditions: General economic conditions have a substantial effect on the supplier's bargaining strength. 118 2. Therefore. selection of the right time for negotiation is very important.Materials Management iiii) Criticality of the item involved: supplier is usually strong when he The knows that he is the only one who will be able to process the job because of its criticality. the latter is usually not flexible during the negotiation sessions. kkkk)Monopolistic status: absence of competition generally The strengthens the supplier's negotiation strength. the supplier is usually adamant in his stand.
g. is in. T he bu ye r m us t co lle ct rel ev an t in formation such as: • product knowledge what the item is. present and future requirement of the items job life. what assembly it e. . alternatives.g. what it does. job quantity e. substitutes etc.t h e a d m i • n is tr at i v e m at te rs o f t h e m e et i n g .
He must be honest. the buyer must make sure that the supplier's representative(s) has full legal authority to conclude the contract on behalf of his (their) company. in) his company's fairness in dealing with the vendors While making a mention of these features. market position. "Good offence is the best defence" is an age- .U nit 5 B u ying at th e R ig ht Price • • • • cost element e. 'T alk to the proper m an' At the outset. Before starting discussions. 3. and place of meeting also need to be given due attention in the planning process. • 119 To be a successful negotiator.e.g. financial stability. it is always desirable to maintain the pressure on the person on the other side of the table. he should not exaggerate. date.e. This is possible if the supplier is truly convinced that the contract following the negotiation session is in the long term interest of his company. customs and practices i. the buyer •hould mentally make the supplier ready for concessions. overheads etc. The buyer should not discuss his negotiation plan with supplier's representatives who have no authority to make a commitment on behalf of the company and who need to obtain approval from their superiors. labour cost. the buyer should enumerate whatever positive features of the business transaction are. tool cost. To create suppliers' interest. the buyer may mentioni) h) the his growth plan of track business record in of the ensuing years company's timely payments " . 5. 4. Administrative matters such as time. range of product. 'A b u y e r a lso h a s so m e se llin g to d o ' The rule may appear strange but it is a fact. reliability etc. 'A g o od o ffen ce is th e b est d e fe n ce' t . what has been done in the past capacity of company's staff " suppliers' strength i. For example. material cost.
Also. "let us think through this again and meet tomorrow. 'Time constraints in negotiations. "Commitments once made must be kept" I i Suppliers must learn to trust the buyer. A buyer who builds up trust with his . Hard-won concessions. Tempers may rise but they would not help. the buyer should never give the impression to the supplier that the supplier has reduced that rates because he had done some padding. thus giving him or her the edge. Having obtained the desired concessions. are subject to the 80/ 20 rule' Deadlines are inevitable and common deadline spurs both sides to generate a solution. An experienced negotiator can divert attention away from the issue at hand (when tempers flare) by making a joke or calling a coffee break. 7. To be in the driver's seat. 'Tact and diplomacy are necessary to make a supplier do face-saving' Everyone likes to be appreciated. 9. 120 10. let the buyer ask the seller questions such as: "What are the major elements in your cost estimate?" 6. A quick concession will have no value to the supplier. One can lose more by losing control and making bad judgements." 8. A hard-won concession earns greater appreciation from the supplier. No one likes to be criticised. The buyer on the other hand should compliment the supplier for having agreed to the buyer's request. regardless of its value to the buyer.Materials Management old saying. the buyer should hold his concessions until late in the process. the buyer should take up the role of an interviewer. 'Diversions at the appropriate time are essential for keeping control and avoiding bad judgement' Direct confrontations do come up in negotiations. the rate at which concessions are made affect the supplier's expectations. For example. He also knows when to stop or say. as in other activities. Statistics show that 80 per cent of concessions tend to be made during the last 20 per cent of the negotiation time. The best strategy will be to "listen more and talk less" and to be able to do this. provide greater satisfaction to the receiver (the seller) of the concession Buyer should learn to concede slowly and carefully. It also gives the supplier the satisfaction that a concession has been made.
S u p pl ie rs tr u st in th e b u y er d e p e n d s o n how the buyer lives .s u p pl ie rs j c a n a c c o m pl is h a n yt hi n g.
job life. 5 . One should not give one's word lightly but keep it up once it is given. . sales tax. buyer-seller relationships. delivery. octroi etc. geographical location.6S U M M A R Y ________________________________________________ R 'ght price is the price that m ust be paid to the supplier to obtain the goods of the right quality at the right tim e. degree of competition. quality. size of the suppliers' firm etc. Commitment once given must be kept. levies. A shipping term signifies the place of transfer of ow nership rights and also expenses uptothe place implied by the shipping term. Pricing agreem ents can be either 'fixed price' agreem ent or 'cost plus agreem ent' 121 and there are two basic m ethods to arrive at the final prices. & Activity D: Negotiate for vegetable at a local vegetable market and write down the factors which affect the negotiation. demand and supply position. excise. packingand forw arding charges. have an effect on the price. A num ber of factors. Price inform ation can be obtained from a w ide variety of sources such as (i) suppliers'price lists (ii) old records (i) telephonic quotations (iv) tendering (v) letters of offer (vi) buying personnel of sister company and so on Price is a com posite figure and it com prises basic price. transit insurance. discounts. govt. freight.U n it 5 B uy in g at the R ig ht P rice * up to the terms of the deal. nam ely quantity.
they are generally not of significant importance to an industrial buyer. Since these discounts are allowed on some consumer products. which has been reviewed. quality control.Materials Management (i) competitive bidding (ii) negotiation Negotiation is a powerful tool for the buyer to gain value for money. manufacturing. Negotiation requires good initial preparation. Price Panel: Price panel is a committee of members of various functional areas such as purchase. Negotiation: Negotiation is the process of planning. if the buyer makes payment on the spot or before the mutually agreed date. knowledge of the suppliers' bargaining strength and acourteous and tough personality on the part of the buyer to achieve the desired objective.7 KEYWORDS Cash discount: Cash discount is the deduction allowed by the seller from his bills. analysing and discussing the information between buyer and the seller to arrive at an acceptable agreement. etc. reviewing. 1 Right price: Right price is the price that must be paid to the supplier to obtain the goods of the right quality at the right time. 5. negotiated and accepted by the buyer. Price adjustment: Price adjustment is the price correction based on a supplier's for price increase. Off-season discount: Off-season discount is the deduction allowed by the buyer for offseason purchases. Original Equipment Manufacturers Discount: OEM Discount is the discount offered by the supplier to the manufacturers who use the supplier's items in their original equipment. . to discuss the cost details of an item and accord approval to the price asked for by the prospective supplier. r Quantity Discount: Quantity Discount is the price reduction offered by the seller for the purchase of goods in large quantities. I . finance. 122 Standard Package Discount: Standard Package Discount is the discount offered for > purchasing quantity in the standard packing. technical.
.Trade Discou nt: Trade discou nt is the deduct ion allowe d by the manuf acturer off the . catalog ue (or list) price.
6.1 PURCHASE OF CAPITAL EQUIPMENTS Capital equipment includes production machinery (e.g. machine tools), plant service equipment (e.g. power generating sets, materials handling equipment), inspection equipment (e.g. test rigs, laboratory and test equipment) and office equipment (e.g. computers, weighbridge). Procedure for Purchasing Capital Equipment i/. Though the stages in the purchase of capital equipment are identical to those for materials, they differ substantially in content. The purchase procedure for capital equipment is as under: Initiation of the need The need for the capital equipment is identified in the user departments, which are generally manufacturing departments (e.g. machine tools), plant service department (e.g. materials handling equipment, inspection equipment, laboratory equipment etc.) or general management (e.g. computers, weighbridge etc.). They are purchased for one or more of the following purposes: i) replace existing worn-out equipment
ii) augment existing production capacity iii) diversify in the new line of production iv) reduce manufacturing cost v) improve quality vi) attain higher productivity, or vii) modernise the manufacturing activity viii) effect saving in labour The intensity of the need for capital equipment is usually not high. Unlike materials, the purchase of capital equipment can be delayed or in some cases postponed.
The technical specifications for the capital equipment are drawn by the user department on the basis of past experience, literature obtained by the purchase department from the
; O b tai •i n in g suppliers of such equipment, technical discussions with representatives of the approv manufacturing s, feedback data obtained from the current users of the equipment firm al and opinion of the fro m company's own maintenance personnel. concer ned The specifications cover features such as size, weight, dim ensions, com position, u th o r H.P., r.p.m., quality requirements etc. Different equipment require adifferent i ty specifications. The Certain com plex m achines and equipm ent require efforts for '• draw ing purc specifications. Prelim inary specifications are draw n by the user departm ent, which hase are refined during discussions with representatives of manufacturing firms. of Vendorselection . . . . . r..> .-.;..... , ,; c a p it al Source identification and source selection process for the purchase of capital equipment equi is sim ilar to that of consum ption m aterials. Sources are located by referring to pm e the m anufacturers' directory, advertisem ents appearing in the trade journals,t trade n exhibits, discussions with the manufacturers' representatives etc. re q u ir e s C om petitive bidding criterion is applied for selecting suppliers for the purchase cap of r!uadardised equipment. For the purchase of non-standardised equipment, itthe al competitive tiding cannot be used, since suppliers cannot quote unless the detailed specifications of fe equipm ent are known. Such purchases, therefore, s a n c require tio n shortlisting of tw o or three suppliers, holding detailed technical discussions and om draw ing m utually acceptable specifications of the equipment and finally invitingf rthe th e suppliers to bid for the equipment the features they can supply. | with m an j Since different suppliers may offer different features, negotiation is the most a g e m ent appropriate method to arrive at the mutual acceptable terms of contract. . E c o n o m a n a ly s is o f th e e q u ip m e n t ic The c ap it E c o n o m ic a n a ly s is o f th e e q u ip m e n t is a l s o c a r r ie d o u t a t th is s ta g e . T h e a n a ly s is is al m ade sa n ct o n th e b a sis o f in itia l in v e stm e n t a n d s u b s e q u e n t c a s h o u tflo w s n e c e ss a ry in th e io n a c q u is itio n is o f th e e q u ip m e n t a n d th e e x p e c te d r e tu r n s f r o m th e o p e r a ti o n o f t h e e q u ip m e n t o v e r re q u i its 1 e c o n o m ic life . T h e m o s t c o m m o n a p p r o a c h is to p r o je c t th e a n n u a l re d c a s h in flo w s net to and e n su r • o u tflo w s o v e r th e e c o n o m ic life o f th e e q u ip m e n t a n d v e rify th e p ro p o s a l fo r its e e c o n o m ic th at •| via bilit y.
Project and Capital Goods Purchasing
the need for the procurem ent is justified.
(ii) economic feasibility of the proposal has been considered and reviewed by the senior m anagem ent before the requirem ent is authorised. (in) various options such as new equipment versus old equipment, buying versus leasing etc. have been considered. Professional companies make use of a carefully designed form for the sanction of capital equipment form .
The purchase order is raised on the selected supplier. The purchase order for capital equipment, as compared to routine purchase orders placed for the consumption materials, is more specific. The purchase order spells out the specifications, time of delivery, mode of transportation, m ethod of paym ent, post-purchase services etc.
The follow-up function for equipment purchase is distinct from the follow up function for material purchase. The follow-up function, in case of material purchase, ends with the receipt and acceptance of materials. It is not so in the case of equipment purchases. Under equipment purchases, additional activities include • Installation of the equipment under the supervision of the technical person of the supplier. Trial run of the equipment Training of workmen After-sales-service
• • •
The mode of payment too, in the case of capital equipment, differs significantly from that of material purchases. Since the amount involved is very high, paym ents are made in installments. In case of capital equipment purchased with the financial assistance from the financial institutions, the payments are made by the financial institutions.
Project and Capital Goods Purchasing
^ A ctiv ity A ;
'• •' • ' • • • - ' ' . - ' • • '
"• ' -
State at least 5 differences between regular item s purchase and capital purchase.
& A ctivity B; \ W rite the complete specifications and description of a television for purchase.
6.2 E C O N O M IC A N A L Y SIS O F E Q U IP M E N T PU R C H A SE S Capital equipment purchases are characteristically different from the material purchases because they involve large initial investments and the benefits accrue over a long period of e. Since such investm ents are usually m ade on borrow ed funds, tim the repaym ents are heavy. Capital equipment purchase decisions, therefore, are carefully taken after detailed economic feasibility analysis. To do this, the study of the following components, is necessary: i) The initial cash outflow I) The returns (or net cash inflows calculated on yearly basis) over the economic life ofthe equipment i) The econom ic life of the equipm ent (to be defined by the m anagem ent). Economic life represents the m inim um num ber of years that the m anagem ent assigns to equipm ent on the basis of its com petitive use. an Economic life is usually shorter than durable life due to technological advancements. iv) M inimum return desired on such investment, which is called "cutoff point." i The "cut off point" is an important aspect of the investm ent decision. It represents the prescribed minimum standard for the purchase of the capital 131 equipment.
If the proposed investment falls above the cut-off point, the proposal is accepted and if it falls below this point, it is rejected. The cut-off point under different "methods of evaluating capital investment decisions" is decided as under:
Method of evaluation
1. Payback period (PBP)
Cut off point
Certain number of years (for e.g. 3 years) called "cut-off or acceptable" period. The required percentage return on investment (say 25%).
The proposal whose payback period is equal to or less than "cut-off point" is considered a feasible proposal. A proposal whose ARR equals or exceeds the prescribed return on investment is considered -a feasible proposal. A proposal whose NPV is positive is considered a feasible proposal. A proposal whose IRR is equal to or greater than the required rate of return is considered a feasible * proposal. *
2. Accounting rate of return (ARR)
llll) Net present value (NPV) mmmm)Internal rate of return (IRR)
The cost of borrowing capital. The required rate of return as determined by the management.
6.3 PURCHASE OF USED EQUIPMENT
The need for the equipment can be met either by buying a new equipment or by
ent. They buy the ng used used equipment.acquiri is quite a developed market. Typical reasons for premature disposal of the equipment include - . recondition them and sell them off at a better price. There are many dealers in this market. business firms dispose off the equipment before the expiry of its specified market economiclife. equipm Used equipment can be obtained either directly from owners or from middlemen. f Used equipm Directly from the owners ent At times.
sale on completion of the contract (i. old m achines with sufficient unexpired operational life are discarded to m aintain competitive strength).e.e.Unit 6 Project and Capital Goods Purchasing I • replacement of the equipment by a new equipment with innovative technology (i. • . equipment purchased for a certain specific contract may be sold at the end of the contract).
uid ati • closure of the firm on a permanent basis. the buyer of the equipment must consider related costs such as cost of dismantling. on. replacem ent of eq worn out and broken parts. on Information regarding the availability of used equipment is obtained through any of the of the following means fir i advertisements inserted by the seller m (i. not 13 3 . the transportation. installation etc.• liq off to pay the creditors). wh • brokers en • bidding in the auction the fir • an open auction by the creditors/liquidators 1 "'. if the equipment is in operation.. However. especially when the used equipment is purchased under "as is me where is condition. * • m •< > go es • an intimation by the purchase department of the seller to the likely users int o • an offer to sell from the dealers in used equipment liq of uid A dvantages purchasing used equipm ent are: ati i) Lowacquisition cost: Used equipments are generally cheaper to procure. On the contrary. resetting of worn out surfaces. painting etc. time lag between placing be of theorder and receiving the new equipment is very long.e • some reliable indirect resource ."r • • • • . in case of new equipm ent. should also uip be taken into account. besides price." nt ma i) Shortlead time:Used equipm ent can be m ade available alm ost in negligible y lead tim e. The cost of repairs. Such a d facility is usually available in the case of new equipment. dis po i) On the spot inspection of performance performance of the used : The se equipmentcan be verified on the spot.
iv) Higher maintenance and repairs cost: Maintenance and repair costs in used equipments are relatively higher." there is no operational guarantee. ix) Purchases from own funds - . vi) Non-availability of insurance spares in vii) Non-availability of instruction manuals.Materials Management iv) Better integration with existing machines: Old equipment at times are more suited to the buyer' s requirements if • • the buyer already has such old models such models have been discontinued by the manufacturers. v) Non-availability of performance guarantee: The seller may hide the limitation oi the equipment and exaggerate its features to induce the buyer to make a purchase. cheaper used machines prove costlier in real terms. drawings. diagrams etc. v) Economy of operations: Old equipments prove economical by operation. Sometimes. they can never be compared. viii) Inability of comparison of offers: Since the offers to sell the used equipment are made on "as is where is" basis. Since the sale of the used equipment is usually under "as is where is condition. if they are required • • as standby equipment to perform temporary work • to execute a short-lived project Disadvantages of purchasing old equipment Used equipments suffer from the following disadvantages: i) ii) Short life expectancy Technological obsolescence iii) Higher down time costs: The frequency of breakdowns of used equipment is higher.
inspection and test facilities etc. m ay m ean a big expense and. so that production losses can be avoided. A lso. o sts in u sed irove costlier > lim itation of le a purchase. (place of dispatch). foundation drawings must be requested for. T he risks to the buyer's firm are far greater than those with production m aterial. prior to shipment of the equipm ent." P ackin g an d cra ting c osts jnt is higher. Placeof delivery . each equipm ent has its own set of considerations and term s and conditions. F. Seller's technical assistance during start-up tc. eq u ip m en t.R . B uyer's w F o r h ea vy orks.se of expensive equipm ent.O . therefore.O . the objectives of the exercise are com m on: They (i) to obtain the best value (ii) to avoid heartburns (iii) to reduce the firm 's risk (iv) to m inim ize life cycle cost. It is equally important 135 . it is usua lly d esira b le to nego tia te term s o f d elivery a s "Buyer's site" or "A t w orks. F. i equipm ent are The new equipm ent can give problems during the initial break in period. sellers' \\ork.R . The follow ing "D o list" m ay be typical considered a checklist for the purchase of a m ajor capital equipm ent. Thebe supplier m ay asked to provide assistance for the first few days of working. Sp arepa rts a n d su p p ly co n tracts The buyer is usually in a better position to negotiate for spare parts kits for free or at reduced price. The seller's help m ay also be requested for installation and it should appear as a suitable clause in the purchase contract.g. production m achinery. (place of destination). if they Place of delivery .Unit 6 Project and Capital Goods Purchasing m o re P u rc h a se r's " D o L ist" fo r C a p ita l E q u ip m e n t P u rc h a se s C apital equipm ent purchase is the m ost creative form of purchasing. T hough specific term s and conditions w ill differ in purchases of com puters. especially in ." there Packing and crating costs are generally high in case of bulky and/or heavy equipm ent. W hen negotiating/finalising the terms of the machinery. which the buyer m ust include in his negotiation schedule and subsequently in the agreem ent. should be review ed/ In sta lla tio n o f e q u ip m e n t If the equipm ent involves preparation of special foundation. plant construction. at site. office equipm ent. vehicles.. wiring and plum bing work.the point of transfer of ownership rights from the seller to the buyer and the responsibility for the cost of transportation depends on the shipping term e. ndition. A suppliers' requests for a flat percentage of 2% 73% tow ards packing cost.
M .g. paper and toner of a copying machine). wherever possible and desirable should negotiate with the supplier service and maintenance contract. the buyer. thereby making the supplier agree to the contractual obligations to provide maintenance of the equipment. Buyer's acceptance of the equipment '' The buyer should negotiate with the supplier the time period for which the equipment must work satisfactorily at the buyer's works before it is considered to have met the "acceptance" criteria and can be considered for payment in full. since. The buyer may also like to negotiate an extended warranty for a period of one or two years in place of the usual 3 months or 6 months warranty. The buyer should get the seller's agreement 136 . Service and maintenance contract In consultation with the maintenance staff.may require skilled operators. in some cases. the seller's assistance in the removal of the old machinery should be sought. Free training at the seller's works or buyer's works by the seller's staff should be incorporated into the equipment contract. If the seller is not willing to trade in on the old equipment.not existing at the company . the cost of supplies over the life of the equipment represents more than or the investment in the equipment itself. Trade-in-value of the old equipment Negotiation may also be necessary for the trade-in-value of the old equipment to be adjusted in the price of the new equipment. Warranties > One of the warranties that relieves the buying firm of the responsibility for the design is the warranty that the equipment is "fit for the intended use" and that the seller understands the use to which machinery will be put at site. Operator training Sophisticated equipment .Materials Management • to finalise the long term price of supplies (e.
VTI (the lowest level being the most favourable and preferred option) are as that follows: the final part of the payme nt will be availa ble to the seller only after the equip ment passes the buyer' s accept ance criteri a. „ Payme nt option s Kt Vario us paym ent option s availa ble to the buyer. listed from level I to level .
VH of Progressive payment (as it is being built). oooo)Some advance (15-30%) with significant portion payable on successful installation and satisfactory performance.g. A typical LD clause may read as under: "D elivery is essence of this order. 10% on proper installation." Indem nification of the buyer's com pany ' The seller should be m ade to agree to indem nify the buyer's com pany in the event of any • em ployee of the seller or his contractors' m eeting w ith an accident w hile perform ing the w ork at buyer's site. To safegu ard. 70% on proof dispatch. Advancebank guarantee (ABG) and performance bank guarantee (PEG) The buyer should obtain advance bank guarantee (A BG ).30 Payment after equipment has passed the buyer's criteria. Penalty for the late delivery charges LD charges should be negotiated and suitable clause should be included in the contract. A penalty charge of 0. Payment on proper installation and satisfactory E qui pm e nt to conf orm stat utor y requ irem ent i The buyer is not expect ed to know each and every aspect of the gover nm ent regula tions . V I •. .g. thereby assuring successful perform ance of the m achine after the installation and u)mmissioning for the mutually stated period. net . 20% advance.Unit 6 Project and Capital Goods Purchasing Payment level 1 days. M eaning Payment in normal terms e. n acceptance 11! performance. Deferred payment e. 2% -10 days.5% per w eek subject the to m axim um of shall be levied. if delivery is not effected within the specified 5% period. if a significant am ount is to be •isid to the supplier as an advance. The supplier should also be m ade to provide PEG . nnnn)Payment on receipt of the equipment. The seller m ust have his em ployees covered under the Em ployee Insurance Scheme. and specif ic regula tions applic able to the m achi nery being procur ed.
the jll 137 .
hazardous odours and fumes etc. w ithin the given period and estimated expenditure. W here output of a project is a product. such products are generally characterised by immobility during transformation. Life cycle costing The equipment selection should be based on life cycle cost (LCC) rather their installed cost. 6.4 PROJECT MANAGEMENT A project.Materials Management buyer should discuss with the seller and make him agree to include a clause in the contract guaranting that the equipment shall meet required/essential standards relating to statutory requirements (e. grounding of electrical equipment.). State at least five benefits and five disadvantages of purchasing an old equipment. automatic shutdown. The transformation of such products carried out in "fixed position assem bly type of layout".g. Activity D . a product or a long term utility). 188 . consists of a set of non-recurring activities that must be performed in a particular order. w hich can are be observed in the production of ships.e. Projects have the following basic characteristics (a) A project is a one-time activity with a well defined set of desired goals. construction of roads and bridges. by definition. Prepare a list of items that you will check for when purchasing an old used car. to create a specific result(i. JS$ Activity C. locom otives and aircraft.
m ak in g o p tim u m u se o f re so u rc e s o f tim e . th e re is d islo c a tio n o f n o rm a l life . ev ery d ay 's d elay in co m m issio n in g also resu lts in h eav y p ro p o rtio n ate lo sses. ivo ject m an ag em en t refers to th e p lann ing an d ex ecu tion of th e pro ject in th e m ost effectiv m a : e r i. b y c o m p a n y 's o w n e n g in e e rin g o r p ro je c t d e p a rtm e n t) o r b y a n o u ts id e a g e n c y (i) A p ro ject has a defin ite life cy cle. re su ltin g in co st o v erru n s. rrrr) T h e re q u ire m e n t o f re s o u rc e s fo r th e p ro je c t a re n o t u n ifo rm . » delay addition of the product to its related product line.le a d in g to p e rs o n n e l p ro b le m s (e. s s s s )A p ro je c t g e n e ra lly in v o lv e s m a n y ta s k s an d a re p e rfo rm e d b y d iffe re n t a g e n c ie s . e . • result in unwelcome additions to the fixed manufacturing cost. h ig h em p lo y ees tu rn o v er) ( h ) T h e p r o j e c t m a y b e u n d e r t a k e n b y t h e c o m p a n y i t s e l f ( i . tttt) P ro jects are u su ally su b jected to u n certain ty . u u u uS in ce a site fo r a p ro je ct m ay b e in an u n d erd ev elo p ed reg io n an d it m ay ch an g e ) fro m p ro je c t to p ro je c t. m a n y o f w h ic h re q u ir e ) to b e p erfo rm ed in a p artic u lar seq u en c e . » penalise the contracting firms when the completion lags behind the agreed date (since most of the contracts of the projects contain a penalty clause).Unit 6 Project and Capital Goods Purchasing p p p pA p ro je c t h a s a d e fin ite s ta rt a n d a d e fin ite e n d .o rd in a tio n b e tw e e n a g e n c ie s is o futm o st im p ortan ce. delay in invoicing and therefore reduction in working capital. as men and machines are employed beyond the economic time scale. O ften . e T h e c o s t o f m a n y a m e d iu m s iz e tu rn k e y p ro je c t to d a y ru n s in to c ro re s o f ru p e e s a n d th erefo re. T h e ta s k s u s u a lly h a v e s tr ic t p r e c e d e n c e a n d c o .e . d elay tak es p lace in th e co m p letio n o f th e p ro je cts. 139 . D elaysin com pletion of the projects • • tend to increase investment in work-in-process. ) q q q qA p ro je c t c a n b e d iv id e d in to a n u m b e r o f a c tiv itie s .g . m o n ey an d m e n .
6. there are four distinct stages in project procurement (i) Detailed engineering stage (ii) Pre-ordering stage (iii) Order execution stage (iv) Dispatch stage The key activities to be performed in each of these stages are briefly explained below: s ' 1. without any time and cost overrun. place.1: Engineering Stage I (a) Cross verification of technical specifications The technical specifications prepared by the consultants should be cross verified by the project team considering Operation. Patel and Sood. Maintenance.1) Third party inspection agencies Detailed Engineering Stage Long delivery items Cross verification of technical specifications Finalisation of list of approved vendors Finalisation of commercial terms with approved vendors Fig. Statutory requirement etc. source etc. are also applicable in the project purchases and the buyer must assist the project manager in timely completion of the project. Pollution.M a te ria ls M a n a g e m e n t >>•' All the purchase parameters like quality. 6. delivery. which form the inputs for the next stage and reduce project duration (Fig. . Safety. Stages in Project Procurement According to Mehta. Detailed engineering stage This stage involves activities both technical and commercial. price.
time that is lost in selectingvendors for enquiries and/or placing orders). The suppliers should be selected after thorough analysis of their technical capability.tfnit 6 Project and Capital Goods Purchasing (b) Finalisation of the list of approved vendors A list of approved vendors should be drawn for all items required for completion of the project. verification and acceptanceof all required despatch documents and test certificates. !» • Delivery period Delivery may be considered to commence with the date of release of 141 the . . This would save a lot of timewhich is otherwise lost at the time of placing the order. The following commercial terms need to be settled to the satisfaction of the parties concerned: • Advance payment . This will save valuable time which is otherwise lost in locating and selecting vendors at the time of pre-ordering stage (i. to eliminate the problem of follow-up in the event of short receipt of materials and non-submission of test certificates by the vendor. . placement of orders for major raw materials. financial capability. Advance payments should be linked with the achievement of important milestones such as submission of drawings. well before floating the actual enquiry. . . (c) Finalisation of commercial terms with approved vendors Commercial terms and supply conditions should be discussed with all approvedvendors. employer-employees relationship. past performance. . managerial capability. • Main payment Main payments should be made only on receipt. etc. . r • Retention amount The last installment of payment (may be 10%) should be released only after receipt and acceptance of materials at site. Since bankpayments usually cause delay in receipt of materials at site and risk of payment of demurrage/wharfage charges. push the vendors for speedy completion to of orders. quality assurance capability. . the release of payment through bank should be discouraged. . opening of Letters of Credit for imported raw materials etc.e. .
A typical performance clause may be as under: "The supplier shall guarantee satisfactory performance of the equipment for a period of 12 months from the date of installation or eighteen months from the date of despatch. Bonus Clause A Bonus Clause should be inserted in the purchase orders of items critical to the project to inspire the supplier complete the order early. whichever is later." (d) Long delivery items Long lead time items should be identified and their orders should be placed on top priority. so that they do not remain in stock unnecessarily. Penalty for delayed delivery A penalty clause should be incorporated in the purchase order to exert moral pressure on the supplier to deliver material as per schedule. Performance Guarantee Clause A performance guarantee clause should be discussed and incorporated into all the purchase orders. The guarantee period should be large enough to provide • • sufficient time after commissioning to ascertain equipment performance. buffer towards unforeseen delays. making the supplier responsible for satisfactory performance of the item/product/equipment supplied by him. Such a delivery clause makes the vendor accountable for the delays in transit. The dates of other boughtout parts should be finalised. He will exercise care in selecting reliable transporters. lit . Also. the delivery may be considered completed only on the receipt of material at site and not on the date of despatch of material. The penalty for late delivery should be applied to the total order value and not to the delayed portion of the order.Materials Management order by courier/fax and not linked with the release of any advance payment. considering the delivery time of long lead time items.
Formation of project procurement board/ committee Selection of vendors prior to freezing actual specifications Fig.Unit 6 Project and Capital Goods Purchasing • (e) Vendor list of bought out items Tier 1 suppliers should be supplied with a vendor list for all bought out items. 6. • (f) Third party inspection agencies Third party inspection agencies and their scope of work should be clearly identified for various project orders to be placed with different vendors.2) such as: • • • • • • Project procurement board/committee Pre-bid discussion Fixed price bid Obtaining offer for spares during the lifetime (say 5 years) Personal commitment of Owner/Managing Director Selection of the vendor prior to freeze actual specifications Personal commitment of owner/M. 2. 6. so !*that the quality of such boughtout parts is ensured.4. P re-order stage The Pre-order stage involves activities that help speeding up delivery during actual order execution (Fig. .2 143 .D.
cables etc. there is no price negotiation and suppliers) are selected on the basis of lowest bid). scared of losing a large value order. Fixed price bids have the following advantages: (i) It helps in obtaining the most competitive price since the suppliers.e. the suppliers require to be selected as early as possible. (ii) It helps in speedy fmalisation of orders. A committee consisting of senior staff from Purchase. (iv) Once the "no price negotiation" policy of the company gets known in the market. so that all the participants are absolutely clear of the requirements and there is uniformity in their technical offers. instrumentation items. However. (iii) It reflects the buyer's image of integrity and fairness in awarding contracts to vendors. Vendors are generally informed regarding fixed price condition during pre-bid-discussions session. the vendors start submitting their most competitive bids. are usually finalised only in the last stage of detailed engineering. in case of a disagreement. (b) Pre-bid discussions Pre-bid discussions are held with all qualified vendors of equipment manufacturers and high value items. Finance. tend to submit the lowest bids initially only. (d) Selection of vendors prior to freezing the actual technical specifications In any project. based on . the vendors are expected to submit their ' competitive bids from day one as they are not given a second opportunity to revise their bids later (i. in view of long delivery period of such items. prior to submission of their final offers. The vendors are given provisional requirements. In order to take care of these two conflicting situations.Materials Management (a) Project procurement board/committee Project procurement decisions are usually committee decisions. the enquiries are floated when hardly 50% of the detailed engineering has been done. the Project Manager's decision is to be considered final. Actual user and Project Manager should be formed to jointly select vendors. However. the specifications of items such as electrical items. at the right price. Under this method of price bidding. The discussions are intended to provide technical clarifications. (c) Fixed price bids/No regret price Fixed price bids (or no regret price bids) are invited to obtain bottom line price.
» 5 !* estimated bill-of-material. once the technical specifications are frozen. (e) Offers for spare parts requirements and annual maintenance contracts ! Vendors usually quote (or charge) exorbitant prices for spare parts and maintenance contracts. The problem can be avoided by |c (i) making the vendor quote prices of maintenance spares and services required during the life time (say 5 years) of the equipment. Since vendors and prices are already decided. a meeting should be held with the owner/CEO/MD of the supplier. alongwith offer/quote for the equipment. the order for the actual requirement may be released directly by the consultant. after the supply of the original equipment.3). with a clear understanding mat they (the vendors) will start actual manufacturing only on the receipt of frozen technical specifications from the owner or their consultant. By this method. The order execution stage involves activities which help speedy execution of the procurement process (Fig. to seek his personal commitment for timely delivery.e. which can become reference prices for the orders of spares to be released at a later date. At times. total cost of the equipment and spare parts). the long lead time of t floating enquiry and selecting vendor can be avoided.D. the cost of spares is higher than the cost of the equipment. 6. 3. O rder Execution Stage . This forces the vendors to give competitive prices of the spares.Unit 6 Project and Capital Goods Purchasing . These activities are: • • • • • Interaction with consultant Release of a clear techno-commercial order Receipt of progress reports from suppliers Joint approval of drawings Confirmation of statutory approvals 145 . (f) Personal commitment of the owner/M. •*! Since project procurement involves high value purchases. (ii) informing suppliers that their offers (bid prices) will be evaluated in totality (i.
with the project manager. consultants and suppliers. (b) Release of techno-commercial order Clear and complete techno-commercial purchase orders should be released immediately on selecting the vendors.Materials Management • • Periodic meetings with the vendors Issuance of despatch clearance/material release note. It is better to issue technically and commercially clear orders from Day One. . The tendency to raise a letter of intent followed by release of confirmed PO later should be curbed. (c) Receipt of progress report from vendors Vendors should be required to submit a bar chart giving the schedule of major activities/milestones at the earliest and fortnightly progress reports thereafter.3 (a) Interaction with the consultants The consultant's role . Timely release of technical specifications is essential for timely completion of the project. Periodic meetings should be organised. to provide clarity and answer queries. Periodic meeting with vendors Issuance of dispatch clearance Interaction with consultant Order Execution Stage Release of a clear technocommercial order Confirmation of statutory approvals Receipt of progress report from suppliers Joint approval of drawings Fig 6. Vendors should also be required to submit unpriced copies of purchase orders placed with the suppliers of boughtout items and copies of Letter of Credit for imported raw materials and components.preparation and finalisation of technical specifications -in project purchasing is of vital importance.
(f) Solving vendors' supply related problem s Periodical analysis of vendors' progress reports may suggest that the progress It. on account of shortage of funds. it is found that the despatch clearance is delayed because the inspector has to report the inspection results to the Project Manager at the head office. who has to confirm the necessity of materials at site and then give clearance for dispatch and/or mode of dispatch. The Project Management team has to analyse the vendor's problems and help the vendor solve them. Good project management demands that the inspector visiting the vendor for ' . The supplier . Often. as soon as the materials are accepted by the inspector.Unit 6 Project and Capital Goods Purchasing (d ) Statutory approval by the vendors At times. after discussion with the vendors and progress against these targets should be monitored Ap periodically. the Project Management team may modify either the vendor's payment terms or pay the sub-vendors directly. For j£ example. of work at a particular vendors' place is not satisfactory. 4. vendors may have to obtain necessary statutory approvals from various government authorities/departments. inspection should be in the know of the urgency of the material at site and should issue a Dispatch Clearance or Material Release Note soon after successful completion of inspection. Dispatch Stage The Dispatch stage concerns post production activities and includes the following: • • Selection of the transporters Receipt of dispatch documents t Compliance with requirements (a) Selection of the transporters The vendors should be given a list of approved transporters. Target dates should be fixed. if a vendor is not able to obtain materials from sub-vendors. s h o u l d b e a d v i s e d t o s e l e c t t r a n s p o r t e r s • who hav e an offi ce at/n (e) Dispatch clearance Vendors should be issued a Material Release Note without loss of time.
• who are on the list of approved transporters.ear the project site. 147 .
the following documents together constitute the set: • • • Original packing list Original lorry receipt • Copy of invoice ' • • Copy of Material Release Note Original test certificates For materials dispatched through a bank. • approvals should be taken from the concerned authorities such as Railways. 6.Materials Management (b) Dispatch documents * I The purchase order should spell out clearly the set of documents that must accompany the equipment/material consignment. inspection equipment (e. laboratory equipment) and office equipment (e.g. • the trailer must comply with safe and road worthy conditions. machine tools). computers. weighbridge).5 SUMMARY ________________________________________ 148 Capital equipment includes production machinery (e. test rigs.g. Forest Department. Public Works department etc. plant service equipment (e.g. (c) Compliance with requirements For over-dimensional consignments. £$ Activity E. . Generally. State at least 8 differences between regular items purchase and Project purchase. material handling equipment).g. the vendor should be advised to forward an advance set of non-negotiable dispatch documents through courier.
Describe the sequence of activities involved in making the purchase of a capital equipment. 6.7 SELF-ASSESSMENT QUESTIONS_____________________________________ Ql. close co-ordination between project management group and purchasing is essential. Project procurement involves four distinct stages: (i) Detailed engineering stage (ii)Pre-ordering stage (iii) Order execution stage (iv) Dispatch stage. Q3. Aproject is a one-time activity with a definite start and a definite end." Discuss any one of these methods. Aproject usually involves many tasks that are performed by different agencies. Specification of capital equipment are usually detailed but relatively flexible. Capital equipment decisions are influenced by tax considerations. consists of a set of non-recurring activities that must be performed in a particular order within the given period and estimated expenditure to create a specific result. Q2. giving the salient features thereof. Q5. How does it differ from routine purchasing? What additional precautions should a purchase manager take in Project Purchasing? 149 . Lead time for procurement is usually large. Since in most of the projects. Project purchasing differs from purchases of consumption materials. How does Project Purchasing differ from Consumption Materials Purchases? Q4. "Various methods are available to ascertain the economic viability of capital purchase. 6. almost 70 to 80% of the total cost of the project relates to materials.Unit 6 Project and Capital Goods Purchasing Capital equipment purchases are significantly different from consumption material purchases. What are the key stages in Project Procurement? Briefly describe the activities involved in each of these stages. Explain the concept of project purchasing.6 KEYWORDS Capital equipment: Capital equipments are the machines or equipments which we can use for a long period (more than one year) Project: Aproject. Capital equipment purchases are non-recurring and involve a large sum of money. by definition.
1 INTRODUCTION TO TRANSPORTATION Transportation costs account for a very significant portion (in some cases as high as 40%) of the material cost. which include (i) Getting the consignment prepared (i.e. (iii) General functions (i. weighing.e.) (a) Functions relating to incoming shipments. (iv) Verifying freight bills. checking etc.e. if instructed by the sales department. ••••• (b) Functions relating to outgoing shipments. and/ or instructed by sales department. unloading. packaging and packing). (v) Attending to other miscellaneous transport related matters such as loading. (ii) Selecting the most suitable mode of transport for prompt and economical delivery to the customer. collecting. claim settlements. as outlined in customers' orders. (iii) Notifying discrepancies (if any) to all concerned.e. co-ordinations etc.e. Functions of the Transport/Traffic Department The functions of the traffic department can be placed under three broad categories: (i) Functions relating to incoming shipments (i. records maintenance. railways. (ii) Arranging collection of materials from the suppliers. consignments to bring goods from suppliers). which include (i) Selecting the appropriate mode of transport (i. parcel post or internal waterways). trucks. as instructed by the purchase department. . air.Materials Management 7. consignments to ship goods to the customers). (iii) Attending to the customers' instructions. There exists very high potential exists to reduce these costs. (iv) Prosecuting claims for damages and losses in transit and following up until final settlement. (ii) Functions relating to outgoing shipments (i.
"M s -'. (ii) K eeping track of all the papers concerning m ovem ent of goods..** -• -f " (i) M aintenance of up-to-date transportation/traffic records. •*. b re a k a g e s e tc .'-vf • • • (i) L o a d in g c h a rg e s (iv) Freight (v ) L o c a l c le a ra n c e c h a r g e s (vi) D em urrages iv ii) L o s s e s d u e to p ilfe ra g e s . (vi) Ensuring safe and speedy m ovem ent of m en and m aterials at m inim um transport cost.2 C O N S T IT U E N T S O F T R A N S P O R T A T IO N C O S T ijor constituents of transportation costs are: (i) Packing cost (if) Documentation cost w 'HP'-' 'r''*>''. so to rem ain within the budgetary lim its...l *>.U nit 7 T ransport and Traffic M anagem ent (v) A ttending to custom ers' com plaints relating to transportation. . w h ich in clu d e. (iv) P reparing transport budgets and controlling transport expenses. (v ii) C o s t o f tra c in g m iss in g c o n s ig n m e n ts (ix) T ransit insurance ) C o s t in c u rre d in | | (x lo d g in g in s u r a n c e c la im s I n s p e c tio n c o s t o f d a m a g e d g o o d s . (c) G en eral fu n ctio n s. ' (vi) V erifying freight bills and forw arding them to accounts for paym ents.-'"< 7 . jiB-w "' (v) D eterm ination of freight rates and their classification. (iii) C o m p ilatio n o f tran sp o rtatio n co sts an d circu latin g th em to th e co n cern ed departm ents.
g. Volume of goods moved Transportation costs are lower if the volume of goods to be transported is more (e. the higher is the transportation rate.. cotton bales). A full truck/wagonload would be cheap in comparison to quarter wagonload or half wagonload).: • -ii If the goods are to be transp orted to a small city or town from wher e there is little or no chanc e of gettin g a return ship ment.) Space required Bulky items cost more to transport. The place to which the goods are to be transported . cloth is cheaper to transport than cotton bales. Density The denser the product. the rates are Factors that determine Transportation Costs Major factors that have a bearing on transportation costs are as follows: Value of the product The higher the value of the product to be transported. the easier it is to load into a carrier and consequently lower are the transportation rates (e.g.Materials Management I (xii) Unpacking cost (xiii) Unloading charges (xiv) Warehousing charges >.g. as they require more space and transportation rates are higher as they are based on space required (e.
3 .highe r. the higher are the rates. i 7. Specia l servic es requir ed Speci al servic es such as speci al conne ction and stopo ver privil eges increa se 154 transportation costs. Packaging requirements The greater the packaging requirements.
w h ich are u tilised by the buyer at one tim e or other. 7 .3 M O D E S O F T R A N S P O R T V ariou s m o d es of tran sp o rt serv ices are av ailab le in o u t co u n try . L ist at least eig h t factors w h ich affect selectio n of tran sp o rt. T hey are: (i) Post parcel (i) P arcel d eliv ery serv ice (o r co u rier serv ices) (m ) Road service (iv) Rail service (v) A ir service (vi) W ater service i (vii) Pipeline • ' • . S ta te a t le a s t 1 0 d if f e r e n t c o m p o n e n ts o f c o s ts a s s o c ia te d w ith a tru c k /te m p o i n your region. . the rates will be lower.Unit 7 Transport and Traffic Management Competition The rates also depend on the demand and supply of the carriers. & A c tiv ity B . 155 (vi) O verhead ropew ay . If a large number of carriers are available. > & A ctiv itv A . • .
annuals and carts and is the most important mode of transport in the industry. Parcels below one meter in length and weighing less than four kilos are accepted as ordinary parcels by post offices. Goods can be collected from the centers of production and carried directly to the destination. This is the reason why perishable goods like vegetables. Suitable for short distance Road transport generally proves to be quicker and cheaper than railway transport. if it is full truck/lorry load. which provides the only mechanised transport in hilly. tramways. Parcels are also accepted as insured parcels and VPP parcels. This is perhaps the most important reason for its popularity. fish. Advantages/Merits of road transport Door-to-door service Road transport provides door-to-door service. Road transport is the country's second largest internal transport. normally by overnight travel. (b) Parcel Delivery Service (or Courier Service) Parcel delivery service is offered by private operators wherein a courier accompanies the parcel. when the distance involved is small. fruits and flowers are generally sent by road transport. Most of the courier services claim to deliver within 24-48 hours and dutiable goods within 72 hours. It also serves as a feeder to rail heads. Parcels weighing more than 4 kg but up to 20 kg are accepted as registered parcels. Multiple use of roads 156 Road transport is convenient for carrying goods to the interiors and remote parts of the country. vital life saving drugs. . (c) Road Transport Road transport includes the different means of transport such as motor cars. documents etc. Courier service is ideal for carrying spare parts. tankers. where other means of transport cannot reach easily and quickly.Materials Management (a) Post Parcel Parcel post is suitable for valuable materials that are small in size. rural and backward areas which are not connected by rail. Loading and unloading charges are reduced in road transport if there is direct transportation of goods to the final destination. samples. trucks.
quickly and with limited expenditure. make road transport less dependable. The possibility of loss due to thefts and breakages is limited. Disadvantages of road transport: L ess reliable Road transport is less reliable than railways. The transport charges are not uniform and subject to frequent changes. costly and low grade goods. Indian Railways carry almost 75% of the goods and passengers traffic. It is also affected by weather conditions. Due to high . it is not tied down to fixed routes and time schedules. delays due to road accidents. particularly when goods are door delivered without any break and loading and unloading in transit. (d) Railway Transport Railway transport is the most important and popular means of transport. Absence of uniform rates Road transport is managed by the private sector. It is not suitable for carrying heavy and bulky goods. M erits of railw ay transport Highspeed Railways have considerable speed because of the use of electricity and automation. Safety Road transport is reasonably safe and secure. Not suitable for long distances Road transport is inconvenient and uneconomical for transporting heavy. Like airways. It is most suitable for long distances and for bulky goods. floods.Unit 7 Transport and Traffic Management Flexibility Road transport is a flexible means of transport as changes can be made easily. There is no fixed schedule or time table for road transport Vehicles can move at any time according to the need. Not suitable for bulky goods Road transport has limited carrying capacity. heavy rainfall etc. Breakdowns. road congestions. bulky and low value goods over long distance. straight railway lines and absence of disturbances on railway tracks.
petrol etc. Transport charges Railways are owned and managed by the state. It has a fixed time table from which it does not deviate. as per fixed schedule. Limitations of railway transport: Absence of flexibility Railway transport is rigid and lacks flexibility. Railway provides transport facilities only between certain fixed points. Goods can be taken quickly to far away places. (e) Water Transport Water transport (rivers. canals. reliable and dependable service. Food grains. a lot of time in transportation is saved. cheapest and the most natural means of transport.Materials Management speed. High carrying capacity Railways have very large carrying capacity and. therefore. are carried conveniently by railway transport. :" . sea and creek) is the oldest. Naturally railway freight rates are low and also uniform in all parts of the country. Railway is less affected by weather conditions and is a dependable mode of transport. Railway is a public utility. Water transport is suitable for carrying bulky and low cost goods. There are two kinds of water transport: (i) Inland water transport and (ii) Ocean transport . fertilizers. bulky goods can be taken economically from one place to another. Dependable A railway network operates regularly and continuously. Regularity of service Railways offer regular. It carries goods from one railway station to another only.
In India. It is the only means of transport available for transportation between different countries which are separated by sea. It is useful for internal transportation of goods. timber etc. Small boats and steamers are used for this purpose. tankers and tramps are used in ocean transport. This type of transportation is mainly useful for local transportation. This transport is cheap and convenient. Big passenger ships. The well known Suez canal in Egypt is the finest example of the use of canal for transportation. Coastal transport is generally restricted to the national shipping companies. river transport is very common in Kerala state. In river transport. Inland water transport is not developed much in India. It is essential to keep adequate depth in the rivers. Like river transport. so that they will be available throughout the year for transportation. Advantages/Merits of ocean transport C heapness t> > Ocean transport is the cheapest mode of transport. Overseas shipping is the transportation between different countries. as it is a natural means of transport. rivers are used for internal transport of passengers and goods. Ocean transport is economical. Only a few industrial sectors like jute. Coastal shipping is possible in the case of countries where borders touch the sea shores. it is cheap and safe. namely coastal shipping and overseas shipping.U n it 7 T ran sp o rt an d T ra ffic M a n ag em en t In lan d w ater tran sp ort It includes river transport and canal transport. cargo ships. Coastal shipping is carried by big ships and boats. t99 . It is an economical means of transport. Ocean transport is classified into two categories. Canals are the artificial waterways specially constructed for navigation and irrigation. O cean transport Ocean transport refers to the transport facilities in the open sea. make use of this transport.
(iii) Sea transport runs the risk of losses due to inclement. weather choppy seas and possibly of shipwreck. Ocean transport is used in India for import of bulky/heavy goods from other countries. (f) Air Transport Air transport has made a revolution in the field of transport. . ' • * Merits of air transport High speed Air transport is the speediest of all means of transport. It is convenient for transportation of goods between different countries. it reduces lead time and therefore enables the firm to operate with smaller inventories. It has made the world smaller. Suitable for light/valuable articles Air transport is particularly suitable for movement of delicate and perishable goods. Low packaging cost Air transport entails low packaging cost. (ii) Sea transport requires strong and much better packing of goods. Disadvantages of ocean transport (i) Cargo carried by sea is subject to deterioration in quality because sea water is corrosive.Materials Management Suitability It is very suitable for carrying bulky goods over a long distance. which partially offsets the higher freight cost Lower lead time Being the fastest mode of transport. A lot of time is saved due to air transport.
5. due to high operational cost. Selection M ode ofTransport of r . Unreliable Air transport is also uncertain and unreliable. From /To 2. As a result.Unit 7 Transport and Traffic Management * Demerits of air transport * H igh cost of operation Freight rates are very high. Pipelines are used to bring crude and finished products to and from the refineries. No. It provides service from one airport to the other. Major pipelines are as under: Sr. L acks flexibility Air transport lacks flexibility. 4. The initial investments are high but the operating costs are lower. air transport needs the support of other means of transport. From A nkleshwar to Baroda From B aroda to Ahm edabad From G auhati to Barauni Barauni to Kanpur From From Salya to Varm gam i (h) O verhead Ropew ays Service Steel. Flights are cancelled very often due to unfavorable weather conditions. fog etc. cement and similar other sectors use overhead ropeways to transport materials from the mines to factory. 3. snow. Cancellation of flights is very com m on during the rainy season and in winter due to heavy rainfall. (g) Pipeline Pipeline service is used to transport crude hundred of m iles from Assam.
The following could be the broad points for the comparative analysis: .Correct n of the mode of transport requires a comparative study of all modes vis-a-vis to merits selectio and demerits.
Road transport is two times costlier than rail transport and four times costlier than waterways. followed by road transport. It offers door-to-door service. tanks and trucks. then the freight cost is almost twice the cost of inland waterways. Bulk liquids. Perishable goods are routed through carriers who provide heater or refrigerator services. Usually. road transport is faster than the rail transport. • • Rail transport is two times costlier than inland waterways. Speed of transport n Air transport is the speediest among the modes of transport. • Flexibility of service Road transport provides the maximum flexibility of service compared to any other mode of transport. are transported via tankers. Road transport may be preferred over rail transport for expensive goods. . Railways ranks next for speed where long distances (over 500 km) are involved. dangerous articles etc.Materials Management Value of shipment Value of shipment is the first factor which influences the selection of the mode of transport. If the freight cost of inland waterways is taken as base. Its route and times can be adjusted to the needs of the customers. •* Air transport is 40 times costlier than water transport. Cost of service Inland waterways is the cheapest method of transport and air transport is the costliest. over short distances. which reduces carting expenses and loading and unloading charges. inflammable liquids. high value consignments are transported with lesser concern for transport cost. 20 times costlier than rail transport and 10 times costlier than road transport. Costly items require more careful handling and carry greater liability on the part of the carrier. Nature of consignment Nature of consignment may restrict the selection of the transport. However.
value and nature. Details in respect of the goods such as num ber of packages. D istance involved Road transport is generally economical for transporting goods or consignments weighingbetween 1 to 15 tonnes. in return for specified charges which are called freight. For longer distances (over 500 km ) rail transport is usually econom ical. • • • Inform ation as to goods carried at Carrier's risk or O wner's risk. from which it does not deviate.Unit 7 Transport and Traffic Management Regularity of service R ailways ranks the first am ong all m odes of transport in term s of regularity of service. Nam es of the places of departure and destination. It has a fixed time schedule. 163 . road transport third and w atertransport fourth. considering regularity of service. Details in respect of freight (paid/to-pay) Date on which the document is issued. their weight. within city lim its.Railway transport is a public utility.4 TR AN SPO R T D O C UM EN TS __________________________________ Transport documents are the receipts issued by the transport organisation to the consigners sender of goods) in acknowledgement of the receipt of goods by them (or and acceptance of responsibility for carrying the goods to the destinations. 7. A ir transport m ay be placed second (next to railw ays). Transport documents contain: • • • Consignor's and consignee's nam es and addresses. over short distances and medium distances of about 500 km .
when the former hands over the goods on the ship. The RR is transferable by endorsement. A qualified bill means that the ship-owners have found the packing unsatisfactory. The railway receipt is received by the consigner (sender of the goods). is transferable by endorsement and delivery can be sent through a bank to collect payment of goods. (b) L orry R eceip t (L R ) LR is the acknowledgement of the receipt of goods by the transport organisation and acceptance of its responsibility to transport the goods to the consignee (i. A clean bill indicates that the packing of goods is properly done. against the submission of the Mate's Receipt. It is either signed by the captain of the ship or by the ship owners. the consigner can route the RR to the consignee through the bank. The consigner can send the lorry receipt to the consignee through the bank and collect payment for the goods sent. The consignee obtains the delivery of the goods from the transport company against the lorry receipt. The consigner (i. The consignee takes the delivery of goods from the station against the railway receipt. (a) R a ilw a y R e c eip t (R R ) RR is the acknowledgement of receipt of goods by the Railways authorities and acceptance of the responsibility to carry goods to the railway station of the receiver of the goods (consignee).e. the buyer). The airway bill is issued in triplicate. Alternatively.Unit 7 Transport and Traffic Management The main transport documents used by trade are: ' ' n . The bank hands it over to the consignee against the payment of amount stipulated in the invoice.e.. It is prepared on the basis of the Mate's Receipt. The airway bill has the following particulars. the seller) thus is guaranteed of the payments of the goods sold. Then the consigner or the shipper gets the bill of lading from the ship-owners. by the airlines for carriage of the goods under the specific conditions of the carriage. one copy signed by both the carrier and the consigner accompanies the goods and the third copy is to be kept by the consigner. (d) T h e A ir C on sign m en t N ote o r A irw ay B ill It is an acknowledgement of receipt of the cargo and acceptance of the responsibility . which is a sort of kutcha receipt given by the ship-owners to the consigner. 165 . (c) B ill of L ading A bill of lading is a contract of affrightment for the carriage of goods from the port of dispatch to the port of destination. One copy is retained by the carrier. It is issued in triplicate. A bill of lading may be qualified or clean.
service claims etc. 166 . their weight. destination and stoppages The names and addresses of the consigner and the consignee The particulars of goods The numbers of packages. (n) Buyer get priority with respect to rates. This gives the buyer a number of benefits. The apparent conditions of the goods The amount of freight and person liable to pay g$ Activity C. 7.5 REDUCING TRANSPORTATION COSTS_________________________ (a) A buyer should route the consignment and not leave to the vendor to decide the routing. dimensions etc. quantity. Mention five benefits of railway transport. volume.Materials Management • • • • • • • The place and date of issue T The places of departure. List five benefits of road transport £$ Activity D. (i) Carriers get to know the buyer as an important customer.
better rates and service. Goods in a sea transport. if they do not follow the instructions. pipeline. yyyy) endors should be instructed to follow routing instructions rigidly. xxxx) he number of carriers should be restricted so as to avoid being a general T customer. in order C carriag to get e. Land transport consists of two means of transport viz. courier service. under specific . Besides the above four basic modes of transport. are susceptible to pilferage and deterioration. water and air are three main forms of transport. to each time a purchase order is raised. rail Railways is a quick. 7 . however. is inflexible and does not provide door to door service.7 K E Y W O R D S _______________________________________________ Airway Bill: It is the acknowledgement of receipt of the cargo and acceptance of the responsibility by the airlines for carriage of the goods. Sea transport is a preferred mode of transport to move bulky goods over enormousdistances.Unit 7 condi tions of the vvvv) arriers should be selected based on the areas serviced by them . Air transport is the fastest among all the transports and also the costliest. overhead ropeway etc. regular and economical means of transport for carrying bulky goods over long distance. Road transport. road and transport. however. It is best suited for transport of perishable. Land. however is unsuitable for bulky goods and transportation of goods over long distances. others means of transport include parcel post.6 S U M M A R________________________________________________ Y Transportation cost forms a significant part of material cost. is unsuitable for short distance. The vendors V should be warned that they will be back charged for excess freight. wwww) he purchase department should prepare a list of preferred carriers and T the same should be referred. Transport and Traffic Management 7 . Railways. Road transport is suitable for perishable and delicate goods. light and costly goods.
Since it takes a lot of time to procure materials. tools. Goods stored may be either. they are stocked to meet the production requirements in the future. movement. which is concerned with the physical storage of goods. Store function concerns the receiving. consumables etc. which is varied. in a majority of the firms. to the right place and to provide these services at the least cost.1 INTRODUCTION TO STORES MANAGEMENT____________________ Storekeeping is a service function which deals with the physical storage of goods under the custodianship of a person called the storekeeper or store-controller. iii) Business constraints 172 Large purchases are. therefore. if raw materials are used as soon as they arrive at the factory and the finished product is shipped as soon as it is completed. "Stores" or "Stocks. at the right time. seasonal availability. "Storekeeping. to issue the materials in the right quantities. spares. According to Maynard. piece parts. is that aspect of material. ii) Economy in buying Purchasing on a day-to-day basis is neither possible nor economical. while in storage. the responsibilities of Stores Management are "to receive materials." Finished products ready for shipment are usually called "stocks"and are housed in a place called the "stock-room. storage and issue of materials -raw materials. are used in varying amounts and at varying times.:•• i) Lead time required for procurement Raw materials. to protect them. etc.•. packing size. maintenance and operation of the plant. To effect economy in buying and reduce the transportation costs. from damage or unauthorised removal." Necessity for Storerooms and Stockrooms Store rooms and stock rooms would not be necessary."Unworked material or raw materials are usually referred to as "Stores" and the place where they are kept is known as the "store-room. to satisfy the market demand. . However. because of which space must be provided for the storing of materials. at times. bought out parts. -required for the production. and finished goods until its dispatch to the customers.Materials Management 8. necessary to satisfy business constraints like the supplier's minimum quantity condition. this cannot happen because of the following reasons: O •:. purchases are made in large quantities.
To reduce the time for return and the issue of tools. /gf Activity A." vi) Economy in manufacturing Frequent production runs increase manufacturing cost. State five reasons for the necessary storing of material.buying large quantities of an item in anticipation of an increase in its price . therefore. each crib store to serving one or more shops. is made for the storage of finished goods in a "finishedgoods store" or "warehouse.Unit 8 The Stores Function iv) Forward buying Forward buying . in order to perform manufacturing operations economically (i.is yet another reason why large quantities are purchased and stocked to be consumed at a later date. vii) Reduction in the operative's idle time Cutting tools. Therefore. v) Prevention of loss of sale To prevent loss of sale in a competitive market. These parts are stored in what is known as "finished-parts-stores" and are taken out when required for the final assembly. separate stores called "crib stores" are attached to production shops. reduce production capacity and make the work of production control difficult.e. hand tools. Provision. which are returned at the end of the shift or on the completion of the job. it is usually necessary to ensure a prompt delivery for which products are frequently manufactured in advance of sales. to reduce the setup cost) certain parts are produced in large quantities. 173 . measuring instruments and gauges required in an engineering firm are usually issued to the workmen in the beginning of the shift.
If external customers are to be served. It also includes the preparation of the appropriate receipt document (called Goods Inward Note or Goods Receipt Report). . road. rail.Materials Management 8. it is the responsibility of the store to offer materials for inspection and take them into stock only after they have been verified for quality against pre-fixed specifications. receipts and issues of stocks. (c) Inspection is the verification of all incoming materials for quality. The security aspect also covers adequate measures to prevent damage. which forms the basis for payment of the suppliers' bills by the company's accounts department. zzzz)Storage is the providing for the right and adequate storage and preservation to ensure that the stocks do not suffer from damage or deterioration because of inefficient storage. Even if a separate inspection department exists. so as ensure efficient identification and location of goods and services held within the store operation. (b) Receipt is the process of inwarding all required materials. aaaaa)Identification and location of stock is the process of formulating and updating a system of stores and coding.2 FUNCTIONS OF STORES The major functions of stores are as follows: (a) Identification is the process of describing. keeping the inventory investment within the desired limits. loading and dispatch through the appropriate mode of transport (i. bbbbb)Security of stores is the process of providing security cover within the stores buildings and stockyards to prevent the theft of stores and damage to the company's property. fire and spillage. sea or air). It also includes the operation of handling and storage equipment to facilitate the easy location and retrieval of materials. keeping the optimum space utilisation. so as to ensure adequate stocks to serve the production needs. this activity may involve packing. (h) Issues and dispatch is the process of receiving demands from consumers in the form of authorised material requisitions/issue slips. ccccc)Stock control is the process of recoupment. after due verification of quantity and quality. selecting the required items and handing them to the users without loss of time. forwarded by external sources or internal manufacture.e. classifying and codifying all items that require to be stocked.
The Stores Function
(i) Stock records is the maintenance of up-to-date records of receipts, issues and balances, which serves as an efficient basis of stock control. (j) Stores accounting is the process of recording details of stock movements and balances in terms of financial value. It involves decisions on the appropriate method of the pricing of stores issues (e.g. FIFO, LIFO, Weighted Average, etc.), so that money spent on materials is properly allocated and the product is correctly costed. (k) Stock verification is the process of physically verifying the quantities of materials and their condition at specified intervals, to see if they tally with the quantities shown in the stock records. It includes the investigation of discrepancies and adjustments in the records thereof. Q) Surplus management is the process of minimising the surplus and obsolescent stock through proper inventory control and the effective disposal of surplus and obsolete items. (m) Administrative control is keeping a vigil on the discrepancies, abnormal consumption, deterioration, accumulation of stocks, etc. and enforcing the appropriate control measures. (n) Co-ordination and co-operation involves interfacing with other departments such as engineering, purchasing, production planning and control, manufacturing, quality control, accounts, etc.
& Activity B;
Mention at least seven functions being carried out in a nearby industry/factory.
S ystem s of S to ra g e
Basically, there are two systems of storage: (i) a closed stores system and (ii) an open stores system. (i) Closed Stores System: In such a system, materials are physically stored in a closed area. Except stores personnel, no other person is permitted into the area. Movement of materials in and out of the store is permitted only when 175 accompanied by the authorised documents.
Closed stores system allows a tight security arrangement and rigid material accounting. (ii) Open Stores System: In such a system, materials are stored as close to the point of consumption/use (there are no store room) as possible. An Open Stores System allows little or no security and is useful when • • • Materials are too heavy/bulky to handle (for example, heavy castings). There is little or no chance of pilferage or theft. Materials have a negligible chance of spoilage/deterioration. Such stores systems are suitable in mass production units, wherein materials are arranged at the work stations as per the requirement and the available space. The storage facilities have a direct access for the workmen. No authorised document is needed for issuing materials. The responsibility of Stores in this system is to move material to production areas, arrange for physical storage, in consultation with production supervisors, and obtain the necessary issue documents. Further, the responsibility of the materials stored in these production areas lies with the production supervisors. The open stores system cuts down paper work considerably, as the material is issued in bulk and not against individual work orders. No perpetual inventory records are kept. The actual consumption is ascertained by finding the difference between the stock at the beginning and at the end of the period. 8.3 TYPES OF STORES________________________________________________ Functionally, there are the following types of Stores: 1. Receiving store performs activities necessary to exercise control on the quality and quantity of purchased materials, before they are accepted and taken into stock. Receiving store may be sub-divided as under: (i) In ward store to keep incoming materials until they are accepted and taken into stock. I\
The Stores Function
(ii) Quarantine store to temporarily stock materials which are under dispute and require suppliers' (or transporters') certification (for example, quantity discrepancy in the consignment, transit damage to the goods, etc.) (iii) Rejection store to stock defective (non-conforming) goods, until they are sent back to their suppliers. 2. Main Store performs activities concerning the storage and issue of accepted materials and the maintenance of records. Main store may be either centralised and housed in a large godown or decentralised and located near the point of use. Main store may be divided as under:
i) Crib store to stock cutting tools, hand tools, measuring instruments and gauges etc. to be issued to the workmen in the beginning of the shift and to be received at the end of the shift (or job). ii) Finish part store to stock components and parts produced in lot sizes in the company's own plant. t*( ^ iii) Plant (or maintenance) store to stock spares of plant and machinery. iv) Sub-stores (Raw materials stores) to stock bar stocks, castings and forgings etc. which require a lot of space and can be stocked in areas open to the sky. ddddd)Warehouses (Finish Product Store) to perform activities concerning receipt, packaging and packing, dispatch of finished goods to different destinations and the handling of connected papers and documents. eeeee)Special Stores to perform activities of receipt, storage and issues of special materials. Typical examples of special stores are: fffff) Bonded Store to stock materials "hypothecated with banks" and to stock "excisable goods." ggggg)Statutory Store to stock materials, namely kerosene, diesel and other petroleum products requiring a strict conformance to safely precautions which have been stipulated as statutory regulations. hhhhh)Temperature Controlled Store to stock perishable items such as meat, fish,
mil k, veg
etables and fruits or goods like rubber and rubber parts, active ingredients like antibiotics and vitamins and others which require a temperature controlled store-room.
Scrap Yard to perform activities of receipt, segregation and the storage of different types of scrap.
8.4 STORE LOCATION
"Store location is the process of selecting the appropriate site for the store building in the organisation and deciding how materials are to be placed inside the store (i.e. decidingthe spot in which an item is to be placed) so as to provide efficient and prompt service to the user departments. " Store location to a large extent influences the efficiency of the manufacturing/service departments and it is a function of higher management. The location of the store must be based on the activity relationships between Store and the different departments.
Principles of a good store location are as follows: 1. Economy in cost of transportation
The store location should be such that unnecessary material handling is avoided. Store building/store should be located close to the place of work, where materials are required.
Approachability by rail/road transport
Raw material like coal, coke, manganese and ores should be stored in the open and in such a way that they can be easily removed by trucks, cranes and conveyors. Also, the location of the store should be approachable by rail or road transport.
Location of the store should result in efficient service to the user departments for which activity relationships between the store and the user departments must be given due consideration. As a general rule • raw material store - forgings, castings, bar-stocks, etc. - should be located near the shops where the initial operations are performed.
finished parts store should be placed closer to the assembly bays.
The Stores Function
finished goods store should be located in the proximity of the shipping
• jigs and fixtures should be stored near the machines at which they are
used. • tools and supplies required on day-to-day basis should be stored near the production shops.
4. R educed fire risks
Materials should be stored in locations which minimise fire hazards. For example, • • Inflammable materials like petrol should be separately stored. Combustible materials such as paints, oils, greases, diesel, kerosene, etc. should be kept away from each other and from general stores. Oxidising agents should be kept away from combustible materials.
For security reasons • • The Storeroom should be away from the main gate of the premises. The Storeroom should not be located near the factory wall, where it is likely to be broken into by outsiders. The Main Store should be placed in such a way that suppliers' representatives, drivers and others do not have easy access.
6. M inim isation of risk of spoilage and deterioration
While selecting a suitable site for the store, due consideration should be given to the requirements of temperature, humidity and light.
7. Flexibility (for future expansion)
While selecting the Store site, future expansion needs must be considered. Sufficient space should be available for future expansion of the store
d e p ar t m e nt to pr e v e nt cr o w di n g/ c o n g es ti o n a n d to a v oi d th e n e e d to s hi ft th
£79 .e Store to another location at a later date.
The main criteria for store layout are i) . store location should be such that it results in an overall integration of factors. material handling equipment. storage and issue of materials. JS$ Activity C: List the factors that you will consider when locating a store for the storage of material for deliveries to the retail outlets in your city. storage and issue of materials ii) Sufficient space for the easy movement of men and of the material-handling equipment in) Optimum utilisation of storage space iv) Clear identification of materials v) Quick location of items vi) Ease in physical stocking vii) Protection against fire risk to the store and the rest of the establishment viii) Easier and efficient supervision of store ix) Adequate capacity and provision for future expansion .5 LAYOUT OF STORES Store layout means the physical arrangement of space for storage. and thereby providing for the most efficient receipt. Overall integration of factors Since it is almost impossible to satisfy each and every factor.• : Easy receipt. materials movement.Materials Management 8. . 8. office and its records.
or near broad to transport gangways. Bulky items impervious to weather L ocation N um ber In small factories. vi) makes the task of physical stock taking simple and efficient. ii) helps to know where each and every item is kept.Unit 8 The Stores Function The general principles of locating materials within the Store are given below: Characteristics of the material iiiii) High usage items jjjjj) Heavy items that are difficult Preferred location in the store As close to the issue counter as possible Near the point of use. iv) improves housekeeping and renders a neat and orderly appearance to the store.2. Location number of an item implies the precise spot in the Store.. with a sprinkler system In an air-conditioned store In locked cupboard and away from the entrance to the store hi the outside yard 1. where the requisitioned material can be found. . v) reduces the possibility of misplacement of items. or near the gate. or in the open In a separate store In an isolated fireproof place. kkkkk)Oils. One of the most popular locationing systems in Indian industries is described below: • All the racks from one end of the store to the other are serially numbered as . the storekeeper generally will remember the location of material but in large industrial units. it is impossible to remember the place in the store where the item is kept. some sort of system of the location of materials is necessary. in) eliminates the possibility of wrong issue of the item. where there is one small store. This avoids the need to remember. with thousands of items in store. greases. etc. the storekeeper can't bank on his memory. paints or messy items lllll) Inflammable and dangerous items mmmmm)Rubber and rubber parts nnnnn)Costly items like bearings.3. 7. Proper locationing i) provides convenience in the receiving and issuing of stock. In any case.. To assist the storekeeper in the easy location of the item. where several thousand items are handled.
182 ppppp)Labelling: A label may be fixed with a cellophone tape on the item or its container. giving the necessary information. Analyse and write how the layout is done for the storage of material in any nearby retail outlet. batch number. etc. qqqqq)Writing or plating: Identification details can be written on the cartons / drums / . the shelves are alphabetically numbered from top to bottom as A. 8. j Where materials are located on the floor or in open yards (as in the case of open storage system).Materials Management • In each rank.C. sort out the mix-up of materials of the same size but of different specifications. Activity D . the location number 03-D-02 will represent • • • third rack in the store fourth shelf from the top (denoted by D) in the third rack second pigeon hole from left. For example. material of construction. made of paper board or tin plate. etc. the storage area is marked off by painting the floor area into blocks and codified in a similar manner. track the identity of the batch number through the different stages of operations.B.6 IDENTIFICATION OF MATERIALS Identification of materials is the tracing of the part description or part number including size. can be either kept along with items or tied to the item itself. Different methods of identifying materials are given below: ooooo)Tagging: Identification tags. Proper identification is necessary to • • • ensure the issue of the correct items. • The pigeon holes in each shelf are numbered numerically from left to right. source of supply.
gl as s m ar ki ng cr ay on s. pa in ts. . et c.ite m s in in k.
14 Typical Layout Plans A few typical store layouts are given below: 1. M 7. batch num ber. Code number in such items may be etched by chemicals. date of m anufacture. Numerals in the figure represent the following: 1. 8 . Entrance a) b) c) Storekeeper Issue clerk Filing cabinet d) Storage racks Layout of a sm all store 18 8 Fig. The seating arrangement. C olour coding: aw m aterials/rubber parts in different specifications m ay be R identified by colour codes.Unit 8 The Stores Function rrrrr) ngraving: E Vibrating m arking tools can be used to engrave identification details. . The . L. supplier's nam e / code.1: Layout of a Small Store . storage equipment and the # arrangement of the equipment to form aisles is shown in the figure.1. may be cast on the item. sssss)Embossing: part number or any other details such as the material of construction. direction of flow. 8. ttttt)Stamping: etal punches can be used to stam p the code on the metal com ponents. etc. on bearing surfaces). filing cabinet. . E tching:Stam ping operation m ay not be desirable on certain com ponents (for example. A layout of a small store in a small scale industrial unit is shown in Fig 8.
fragile glassw are. rubber parts. m achinery parts. leaking roofs and badly fitted doors. M any a contributes to stock deterioration. Agents of deterioration T he agents of deterioration are as per the figure given below : . te c h n ic a lly . som e of w hich deteriorate nature. dam ages. fire .e. c o rro sio n . leakages. yyyyy) o n ta m in a t io n o f m a te r ia lsc c o u n t o f th e sto ra g e o f d iff e re n t C on a m a te r ia ls in close proxim ity (for exam ple. F th s v e n tila to rs . scratches. etc. vvvvv) a ilu r e to fo llo w su p p lie rs' sto ra g e in strausctio n s ed o n th e F p ro v id p ac k ag es o r delivery docum ents. ass . T he storek eep er m u st ensure th at they are free from dam ag e by an d deterioration d m a in ta in th e ir re q u ir e d p ro p e rtie s. so of a s to m a in ta in m a te ria ls in iheir original form .Unit 8 The Stores Function 8.rv a tio n .e. T he follow ing factor are the im portant ones: uuuuu) a u lty sto r a g e a r e aa t a llo w d a m p to e n te r v ia b ro k e n w in d o w s . storage of oil drum along w ith food item s). e tc . T hey are m ade of m aterials. d u st. ru st. D eterio ra tio n an d ca u ses o f deterio ration D eterioration im plies reduction in the value of an item (i. m o istu re . an P re se is th e p ro te c tio n sto re s fro m h e a t.7 P R E SE R V A T IO N O F ST O R E S Industries use various types of stores like hardw are. w w w w wF)au lty tem p eratu re an d h u m id ity con dition s of sto rag e. dents. (f) F ailu re to ob serve first-in -first-oucauses old stock to be left unused that t thereby m aking the item (s) to becom e useless on acco unt of the expiry of shelf life. drop in ability of the item ) to fulfill the functions (i. paintsand colours. xxxxx) au lty or careless hand ling of m aterials F that cause breakages. specific purposes) for w hich it w as purchased /fabricated. etc.
4: Agents of Deterioration These agents cause deterioration as detailed below: zzzzz)Sunlight (ultra-violet rays) causes chemical reaction in materials. etc. H2S. bbbbbb)Wind assists the movement of contaminants such as CO2. either acting alone or in company with other agents like moisture or oxygen (for example.Materials Management Agents of Deterioration f Climate and environment * • Rainfall • Humidity • Wind (low air pressure) Physical agents • Sunlight • Heat • Wind • Dust Physical and chemical agents 1 Chemical Micro agents organisms • Moisture • Salts • Acids • Alkalies • Gases i 1 Biological agents 1 1 Insects Rodents r Fig. absorb moisture from the humid atmosphere and cause deterioration in some materials. making the materials brittle and in extreme cases causes fire. cccccc)Dirt. aaaaaa)Heat causes oxidation. (e) Salts accelerate the corrosion of ferrous metals. which can be further divided into: (i) micro-organism of vegetable origin (called fungus) (ii) micro-organism of animal origin (called bacteria) Both categories thrive on food. SO2. dust and grit being hygroscopic. storing materials on proper dunnage. Their effect can be eliminated by using air tight containers. textiles. Biological agents are the living organisms which may be classified as (a) Micro organisms. moisture and humidity.. 8. which adversely affect the leather and textile goods. . plastics). oxygen.
T. (c) Rodents.). dust. stacking materials on anti-termite products. offering poison baits to rodents to destroy them. DDT.D. locating windows at least one meter above the floor level. 18 7 . treating the ground with insecticide before erecting the building. from attacking materials. n) All items. inspecting articles at regular intervals. particularly those with a limited life.. fumigating rat holes.U nit 8 T he Stores Function I i covering stocks by tarpaulin. trapping and killing rodents. Preservation Measures Preservation measures depend upon: i) the nature of the items ii) the duration for which an item is to be preserved. . inserting napathalene balls between layers of cloth. They should be kept on raised platforms called dunnage. Gammaxin.. chlorodine etc. should be issued on "first-in-first-out" principle. Their effect can be minimised by • using floor of bricks or concrete. woole bears.. cloth moths. treating materials with insecticides like creosote. aldrin. etc. textile. bamboo-borers. insects. • fixing tin sheets at the edges of doors and windows. covering open ends of wipes with barbed wire. etc. Deterioration due to insects can be prevented by using insect-proof packing. leather etc. (b) Insects include termites. This prevents moisture from ground. General rules for Preservation A few common rules for preservation are: i) Materials should not be allowed to have direct contact with the floor. spray of D. exposing damp stores to the sun to remove moisture (for example.
Materials Management iii) The user department should be informed of the expiry date in advance.8 SECURITY OF STORES Security of stores includes measures against (i) theft by outsiders (ii) pilferage by employees (iii) malpractices by stores staff (iv) precautions against fire protection and (v) pest control measures to contain rodents and termite menace. v) Items should be kept as far as possible in the suppliers' original packing provided by the manufacturers (for example. The measure should include: • • • • • • • 188 Daily closing of stores and custody of keys. Movement control of incoming/outgoing vehicles. &Z Activity E. white ants and fungi. Fire fighting equipment Pest control measures. roller bearings are greased and wrapped in impregnated papers). iv) Store should also be given periodically a spray of suitable pesticides or fungicides to get rid of termites. 8. Enquiry and disciplinary action against defaulters. Storage of expensive and scarce materials. Visit a nearby retail outlet and list down the preservation methods used by them in the store. spares and instruments should be stored in temperature-controlled stores. vi) High precision and high value components. Marking of stores. Indemnity bonds or bank security from store employees. Adequate precautionary measures against these must be worked out in advance and implemented. • .
vi General. ffi. The office must be kept locked when not in use. etc.•. Daily closing of stores and Custody of keys dddddd)Daily closing of stores should be properly supervised. •>. entrances. Marshalling areas. windows. All stocks held as work-in-process must be secured and correctly recorded. Stockyards. All doors. During off duty hours. The fencing should be checked daily. which include the following. are secure: i. Any one collecting and depositing a key. ggggg g) A ll d u p li c a t e k e y s s h o u l d b e k e p t u n d e r t h e c u s t o d y o f t h e s e n i . Work-in-process. desks etc.Unit 8 The Stores Function S e c u r ity o f In sta lla tio n s . should be required to sign the register. keys should be kept in a locked key safe under the supervision of a responsible * person of watch and ward. i Store offices. The entire stockyard should be security fenced. Written instructions should be issued. v. ffffff)"Key movement" register should be maintained. Regular inspection of all installations is essential to ensure security. must be secure and kept locked. iv. shutters and other possible means of entry are secured.The Store manager has to ensure that all installations. pallets with metal cages fitted on the top with a lockable entrance. production control.e.. Normally marshalling areas are difficult to secure because of the high degree of access by the other departments such as materials handling. The stockyard gates and stockyard office and all locks must be secure. so that unauthorised persons are prevented from entering store buildings. No valuables should be left in the office. However. particularly after the factory hours. Any breakages or damage to the fencing must be repaired. skylights. nominating the persons responsible for the maintenance of the keys. eeeeee)Stores' keys must be numbered and registered. Store buildings. All cupboards. filing systems. mobile stocks can be secured by use of lockable pallets i. cabinets.
189 . Old locks should be replaced in case of even the slightest doubt. hhhhhh)Loss or misplacement of a key on each occasion should be thoroughly investigated.or officer.
Prevention of theft by outsiders To check theft by outsiders. which ensure entry to only holders of specially coded pass-cards issued by the management. Constructing counters so that unauthorised persons cannot easily enter the stores. can easily be established. jjjjjj)The number of windows. Marking is desirable because • • it discourages theft as marked stock cannot be easily sold to outsiders. glass shutters and open ventilators should be the minimum possible. in the event of theft and subsequently the recovery. Control of entry into store installations No unauthorised person should be permitted to enter the Store area. Embossing or engraving trade mark Marking by dye (this method allows the dye to get transferred to the hands of the thief when touched by hand). This can be achieved by i. by the police or the investigating agencies. Marking of stocks can be achieved in different ways as follows: • • • Colour marking by paint. the following measures should be taken: iiiiii) The entire factory should have a high compound wall or a high barbed wire fencing. Installing electronic sensors. wherein passes are issued by the management only to those persons who should be in the Store at any given time. ii. kkkkkk)All windows and skylights should be capable of being securely fastened. They 190 .Materials Management Marking of items Items of high value and which can be easily pilfered should be marked in some way to identify their ownership and origin. ownership of the stocks. iiL Adopting a system of pass cards.
m us t al so be fit te d wi th ba rs an d ir on m es h. .
O oooooo) o personal property should be allowed to be kept inside the store. F rrrrrr)Surprise checks of a section of Store items should be done every now and then. pppppp) tems liable for pilferage should be monogrammed with the company's I name or marked for some kind of identification qqqqqq) resh materials may be issued against return of old ones. parcels etc. G wwwwww)ndemnity bonds or bank security must be taken from store I employees. Prevention of M alpractices by Store Staff ' M alpracticesare the manipulations by store personnel with the active help of outsiders. trolleys.The following steps help in checking malpractices by store staff: uuuuuu) utgoing trucks. O vvvvvv) ate passes should be issued for taking any material out of the company. Prevention of fire Fire isan accident caused by the chem ical reaction between com bustible materials . N and oxygen . ssssss)Immediate enquiry should be conducted. should be thoroughly checked. tttttt)Store staff should be searched before they are allowed to leave the main gate after the day's work. as soon as any case of malpractice is brought to light. Prevention of pilferage by employees The following steps should be taken to check pilferage by the employees: nnnnnn) nly authorised personnel should be allowed to enter the store. and punishment for pilferage should be given adequate publicity.Unit 8 The Stores Function llllll)Security guards should be put on duty at strategic points. mmmmmm) utsidersshould not be permitted to enter the store beyond the O serving counters.
fffffff)Exits should be provided with panic bolts and should open outwards. they should be stored appropriately. greases and fluids should be prevented. . water sprinklers etc. sand and water-buckets. bbbbbbb)Combustible materials should be stored in covered metal bins ccccccc)Defective wiring should be immediately replaced to eliminate the possibility of fire due short circuit. iiiiiii)Appropriate fire fighting equipment (e. jjjjjjj)Smoke detectors should be installed in all Storehouses. zzzzzz)Adequate earthing should be provided to the external and internal wiring of store buildings. ggggggg)Telephone should be provided at strategic locations. hhhhhhh)Material inside the stores should be stocked keeping a fire hazard in mind: Enough clearance (around half a meter) between the wall and the storage rack should be provided.M a teria ls M an ag em e n t re •< •< The following precautions should be taken towards fire prevention in Stores: xxxxxx)Doors and staircase should be made of fire resistant materials yyyyyy)Smoking should be prohibited in and around the store houses. fire extinguishers. to sound emergency communication to all. with a ready access to the telephone numbers of the fire brigade. to detect an outbreak of fire. kkkkkkk)Fire alarms should be provided at appropriate places.) should be provided at strategic places.g. aaaaaaa)Leakage of inflammable oils. ddddddd)Since inflammable materials can undergo spontaneous ignition on account of slow oxidation coupled with inadequate ventilation to remove the resulting heat. eeeeeee)Those parts of buildings where inflammable materials are kept should be well insulated to reduce the risk of fire spread.
Security m easures are intended to prevent theft by outsiders. Special store Scrap yard. Store room s and stock room s are necessary because aterials are not used as soon as they arrive at the factory and m the finished productshipped as soon as it is completed. issue and dispatch. efficient service to the user departments. stock verification. Finished parts store. storage and the issue of material under the custodianship of a person called the storekeeper or store-controller. minimization of the risk of of spoilage/deterioration. storage and preservation. the Principles of a good store location include econom y in the cost of transportation. w hich deals w ith receiving.U n it 8 T he Sto res Function 8. pilferage by em ployees. verification of the quantityand quality of incoming materials. and The m ain function of a store are: classification and codification of item s to be stored. flexibility future expansion) and the overall integration of (for factors. It also includes decisions on how m aterials are to be placed inside store.Stores are of five types: Receiving store. M ain store. 193 .movement. minimization fire hazards. exercising control on of surplus and obsolete stock. Threekey agents that cause deterioration are i) climate and environment ii) physical and chemical agents iii) biological agents. deterioration and accumulation of stocks and co-ordination and cooperation with interfacing departments. accounting and the adm inistrative control on stock stores discrepancies.inwarding materials forwarded by external and internal sources.9 SUM M ARY Storekeeping is that function of M aterials M anagem ent. destruction of stores by fire. security of stocks. Store location is the process of selecting an appropriate site for the store building in the com pany's prem ises. Preservation refers to protection of the materials against any functional degradation. is There are two system s of storage: (i) a closed stores system and (ii) an open stores system . alpractices by stores staff. approachability by rail/road transport. maintenance stock records. loss due to m m enance of rodent andtennite.
viii. . Nature of Material Receipts Material in the receiving store are received from the following sources: i. v. Its importance can be gauged from the following: Errors in purchase transactions can be detected more easily at the time of the receipt of materials rather than later. The receiving department can assist the purchase department in improving the effectiveness of the vendors. vl P re p a rin g th e n e c e ssa ry d o cu m e n ts su c h a s th e d isc re p a n c y n o te . iv. iiL In w a rd in g o f th e c o n s ig n m e n t. F o r w a r d i n g t h e a c c e p t e d m a t e r ia l s t o t h e a p p r o p r i a te s t o r e s f o r s t o r a g e . Unloading of material. Correctly performed receiving function can prevent malpractices.Materials Management . R e tu r n in g a ll r e je c te d g o o d s b a c k to th e s u p p li e r s . Responsibilities of Receiving Store The receiving store has the following responsibilities: L il Verification of the correctness of paperwork and the appropriateness of supply before accepting the goods. x. g o o d s i n w a r dn o te e t c .1 INTRODUCTION TO STORES OPERATIONS_______________________ Receiving concerns on the control on the quantity and quality of materials from the time they are received until they are accepted and taken into stock is an important aspact. I n f o r m in g p u r c h a s e / in d e n to r / P P C r e g a r d in g r e c e ip t o f g o o d s . A rra n g in g th e in s p e c tio n o f m a te ria ls . V e rific a tio n o f q u a n titie s. ix. vii. 198 Purchased materials received from suppliers. 9. R e tu r n in g a ll c h a r g e a b le e m p tie s b a c k to s u p p lie r s .
nnnnnnn) of entry is a document received from the clearing agent against imports. v i S em i-fin ish ed o r fin ish e d jo b s received fro m ven d o rs. iiL Materials returned by customers as defectives. Documents used in Receiving The following docum ents are received/raised for receipt transactions: lllllll) elivery challan. vi "On Joan materials "returned by the vendors. trader. 9. delivery note or delivery advice is D a docum ent sent by the local supplier/m anufacturer. Materials received from customers for processing. Inwarding the consignment at the security gate. k. vffi. Bill ooooooo) Cash memo is a document which is used in connection with a cash purchase/sale and constitutes a receipt for the money which the buyer has paid to the seller. iv. mmmmmmm) Railw ay Receipt (RR )/Lorry Receipt (LR) issued by the railways/transporter is a docum ent that acts as an authorization slip for getting the delivery of goods by the purchaser from the railways or transporters. also called dispatch m em o. . Materials returned by customers on account of excess supply v. M aterial received from forwarding agents against imports. Petty cash purchases by the purchase personnel. received from customers "on loan" to be returned. dealer with the m aterial. It lists the item details and the number of packages being sent by the carrier. gauges etc. material: In warding at the security gate Security aspects of materials requires that each incoming consignment is entered in a register at the security gate and the original copy of the document accompanying the material is stam ped for the security seal. Tooling.2 RECEIVING OF MATERIALS ___________________________________ The following are the main steps to be followed when receiving1.Unit 9 Stores Operations ii.
3. makes it possible to trace the consignments in case of a dispute by the supplier.Materials Management i iL guards against malpractices by the stores personnel.received earlier from their own buying department. Every incoming consignment is assigned a GRR number and the details of the consignment are entered in the GRR register against this number. Inwarding of the consignment in the receiving stores Inwarding of the consignment involves the following clerical activities: i) Verifying the number of packets/cases as per the accompanying note. are checked for the correctness of the paperwork and the appropriateness of the supply. Only a summary of the items contained in each consignment is written in the register. 2. vii) Giving acknowledgement to the carrier. iv) Guiding the carrier to unload material at the appropriate place. 1200 . appropriate action should be taken. Verification of quantities This function comprises of unpacking and inspecting the general condition of the goods inside the packages for transit damages. Verification of correctness of paperwork and appropriateness of supply Materials in the receiving department on receipt.purchase order and delivery schedule . before being unloaded. vi) Stamping the accompanying document (on front) for the inward details. The carrier copy is also stamped and updated for receipt details. As soon as the discrepancy is detected. verifying quantities against the supplier's packing slips and notifying discrepancies (if any). A supplier's note accompanying the consignment provides the necessary identification and procurement details of the items which helps the receiving personnel retrieve the necessary documents . 4. ii) Observing apparent damages to the packages (if any). iii) Obtaining certificate/signature from the carrier confirming the shortage/damages to the packages. v) Entering the details of the consignment into a Goods Receipt Register (GRR).
It provides a check on the quantity invoiced by the supplier. is an important linking document between the supplier. . all incoming goods are insured against damage or loss either by the consignor or by the consignee. Preparation of Goods Receipt Report edand i of the ipplier's ancy is For each consignment. store. 6. Until the GRR reaches the concerned department. Notifying indentor and purchase regarding the receipt of materials lages RR). steamer agent or carrier's agency) to that effect. is generally distributed as under: L Original copy (Supplier's copy) to acknowledge receipt of the indicated quantity and communicate the inspection results. the receiving department should notify indentors and the purchase department of the receipt of materials at the earliest. the indentor may be ignorant of the receipt and perform unnecessary follow-ups with the purchase department.er. it takes three to four days time until the GRR reaches the indentor. normally. inspection.r's md the om 4 Claims should be lodged with the insurance agency since. U n it 9 S to re s O p eratio n s '•••< ^•••' :ed . a Goods Receipt Report (GRR) is prepared by the receiving : tore on completion of physical verification of the quantities. M RR (Material Receipt Report). To obviate these difficulties. Goods receipt report(GRR) in a company. Shortages and discrepancies in the consignment mentioned in the contents of the packages require to be communicated to the supplier using a form known as "Discrepancy note. Usually. Goods receipt also known as GIN (Goods Inward Note). Materials along with the packages/cases require to be moved to a separate enclosed store called "Quarantine Store" until negotiation and scrutiny by the concerned authorities relating to the observed discrepancies are settled. A certificate for the shortages in packages/cases should be obtained from the transporter (railways. Purchase and the accounts department. il Accounts copy to confirm the quantity actually received and the quantity accepted for payment." 5. MIN (Material Inward Note). of the unary Goods received in the department must be cleared in the shortest possible time since it adds to the procurement lead time without adding any value to the goods. RCIA (Receipt-cum-Inspection Advice) etc.
2 0 1 .
. not charged to the buyer's company. Afew companies use a document called "Rejection Note" to report inspection results. Return of defective materials to the suppliers Defective materials are kept in the rejection store. vi.Materials Management in. 7. while non-confirming materials are sent to the rejection store. Purchaser's copy to enable the buyer to record receipt materials on the followup copy of the P. 9. are returned to the supplier as per the terms of the purchase order. Outstation suppliers are notified and defective materials are sent back to suppliers. Main Stores copy to give custody of the accepted materials. steel pallets. Local suppliers are asked to collect rejected materials. Delivery of inspected materials to the appropriate store Accepted/rejected materials after inspection are forwarded to their respective store accompanied by a copy of Goods Receipt Report (GRR). empty chemical tanks. 10. wherein each rejected consignment is logged in. empty oil barrels. usually on a "freight to pay" basis. Indentor's copy to intimate the receipt and inspection results of the materials received. Returning all chargeable empties to suppliers All empties such as empty gas cylinders. on receipt of the GRR. 8. it is offered to the Quality Control department for quality certification.O. iv. A separate register called "Rejection Register" is maintained. etc. Receipt-cum-inspection copy to maintain records of the GRRs. carries out the necessary inspection and enters the inspection results (quantity accepted/rejected) including causes for non-conformance (if any) in the GRR.. Inspection of materials After the materials have been uncrated and verified for quantity. Accepted materials are moved to the main store. post stock cards etc. v. The Inspection department.
. (xiii) the com pany's departm ents operating under im prest system . (x) the repairers against repair contracts (for exam ple. sale of scrap materials). in the right quantities and at the right time. (xi) the em ployees or scrap contractors (for example. jigs and fixtures etc. rew inding of m otors. (xii) the customers as sale of finished products. Material is issued to (i) production for the manufacture of goods against customers' orders or for manufacture to stock" purposes. (vii) the contractors to manufacture products/items against contracts. repairs of instruments). fix) the laboratory to re-evaluate quality of material (when material is stocked beyond its shelflife). to recoup the quantities consumed.i the contractors for conversion into finished products/materials. fri) the maintenance departm ent for plant repairs and m aintenance of m achinery. (v) the suppliers "on loan" to be returned (for exam ple. (iii) the tool room for manufacturer of jigs and fixtures. gauges. Prepare a check list for checking the received material for any small scale organisation.U n it 9 S to res e ra t io n s Op ^ A ctiv ity A . wherein it is agreed to supply certain materials free of cost. (viii) the crib store/sub-store to replenish the stock con sumed by them.) (vi) the sister companies "on loan" from the stock held. 93 ISSUE O F M ATERIALS Issue function is the key activity of Store. to periodically issue quantities equal to the difference betw een the sanctioned im prest and the current stock. i i '. m easuring instruments. which concerns the issue of materials of the right quality (as specified in the material requisition).
soap.: Indenting Department : Unit price Remarks Qty. Their number should be just adequate. MATERIAL REQUISITION Material Requisition No. If too few numbers of staff are authorised. Document to authorise issues The basic document to authorise issue of stock is known as "Store Issue Note" or Material Requisition.1 : Typical Format of a Material Requisition 204 . Although the design of the requisition varies slightly from organisation to organisation. demanded Unit issued Authorized by Issued by Date of issue Entered by Fig. etc. it can cause delays in the issue of stock and if too many are given authority. stationerym. Part Name/Part No. Typical examples of the items issued under this category are consumable items like lubricants. a typical material requisition is as shown below: PRODUCTIVITY SERVICES EC. Store administration should be given a list of designated persons who can authorise the requests for the issue of materials. No.Materials Management (xiv) the cost centers/departments to issue the quantity budgeted (or fixed) per period (maybe a month or a quarter). Some control on issue of stock therefore is essential to avoid losses. : Work Order No. then control is likely to be weakened. Road. Every employee in the organisation cannot be allowed to authorise issues. The list of authorised persons requires to be periodically updated. 9. Control stock of issues The stock held by the company represent money and it needs to be treated like money. Pune 411 004 Sr. cotton waste.
9 . code num ber. (a) P re p ara tio n o f M aterial Issu e N o te /M ateria l R eq u isition The requisitioner needs to prepare a M aterial Requisition giving com plete details of the goods required. M aterial requisition found acceptable should be logged in the Requisition Register. demanded Qty. quantity etc. (b) A u th o risa tio n The requisitioner must next locate a designated official or a member of staff to authorise the issue of the stock and request him for his approval and signature. it needs to be presented to store for delivery. H ow ever. receipt F ig . Issu e p ro ced u re The following are the steps that occur between the origin of the need for aparticularitem of stock and its final issue by the store departm ent. Store staff is obliged to check all details concerning the item requisitioned such as description. S e ria l Material No. like a diary.2 : R e q u is itio n R e g is te r 205 . This enables the storekeeper to attend to other duties outside these hours. (c) Presentation of M R to Store O nce the M aterial R equisition or Issue N ote has been authorised. Requisition Date of raising material requisition Actual date of Indentor Brief description Qty. if urgent dem ands are presented outside the stipulated hours.Unit 9 Stores Operations T im in g of issu e s M aterial should be issued only during specified hours of the day. which needs to be mentioned datewise. they m ust be m et w illingly and happily. and verify the reliability of authorisation. issued Issue Note No.and date No.
the issue note must be priced. to be presented later on receipt of material. both stock records and stock control are updated for the issued quantity. (e) Issue of required items Stores keeper should next check the availability of the indented material. of the material Number of packages Issue voucher no. (g) Cost Allocation To enable the costing department to determine true cost of the job. it may be delivered by the store on door-delivery basis.Materials Management (d) Identification of required items(s) • Stores then identifies the item(s) required. This is done by entering the value of each issue on the issue note. If the exact material or substitute material is not available. (h) Updation of stock records and stock control Once the materials have been issued. a gate pass should be prepared. However. . giving the following details: • • • • Description/code no. issues to vendors/ sub-contractors/customers). Where the material is to be taken out of the company (for example. The indentor should be informed of the availability of the alternate or substitute material and the same should be issued if it is acceptable to the indentor. where the material is bulky/heavy. using the code number/description contained in the issue note/MR and the codification system held in the store vacabulary. whether available in full or in part. before forwarding it to costing. the requisition may be returned. and date To whom sent (f) Collection /delivery Material should be collected by the requisitioner from the issue counter after signing the issue voucher. If the material of the exact specifications is not available. the store should check for the availability of the substitute material or an alternate material.
never tellies withthe book *& 4i 207 . • t Issued materials must be accompanied by an identification tag/sticker to avoid mixup (except when the identification details are engraved/etched on the components/ cartons). in an actual situation. ^ Activity B. particularly for the itfiiis of low shelf life. However. • Material should be issued on the basis of FIFO (first-in-first-out). suppliers' approved sample piece(s) should be issued last. Prepare a checklist for ensuring the correct issue of material. especially for C-class of items. Material should be issued in bags/cartons.U n it 9 S to res O p eratio n s Essentials of Correct Issues The essentials of correct issues are as follows: • • • Material should be issued against written requisitions. kdger). « Material requisitions should be received preferably a day in advance. so that they do not get damaged/dented/ chipped during movement. Physical stock. Material should be issued only in a pre-fixed quantity. Material should be issued only against authorised requisitions.
(e) Stores audit Stocktaking provides an opportunity to audit Stores procedures.e. And material cost equals the sum of value of stocks held at the beginning of the year (i. It helps to reveal weaknesses in the existing system and review stock control procedures. opening stock). (c) Early detection of obsolete and dormant stocks Stocktaking helps early detection of obsolete and dormant stocks. And shortages. Accurate stock records are essential for the proper working of the production control system. . There are other reasons as well too. If the stock records show too high a balance. The statutory regulations therefore demand that the stock shown in the balance sheet must be verified physically during the financial year and all discrepancies must be properly adjusted and accounted for in the books of account. This is because the corporate tax depends on the volume of profit and profit in turn depends on the cost of materials used. thereby enabling the purchase department to take timely action on their disposal and release the company's scarce capital for productive use. malpractices and pilferage. Alternatively. to know whether they are operating satisfactorily and effectively or not. plus the cost of materials bought during the year minus the value of stocks at the end of the year. (d) Moral check on the stores personnel Stocktaking provides a moral deterrent to stores personnel against fraud. It also provides shows as to whether stock records are being maintained properly and accurately and whether the procedures laid down are being followed meticulously. could lead to production stoppages. if not corrected in time.Materials Management Why Physical Counts are Necessary Physical count is essential not simply because we want our records to be accurate. (b) Financial statements Physical count is the prime requirement for the certification of financial statements. an item will be unnecessarily re-ordered. if the stock records show too low a balance. (a) Production control . the requirements will not be indented and thus a shortage will be created.
The discrepancy in such situations arises because of two reasons . because of th e basic characteristics of the m aterials. for exam ple. the issue clerks usually give liberal m easure and secondly. 209 .U nit 9 Stores O perations W hy Physical Stock does not Tally w ith the Stock Balance Stock records never stay accurate all the tim e. o r l e a k a g eosf m a te ria l s . They issue incorrect quantities (i. Physically.firstly. inks etc. the part m ay be lying som ew here under different nom enclature. Som e of the com m on sources of errors are: (a) Clerical errors Inventory control is manned by people and people occasionally m ake m istakes: • • • • • They receive or issue materials but forget to m ake entries. They post on the wrong cards. sheets may be procured by weight but issued by numbers. W ires. m ay be bought by w eight (kgs) but issued bylength. (c) M aterials handling C a r e l e s s n e s s in h a n d l i n g o f m a t e r i a l s o f te n c a u s e s b r e a k a g e s . but discrepancy w ill be show n during stocktaking. Item s such as caustic soda being hygroscopic gain weight. there is alw ays som e a wastage w hile m easuring and to requirements. (b) Incorrect location of parts A part m ay get lost due to incorrect location. show shortage due to evaporation.e. d a m a g e s . Errors creep in occasionally. cutting (e) Atmospheric conditions C ertain item s alw ays end up w ith surplus or sho rtag es. w h ic h le a d to d is c re p a n c ie s . They m ake errors in addition and subtraction w hile posting. while item s such as spirits. (d) S h rin k a g e Discrepancies result w hen m aterials are purchased in one unit and are issued in a different unit. over issue and under issue) They m ake errors in copying and posting receipt quantities. because of various reasons.
Methods of taking inventory The physical inventory can be conducted by one of the three methods: ppppppp)Once a year count. cause discrepancies. called continuous stocktaking rrrrrrr)Low point counts.surplus or shortages . if not accounted properly. Mistakes are made due to hurried working or accumulated fatigue.is also caused due to mistakes made by those responsible for the ascertainment of physical balance. etc. (h) Unaccounted materials being destroyed in destructive tests Materials/components destroyed to verify quality of conformance. called re-order point stocktaking . (i) Misplacement of papers and vouchers Misplacement of Goods Receipt Reports.Materials Management (f) Theft. And pieces destroyed in metallurgical checks should be shown as consumption. pilferage or malpractices. pilferage and malpractice Discrepancies generally result if there are no adequate measures against theft. moths. called annual stocktaking qqqqqqq)Rotating counts. rodents. Material Requisitions. cause discrepancies. The failure to obtain issue vouchers cause discrepancies. Materials Return Notes. (k) Poor storage conditions Spoilage/wastage resulting from damages caused by worms. is yet another reason for discrepancies. To avoid this. (j) Material issued to line because of urgency Often materials on receipt from suppliers are issued directly to line because of urgency. (g) Incorrect stocktaking Discrepancy . if a large number of items are to be verified within a limited time. etc. as in the case of annual stocktaking. stock cards should not be posted for suppliers' challan quantities but for net quantities received in the stores.
i malpractices and misappropriation by the conniving staff cannot be effectively : minimised. Distance suppliers should be instructed in 211 advance not to supply goods during the days of stocktaking. ttttttt)Stock figures in the balance sheet are more correct. finished parts (bought out as well as piece parts) work-in-process. discrepancies due to pilferage. since stock taking is carried out at the time of preparation of balance sheet. Disadvantages of the Annual Stocktaking i) Finalisation of accounts at times gets delayed if the stocktaking activity is not completed within the stipulated period. Essentials for Efficient Annual Stocktaking The following arrangements are essential for efficient annual stock-taking: (a) All local purchases should be suspended close to the period of stocktaking. since personnel from other departments can be called to assist the stores staff. there is accumulation of pending work right in the beginning of the financial year. This necessitates shutting down the production operations. less costlier and satisfactory. a) Since all movements from and into the stores is suspended for the period of stocktaking. The stocktaking is generally undertaken at or near the close of the financial year. uuuuuuu)Annual stocktaking does not require permanent staff. finished goods and supplies. so that physical stock is comparatively less. iv) As the activity is conducted only once a year. . in) Staff called from other departments to assist the stores personnel in stocktaking are not conversant with the stocktaking work and are not accountable for discrepancies ' which affects the accuracy and effectiveness of stocktaking. of all materials. Advantages of Annual Stocktaking The advantages of annual stocktaking are as follows: sssssss)The method is simple.Unit 9 Stores Operations Annual Stocktaking ' "r Annual stocktaking is the process of making a complete count once a year.
Each section may be entrusted to a supervisor or to a foreman. . bins or containers in advance. A more rational approach is to relate the frequency of counts to the usage value classification . . with respect to his responsibilities. components. similarly. more important ones twice. yyyyyyy)The stores should be divided into sections. inventory sheets etc.under which items of high usage value are verified more often than those of low usage value. Inventory tags should be attached to the respective parts. xxxxxxx)Each individual forming the crew should be instructed in writing. should be prepared in such a way that the clerical work during stocktaking is the barest minimum. six times or even twelve times a year.should be kept ready sufficiently in advance of the stocktaking. wwwwwww)All relevant documents . Sufficient quantity should be issued in advance to meet production requirement and thereby avoid loss of production during the period of stocktaking.ABC analysis . Continuous Stocktaking Continuous stock taking.I Materials Management vvvvvvv)The movements of goods in and out of stores should be stopped until the stocktaking is over. thrice. Inventory sheets. is the process of taking physical counts of a few items daily and thus covering each item in storeroom at least once a year. also called perpetual stocktaking.inventory tags.
212 . The need to verify every item at the end of the fiscal year is avoided. This eliminates the possibility of last minute production hold-up. without dislocation of either Stores or Production.Advan tages of Contin uous Stockt aking zzzzzzz ) Co nti nu ou s stocktaking can be planned and worked into scheduled activities. aaaaaaaa)The work can be conducted in a more orderly and relaxed manner. two conditions that are vital for accurate work. bbbbbbbb)Discrepancies are detected and corrected early and frequently. as correct stock figures are readily available. cccccccc)Interim profit and loss account can be complied quickly. as a few items are checked every day.
cards Reorder Point Stocktaking Reorder-point stocktaking is the process of taking physical count of an item . pilferage and fraud. V fC h e c k in g ' Sp. as a sudden a check could herald an Spot checking provides the following advantages: ii It acts a strong deterrent to theft. A spot-check system acts asdeterrent against those intend to pilfer or commit fraud. com pared to the other form s of stock taking. Since spot-check is lim ited in operation. The storekeeper orthe stock controller. has the responsibility of notifying to the auditing departm ent. w hen itsstock falls below the re-order level (or w hen the first bin is exhausted). is. Continuous stocktaking is suitable for large factories. •ii It is easy to conduct. size of the firm and the m ethodM oved for stocktaking. H ie advantages of re-order point stocktaking are the sam e as those of the continuous sid verification method. a m ust to id the operate this method of physical count. C loser co-operation this betw een the store records-section auditing department. The annual inventory statem ents under this m ethod are prepared on the basis of stock balances on the bin cards or stock on the last day of the financial year. as it is carried out on a lim ited scale. Three basic agencies are: 213 . when working with this system . | ipcy for Stocktaking cy for stocktaking depends on the type of industry.ii cads are conducted to verify stock held. w ithout prior notice. thereby providing 10 tim e to stores personnel to replace stocks illegally. it rtprovide data for financial calculations. therefore.U n it 9 S tO peesr a t i o n s or (e) It costs relatively little because regular store-room clerks can be utili sed to assist the counting and in m aking entries in the relevant stock records during the tim e w hen withdrawals are few.
since those charged with the responsibility are tempted to hide facts for fear of criticism of their work by their seniors. The agency is given the information on the codification system and location reference of the items. J& Activity C. Nevertheless. fraud and misappropriation by the staff. Such a practice is obviously undesirable. however. Support staff is provided to assist the team. Even genuine mistakes are unlikely to be exposed. from the time that they are received until they are accepted and taken into stock. the company's internal auditing department is given the responsibility of stocktaking. is withheld. The receipt procedure comprises ten steps. Visit a nearby retail outlet and list the methodology used for stock checking. 9. (Hi) Stocktaking by Company's Specialist Staff Under this arrangement. namely: 214 .Materials Management (i) Stocktaking by Store Staff Stocktaking under this arrangement is conducted by the store staff without obtaining help from outside the department. The information on quantity on the stock card. this practice is followed in small units.5 SUMMARY__________________________________________________ Receiving store exercises control on the quantity and quality of materials. since it does not provide any check against malpractices.retained for the specific stocktaking assignment. (ii) Stocktaking by Outsiders Stocktaking under this arrangement is done by an outside agency professional auditors .
d e e e e e e eV )e r if i c a tio n o f th e c o r r e c tn e s s o f p a p e r w o r k . etc. i) R ear of defective m aterials to the suppliers. which concerns the issue of materials of the right quality (as specified in the m aterial requisition).U n it 9 S toO pse r a tio n s re d d d d d d dIn)w a rd in g a t th e s e c u rity g a te . also called stock verification.•. . Physical inventories. in the right quantities and at the righttime. The different m ethods of stocktaking are: annual stocktaking. hhhhhhhh) N otifying indentor. dealer w ith the m aterial. Delivery chaflan: A delivery challan is a document sent by the local supplier/manufacturer. product sim plification. continuous stocktaking and re-order point stocktaking. ii ii i i i i )r e p a r a ti o n o f G o o d s R e c e i p t R e p o r t . In 8) D e li v e r y o f in s p e c te d m a te r ia l s to a p p r o p r ia te s to r e s . f) g g g g g g gV ) g erificatio n o f q u an tities. trader. forward buying. which the buyer has paid to the seller. Various causes for surplus stocks are over-buying. A nnual stocktaking is generally les Jtfa'five than the other two m ethods of stocktaking. is a must for an efficient scientific inventory control system besides being a statutory requirem ent. A surplus item is one whose existing stock is likely to last longer than its norm al period of consumpi ion. . The function of issue is a key activity of the Store. e ff ff f ff In w a r d in g o f c o n s ig n m e n t in th e r e c e iv in g s to re . lack of control on the quantity of incom ing materials. P jjjjjjjj) sp e c tio n o t m a te ria ls. 9. reduction in the production program me. no inventory control system can • ork unless stock records stay correct and the quantities show n as book balance tally . : .6 KEYW ORDS ________________________________________________ Cash M em o: C ash m em o is a docum ent which is used in connection w ith cash purchase/ sale and constitutes a receipt for the m oney. It lists the item details and the num ber of packages being sent by the carrier. 10) Return of all chargeable em pties to the suppliers. the physical balance.
V " Stock verification : Stock verification.by counting. Describe briefly the basic procedure to be followed for issuing materials." Why do these discrepancies occur and state the methods you would consider employing to reduce them? 216 . v Q2. Surplus stockAn item is said to be in surplus when its existing stock is likely to : last longer than the normal period of consumption. is the process of ascertaining .Materials Management Obsolete stockAn item is said to be obsolete when it is superceded by another : item due to change in design. Railway Receipt (RR)/Lorry Receipt :(LR) Railway Receipt (RR)/Lorry Receipt (LR) issued by the railways/transporter is a document that acts as an authorisation slip for getting the delivery of goods by the purchaser from the railways or transporters.whether the physicalstock of materials tallies with the balance shown in the stock records. Q4. weighing. or measuring . For what purpose are materials issued from stores? List the main types of issuesthat a typical store generally handles. Q5. '<". What are the major activities performed by the receiving store from the time materialsare inwarded at the security gate until they are accepted and taken into stock? Q3. surplus and deficiencies are often found.7 SELF-ASSESSMENT QUESTIONS______________ _ ________________________________________________^ Q1. W hat are receiving stores? Describe briefly the functions of receiving stores. in Store Issue Note or M aterial Requisition : This is the basic document to authoriseissue of stock. W hat is physical stocktaking? W hy is it necessary? Q6. modification or due to the process of substitution. "While comparing physical stock with the balance shown in the stock cards. also called physical inventories or stocktaking. ''r9.
since their receipt from the suppliers.wiatenais management 10. inserts etc. Raw materials. from the basic raw materials. rubber. drills. leather. 3. Raw materials become work-in-progress at the end of first operation and remain in that classification until they become finished parts or finished goods. taps. tin. Products usually leave workin-process classification and enter the classification of finished goods at the point of final inspection. in and around the machines and in temporary areas of storage. reamers. Finished goods Finished goods are the final products. Finished parts are either bought-outparts or piece parts (also called works made parts). These include standard parts as well as parts produced by suppliers to the buyer's design. work-inprocess) or are yet to be utilised/consumed in the production of goods and services. 4. channels. Tools a) Standard tools used on machines such as saws. chasers. Finished parts . Work-in-process Work-in-process comprises items that are in a partially completed condition of manufacture. The principal items of inventories are as follows: 1. waiting to be worked upon or assembled. Bought-outparts are those finished parts. They include items like steel (angles. hobs. sub-assemblies or assemblies that are purchased from outside suppliers. pallets. tees. when they are ready for delivery to the customer or to the finished goods store. cotton. parts and products are manufactured by the company. broaches. trucks. . Piece-parts (or work-made-parts) are those parts which are manufactured at the company's own plant. flats. 2. ready to be shipped.) copper. milling cutters. are those basic materials from which components. Raw materials Raw materials are those basic unfabricated materials which have undergone no conversion whatsoever. form tools. 5. tubes. Work-in-process can be found on the conveyors. shafts etc.e. timber etc. plates.1 UNDERSTANDING THE INVENTORIES Inventories represent the aggregate of those items which are either held for sale in the ordinary course of business or are in the process of production for sale (i. in other words. lead.
c o u p lin g s . lampholders. eft r in clu d e ry and k k k k k k kM )i s c e l l a n e o u s c o n s u m a b l e s t o r e s s u c h a s b r o o m s . etc. W s o ld e r . S u p p l i e s . e) P r i n t e d f o r m s s u c h a s e n v e l o p e s . e t c . t o i le t p a p e r . b e a r i n g s . c sp rin g s. w r e n c h e s . w e d g e s. o r d e r a c c e p ta n c e fo rm s. q q q q q q qr a t) a b l e s p a r e s s u c h a s m o t o r s . der in a 6 . d ie s e l o il. rp) w orm shafts. g a s k e t s . k so c lo th w a ste .U nit 10 fa cto ry. w e ld in g ro d s . e m e r y b e lt s . lamps. c o t t o n w a s t e . q r r r r r r rirn) s u r a n c e s p a r e s s u c h a s p r o p e l l e r o f a s h i p . • • etc . h y d ra u lic /p n e u m a tic p ip e s. shades. a b) H a n d to o ls su c h a s h a n d -sa w s. sp elte r etc. s a n d p a p e r . g rin p l i e r sp u n c h e s . m a lle ts. w o rm w h e e ls. switches. o rd e r a m en d m en t fo rm s.r i n g s . w a s h i n g p o w d e r . o . s o ld e r in g a n d tin n in g m a te ria ls s u c h a s e le c tr o d e s . on. e t c . . S u p p lie s cem e S u p p l i e r s t h a t i n c l u d e m a t e r i a l s t h a t u s e d i n r u n n i n g t h e p l a n t no r i n m a k i n g t t h e c o m p a n y 's p r o d u c t s b u t n o t m a k i n g t h e p r o d u c t . hoses. b la p p in g p a ste . e tc . t h e fr a c oo e . n ils lu b ric a tin g and cu ttin g oils. s p a n n e r s . e tc . plugs. p e tro l. p p p p p p p e p la c em e n t sp a re s su c h a s p u lle y s. e n q u i r y f o r m s . h a m m e rs. p u rc h a se o rd er fo rm s. j u t e t w i n e e tc . a c o m p r e s s o r i n a f e r t i l i z e r . e tc . o i l s e a l s . g e a rs. g o o d s rec e ip t rep o rts. d rill g u n s. l e t t e r h e a d s . l a r g e m e c h a n i c a l s e a l s . f> Electric supplies such as cables. cut-outs. fuses. p u m p s . la p p in g p o w d e r. m m m m m m mAm )r a s i v e m a t e r i a l s s u c h a s e m e r y c l o t h . n e e d le s. clips. *• F undam entals of Inventory M an agem e n t I M a ch in e ry a re s in c lu d in g sp o o o o o o o o )n s u m a b l e s p a r e s s u c h a s b e l t s . tra n s fo rm e r o il. llllllll) e l d in g . n n n n n n nO ) a n d g re a s e s s u c h a s k e ro s e n e o il.
A stockout results when the rate of consumption is more than the estimated usage rate or when there is a delay in delivery. impracticable and uneconomical. To take care of contingencies (i. in anticipation of their non-availability in the future or in anticipation of a spurt in their prices. To economise on buying/manufacturing cost A certain amount of fixed cost . To keep pace with changing market conditions Inventories are created when large quantities of items are purchased and stocked. The buyer. Manufacturers of certain items (made to order or standard) offer discounts if more units are purchased.>ij -! Why does a firm carry inventories? There are seven major reasons why firms carry inventories: 1. whether an item is purchased from outside suppliers or manufactured at the company's own plant. Usually orders and the shipment of orders are subjected 222 . To prevent the occurrence of stockouts. The stock out of a critical item may result in one or more of the following: • • • to do certain operations second time. to cannablise parts from one assembly to finish another assembly. This forms a fixed portion of inventories. The firm. to take advantage of the price discounts.M a te rials M a n ag e m e n t . to shut down the complete operation. may buy quantities beyond the current requirements. therefore. certain extra stock called as safety stock. Rarely does a company have a continuous stream of orders. 2. is maintained./r .ordering cost or set up cost . 3. prorate) the fixed cost over a large number of units. . may order (manufacture) beyond the immediate needs of the company to distribute (i. To stabilise production A product is produced to meet the customer's orders. therefore. To buy or to manufacture goods on a day-to-day basis is both.is incurred. prevent stock-outs) A company may suffer a substantial loss on account of an item going out of stock.e.. 5.e..
7. The failure of fhe company to make such products available immediately may result in a loss of sale or even the in loss of a customer. .n. c o c o n u t.. c) S e a s o n a l a v a ila b ility : T h e re a re c e rta in ite m s w h ic h : i) a re a v a ila b le in p le n ty a n d h e n c e c h e a p ly d u rin g c e rta in m o n th s (fo r e x a m p le . . h e re fo re . A few such situations are mentionedbelow: a) S u p p l i e r ' s c o n d i t i o n o f m i n i m u m q u a n t i t y T h e su p p lie r m a y in sist o n a c e rta in m in im u m q u a n tity . The inventory will gradually increase and reach a peak before the season. b) G o v e r n m e n t r e g u la t i o . To satisfy other business constraints Sometimes the company is forced to buy quantities more than the current requirements and lock-up its productive capital under certain situations. . b e c a u se it is e c o n o m ic a l. sand for foundry in the monsoon). . m o re so in th e c a se o f im p o rte d ite m s.« . .s . The company is thus forced to buy a large quantity and create inventories. The need for maintaining the finished goods inventory assumes greater importance when the products are competitive. To prevent loss of sale Finished goods inventory is maintained to match the requirements of the customers for prompt execution of their orders. 6. .•. T o o m u c h c a p ita l g e ts lo c k e d in c rea tin g in v en to rie s o f ite m s th a t are su b je c te d to g o v e rn m en t reg u la tio n s. T h e c o m p a n y . • ' • . But the production has to be done at a uniform rate throughout the year.-< ••• . . b u y s q u a n titie s a llo tte d b y th e g o v e rn m e n t. so y a b e a n s ) i) are not available during certain months (for example. .Unit 10 Fundamentals of Inventory Management to fluctuations. after which the products will start moving to the market and the inventory will decline.
the latter implies the foregone opportunity cost. cost of storage facilities. company's rate of return on its investment). This requires knowledge of the various * costs that influence inventory decisions. cost of record keeping. 10. The opportunity cost of money represents loss of opportunity to obtain return on the value of stocks and it equals R.R. .O. The former means the interest rate. Capital cost is either the cost of borrowing capital or the cost of diverting the company's funds for investing in inventories. Inventory carrying cost Inventory carrying cost refers to the cost of holding stocks. The other method is to consider the opportunity cost of the money (the rate that the money will yield if invested elsewhere) if the company were to use its own funds. = Net profit before taxes Total capital b) Storage cost includes cost of storage space. cost of maintenance and repairs. There are thus two methods of determining the capital cost. List down at least five reasons for keeping an inventory.Materials Management ^Activity A. The following elements constitute inventory carrying cost: a) Capital cost is an important element of the inventory of carrying cost.2 COSTS FOR INVENTORY DECISIONS Establishing the most economical quantity to order from vendors or the size of the lots to be processed at the company's own production facilities involves a search for minimum i total cost resulting from effects of individual costs. and cost of periodic/ annual stock verification etc.R. The first method is to use the bank lending rate if the money were to be borrowed.e. R.O. (i. cost of preservation.
T h e w a g e s o f th e p e rso n n e l c a n n e v e r b e c u rta ile d e v e n w h e n th e ir w o rk lo a d is re d u c e d . o r s ta ti o n e r y m a y b e c o m e d ir t y ) . O n e m a y . f lu o re s c e n t tu b e s e tc . S o m e o f th e f ra g ile ite m s . ( e le c tr ic b u lb s .T h e s o lu tio n lie s in c o n s id e r in g o n ly th e v a r ia b le e x p e n s e s . cost :ost of periodic/ . S im ila rly . s n t 'e. It is th is a m o u wtritte n o f f o-u tht a t is n .U nit 10 F undam entals of Inventory M anagem ent . n return on the B investment). eA n a d ju s t m e n t. ha s to b e m a d e to av o id fic titio u s sto ck va lu e s to ap p e ar in th e fin ah isial do cu m en ts. be borrowed. s p ir it m a ymeavya p o y a te . c e m e n t m m g e t d a m p a n d s o l id i f y .) m a y c o llid e w ith o th e r s a n d b r e a k . S o m e o f th e p a r ts m a y g e t d a m p .th e a m n c o n s id e re d to c o m p u te d e te r io r a tio n a s a n e le m e n t o f c a r ry in g c o s t. O b s o le s c e n c e is th e lo s s fro m r e d u c tio n in in v e n to r y v a lu e o f th e ite mas /c o m p o n e n ts th a t re ren d e re d un u sa b le b y th e c o m p a n y . • m p r o c e s s o f d e te r io r a tio n th u s r e d u c e s th e v a lu e o f th e s to c k s a n d h i e y m a y n o t n o w th i > r t h th e v a lu e a t w h ic h th e y s ta n d r e c o r d e d in th e a c c o u n ts b o o k th. o r s p o ile d ( f o r e xaay p le . iiij D e te rio r a tio n c a n a lso re su lt fro m p o o r h a n d lin g in th e s to re s. a s t h e y a r e in co fr r e d ir r e s p e c t iv e u t h e i n v e n to r y v a lu e . th o se w h ic h in c re a s e o r r e d u c e w ith r ise o r f a ll in in v e n to ry in v e s tm e n t. in k drr u p . s te e l m a y b e c o m e r u s t y . d r ie d .f the lots to r minimum 'the various nts constitute Capital cost is iy's funds for . r u b b e r p a r t s m a y c r a c k a n d a m m osn iail s if e e ts m a y po h s to c k e d b e y o n d th e ir s h e lf lif e . n o sa v in g s c a n re su lt if th e sp a c e re le a se d fro m r e d u c tio n in in v e n to r y is n o t u tilis e d f o r o th e r p u r p o s e s. ie rate that the own funds. u n s a t i s f a c t o r y b o th . d u e to ch an ge s in d esig n o r d u e tointhth ed e v e lop m en ts e nd repairs. F o r e x a m p l e . th eere fo re . S o m e o f t h e e le m e n ts o f th e s t o r a g e c o s t a r e f ix e d . q u e s tio n th v a lid ity o f u s in g s to r a g e c o s t a s a c o n tr o l to o l w h e n m o s t o f th ec o s t m ren ts o f th is e le a e f ix e d . c ) D e t e r i o r a t iaonnd o b s o l e s c e n c e D e te r io r a tio n is th e lo s s f r o m r e d u c tio n in th e in v e n to r y v a lu e d u e to o n e o r m o r e o f the follow ing reasons: i) T h e p a r t/ite m /m a te r ia l m a y h a v e a lim ite d s h e lf lif e a n d m a y d efte r io r a te if s to r e d o a lo n g t im e . T n c is d o n e b y w ritin g o ff a c e rta in a m o u n t (e q u a l to th e d iffe re n c e b e tw eee n th es vaaslu e o f th ite m p e r th e a c c o u n ts b o o k s m in u s th e v a lu e to b e r e a lis e d f r o m su ce d ism o s aalt o f e th h ite p s) th tim e o f p re p a ra tio n o f fin a n c ia l sta te m e n ts.r implies the rig the capital . A c e r t a i n a m o u n t o f s p a c e i s r e q u ir e d a n d m u s t b e l i g h te d m a in ta in e d . h ) I t e m s a l s o d e t e r i o r a te w h e n s t o r a g e c o n d i t i o n s a r e i n a d e q u a toer.
fie ld . T h e s te p s in v o lv e d in c o m p u tin g d e te r io ra tio n a n d o b s o le sc e n c e c o s t a re a s under: 22 1 .
000. shows an opening and closing stock of inventory at Rs. . theft.000 as the net profit before taxes. • • • • if) Determine the value (Ai) of each obsolete and non-moving item by multiplying the in) Determine the number of years (n) over which the item has not moved.. The company's total capital deployed during the year was Rs. (1-p) I Ai Deterioration and Obsolescence = . . An illustration on inventory carrying cost The balance sheet of M/s. Stock on hand Price per unit Last date of issue quantity on hand with its unit price. 55 . Average Inventory Investment * d) Insurance cost Inventories.000 and 65 . etc. The profit and loss account for the same year indicates Rs. 20.00. 1 . Insurance cost is thus the premium paid or payable to cover the company against loss due to unforeseen acts such as fire. are covered by insurance. The study carried out in the area of inventory management revealed I . ThiswiUbe ZAi n i) Compute deterioration and obsolescence element of inventory carrying cost by dividing the above figure by average inventory investment. ABC Co.. The following details are extracted from the stock card of each item: Part Name/Part No.000 respectively. *'* iv) Establish the proportionate amount that can be realised if the items were to be disposed off(p) v) Calculate average annual obsolescence and deterioration.Materials Management i) Prepare a list of obsolete and non-moving items by going through their stock cards. like other assets.
6.O.000) p Proportionate value like to be realised on disposal (0. Lastly. P /C x lO O 2 0 . whichever is Bank's interest rate = 12% (given) Opportunity cost = = R. which had locked-up the com pany's productive capital to the tune of Rs. b ) Storage Cost = 0 % (Storage cost was not considered since the system w as to be introduced) c) D e t e r i o r a t i o n a n d o b s o l e s c e n c e . the insurance paid for the stock held during the year was 0.000 = 20% Since opportunity cost is higher than the bank's interest rate.U nit 10 F undam entals of Inventory M anagem ent that the com pany had accum ulated a considerable num ber of obsolete and non-m oving item s. 6000.O. a s e s t a b l i s h e d i n t h e p r o c e e d i n g f e w p a r a g r a p h s . i s g iv e n b y th e fo llo w in g re la tio n : Deterioration and Obsolescence (%) = A verage lere A i = (l-p)A i n Inventory Investm ent = T otal value of the obsolete item s as per books (R s. Calculate the inventory carrying cost for this company assuming that the prevailing interest rate is 12% Solution: a) Capital Cost equals either the bank's interest rate or company's R..25%. The discussion with the propnetorof the company revealed that the disposal of such items is likely to fetch 40% of the original value of the items.0 0 0 xiO O 1.00.R. 20% figure is selected as the capital cost. The last issue of certain item was found to be as late as 3 years.R.40) .
25 % 10. record keeping and bill payment per period by the number of orders processed during that period.000 + 65. replenishment cost or recoupment cost is the cost incurred to replenish the stock of an item. Rs.000 x 0.000 = 0.000 Deterioration and Obsolescence = Rs. the cost incurred at different stages of the procurement function and is obtained by dividing the cost of activities like requisitioning. since all orders small or big.000 2 1. 60. I Procurement cost.000 (l-p)ZAi = Average Inventory Investment d) Insurance cost 1. in fact. represents the average cost to be expended to place an order and execute the delivery once.200 Opening stock + Closing stock 2 55.25 % = 22. order writing. It is. order follow up.25 % = 2.0 % + 0.Materials Management n = Number of years over which the items have been accumulated (3 years) = Rs. need paper work.0% /. 1.20.200 x 100 60. therefore. Inventory carrying cost = 20 % + 0 % + 2. Purchasing function sets out with paper work .3 PROCUREMENT COST i Procurement cost also called ordering cost. The basic elements of procurement cost are as under: a) Paper work cost The procurement function is built around the pyramid of paper work.60 (l-p)IAi Average inventory investment = Rs. 6. receiving and inspection.
229 . Follow up is the function of seeing that the suppliers effect the deliveries on time. collection of materials from transporters'/railways' godowns. delivery schedules are mailed to communicate immediate as well as future requirements. Purchase orders are sent to authorise vendors to supply the goods. telegrams. discrepancy notes are sent to highlight shortages in the quantities received. purchase order forms. Toofrequent purchases increase inspection costs. Postage cost is also incurred for the exchange of statement of accounts. etc. trunkcalls. amendments to purchase orders are issued to alter/modify quantity. goods inspection notes are posted to acknowledge receipts of mat. e ) O p e ra tin g c o st o f th e v e h ic le s Vehicles are employed for collection and delivery of materials from/and to the vendors. price or other terms. debit notes. good receipt notes. credit notes and other documents required in the transactions. and/or to bring goods to the plant) as an element of procurement cost. c) Follow up cost . The cost of such communication media is yet another major element of procurement cost. to chase vendors. Telephones.U nit 10 F undam entals of Inventory M anagem e nt (materials requisitions). telexes and faxes are the aids commonly used by buyers for pre-delivery follow up as well as for shortage chasing. The requirement of paper work vfiries directly with the order frequently and its cost is considered one of the elements of procurement cost. Cost of visits to the vendor's plants Follow up with the vendors at times requires visits by purchase personnel and therefore the costs of such visits are considered towards procurement cost. The operating cost of such vehicles should be considered (if the vehicle is exclusively used by the materials department for buying materials from the local market. b ) P o s ta g e c o s t Postage cost is the cost expended to mail the documents necessary for the business transactions. pushes through paper work (inquiry forms. inspection notes. ials and communicate the inspection results. stores receipt notes) and ends up with paperwork (cheques to pay the supplier's invoices). Inspection and testing costs Inspection and testing costs include the cost of destructive tests. etc. cheques are dispatched to settle the supplier's bill.
loss incurred due to nonavailability of the item when it is required). Indents are raised to inform the purchase department of the impending need. bonus.4 STOCKOUT COST Stockout cost represents the cost of going out-of-stock (i. inquiries are floated. 10. supplier's invoices are received. verified and paid for.S t o c k o u t r e s u l t s w h e n t h e s t o c k o f t h e i t e m g e t s d e p l e t e d b e f o r e t h e r e fresh s u p p ly . salaries being the main expense. depreciation on office equipment. Ordering costs.e. provident fund. gratuity.Materials Management h) Administrative costs Purchase is a major function and it requires performing of a number of activities.. ESIC. Other related expenses of these activities are: indirect wages. All these activities add-up to a big expense. Bulk of the above referred administrative costs are fixed as the company has to incur them irrespective of the increase or decrease in the number of orders. terms of payment are looked into. should include all costs to the extent they vary with the order frequency Activity B . and then an order is placed with a supplier whose terms are attractive. materials on arrival are checked for quantity and inspected for quality. etc. rates are compared. progress on the order reviewed and follow up with suppliers is done wherever necessary. Write down the activities which contribute towards the cost of purchasing. O n e o r m o re o f th e fo llo w in g o c c u rre n c e s m a y c a u se S to c k o u t: i) i) U n u s u a l h ig h e r d e m a n d ra te d u rin g th e p ro c u re m e n t le a d tim e Delay in delivery SO T r a n s p o r t a t i o n d e l a y s V 230 iv ) R e j e c t i o n i n t h e i n c o m i n g c o n s i g n m e n t . r f'.. quotations are received. therefore.
\i) C o st d ue to th e ov ertim e paid to w orkm en em p loy ed in in w ard in spection . sto cko u t is m u lti-sid ed an d it d iffers from on e o rg an isatio n to an o th er. N eith er is it possible to estim ate this cost for all its elem ents nor it is possible to specify the range of this cost. It equals the price difference w hen the item is procured from an alternate source of supply. prod uction o p s. replacement or an insurance category of the spare of a vital machine may renderagroup of machines idle. Stockout cost. etc. sh v i) C o st d u e to cu sto m er's d issatisfactio n resu ltin g fro m a d elay ed sh ip m en t. iv) C ost due to prem ium price paid. ••t*' ' ' i) C o s t d u e to lo s s o f p ro fit o n p ro d u c tio n w h ic h d id n o t ta k e p la c e . leaving a wide gap of unabsorbed overheads. stockout of a consumable. Similarly. The following the major elem ents of the stockout cost: are i) C o st of m en and m ach in es ren d ered id le. estim ating stockout costs for inventory decisions. I) C o st o f em erg en cy actio n s su ch as air freig h tin g ch arg es. i) C o st d u e to lo ss o f b u sin ess sin ce th e irate cu sto m er m ay n o t p lac e rep e at o rd ers oh e m a y te ll o th e r c u s to m e rs h o w u n p re d ic ta b le th e s u p p lie r s ' firm r is in d e liv e ry commitments. T hu s.110 Fundam entals of Inventory M anagem ent The stockout of a key material or boughtout component may cause production stoppage and therefore render a group of workmen and machines idle. A nd yet. in general. an d to in d ire ct sta ff to co m p le te th e targ e ts o f p ro d u ctio n . v ) C o st d u e to p en alty p aid fo r the d elay ed sh ip m en ts. The estim ate helps decide ex ten t o f th e safety sto ck fo r item s o f reg u lar p ro du ctio n th e an d th e sto ck in g p o licy o f insurance spares. depends on a particular situation and it equals any of the follow ing: i) Back-order cost B a ck -o rd e r c o st re su lts w h en a n o rd er fo r g o o d s fro m a cu sto m er is k ep t p e n d in g p ro v al an d it eq u als th e co st o f p ap er w o rk an d re co rd -k eep in g ap u n til th e o rd er is m .
1. 10. consumption. The classification enables managerial time being spent according to the importance of the item. Less important tasks . criticality.e. Uniforn control is rarely effective.those involving routine decisions and which involve less risk . The criterion used for the purpose may be the cost of the item.Materials Management ii) Down-time cost Down-time cost occurs in case of spares and it equals the unabsorbed cost per hour (i. procurement difficulties and so on. as illustrated in Table 10. Selective control can be divided into eight types. iii) Foregone profit on lost sale This occurs in case of goods which are easily available in the market.should be delegated to a lower level. Various classifications are employed to render selective treatment to different types of materials. Selective control is essential since uniform control of all items (i) is expensive (ii) gives a diffused effect Selective control means variations in the method of control of various items." This law can be effectively applied in inventory function to identify items that are more important than the others. based on a selective basis. Each classification emphasises a particular aspect. Effectiveness results when important aspects of a problem are pursued more rigorously than others. A major portion of managerial time should be spent in performing more important jobs. since the prospective customer may shop elsewhere. iv) Additional cost due to premium price This occurs when the items are available with another supplier at a higher price. I . lead time. machine hour rate) multiplied by the down time of the equipment.5 SELECTIVE CONTROL OF INVENTORIES______________________ Selective treatment of inventories is based on the following basic philosophy of business: "No one can control everything nor should one try to do so (even if one can). v) Cost of expedited routing This equals the difference between the cost of expedited routing and the cost of normal routing.
. and C on the basis of their annual usage. lassificationsare ach classification ypes.1 : Types of Classification C r i te r i o n e m p l o y e d U sag e va lue (i. town as 'B' and 'C item s. Classification 1.Fundam entals of Inventory M anagem ent t per ur ho .e. the quantity per occasion being small.item. The i few item s. A BC analysis thus tends to segregate all item s into three categories: A . These items require detailed and rigid control and need to be stocked in smaller quantities. These items should be procured frequently.e. These are interm ediate item s.criticality. are numerous in number but their contribution is less significant. therefore.! just a handful of item s account for the bulk of the annual expenditure on m aterials. The control on these i not be as detailed and as rigid as applied to A item s.e . it does no t tak e co n sum p tio n in to a cc ou nt) C riticality of the item (i.r price." Statistics reveal H i. co nsu m ptio n per p erio d x p ric e p er u n it) U nit price (i. hold the key to business. Uniform a problem are iould be spent atine decisions s that are more spent according Hi control of all MNG analysis F SN analysis (Fast-S low -(Non' "" moving) XYZanalysis \BCAnalysis \BC analysis underlines a very important principle "Vital few: trivial many. B . The other item s. ABC analysis Table 10. called 'A ' item s. J B -ltem s: These item s are generally 10-15 % of the total item s and represent 10-15 % of ' 'al expenditure on the m aterials. as illustrated 23 3 . based on a . terns. loss of pro du ctio n) <! since the HML analysis (HighM edium-Low) VED analysis (VitalEssential -Desirable) . A-Items: It is usually found that hardly 5-10% of the total items account for 70-75% of the total money spent on the materials. I the SDE analysis (Scarce-Difficult-Easy) " Procurem ent S o u rce of difficulties pro cu rem en t cost of G ( Fanalysis overnm ent-O rdinary(G Local-Foreign) S-OS analysis (SeasonalOffSeasonal) *• S easonality S toc k tu rn o v er ra te Issu es fro m sto res Inven to ry investm ent 1 of business: an).
. The procurement policy of these items is exactly the reverse of A items. This information is enlisted in the first three columns of the table. starting with the highest annual usage down to the sm allest usage. B. (U) Determ ine unit price (or cost) of each item. Also express the number of items in the cumulative items percentages. Conducting ABC analysis The following steps are necessary to conduct ABC analysis: (i) Prepare the list of the items and estim ate their annual consum ption (units).Materials Management C-Items: These are numerous (as many as 70-80% of the total items). This enables the buyer to avail price discounts and reduces the work load of the concerned departments. An illustration of ABC analysis: Table 10. and C categories. (iii) M ultiply each annual consumption by its unit price (or cost) to obtain its annual consum ption in rupees (annual usage). (v) Calculate cum ulative annual usages and express the sam e as cum ulative usage percentages.2 below. (vii) Decide the policies of control for the three categories. The fourth column gives the annual usage (annual consumption in rupee value) obtained by multiplication of annual consumption and unit cost of each item. (vi) Graph cumulative usage percentages against cumulative item percentages and segregate the item s into A. (iv) Arrange items in the descending order of their annual usage. C items should be procured infrequently and in sufficient quantities. annual consumption and price per unit of 20 items. inexpensive (represent hardly 5-10% of the total annual expenditure on materials) and hence insignificant (do not require close control) items. gives the description.
tools. wherein a small percentage of items accountfor a major expenditure on materials. of % o f i'ems items 3 3 14 15% 15% 70% .'or because.U nit 10 Fundam entals of Inventory M anagem ent Table 10. it is not necessary. Similarly. while makingABC analysis. It would be meaningless to have separate classifications 1 for materials. . an "A" item in product-v ise ABC analysis may become a "C" item in the total ABC analysis.4: Summary of ABC Analysis No. spares. .000 B etw een 4 . quite likely. I All items that the company consum es should be considered together. At times..1% A B C Im portant considerations in A BC analysis \ few important points to considered in connection with ABC analysis are: 1. a company manufacturing more than one product should also make only one ABC analysis. "'lished parts. This is .0 00 Below R s. If convenient. 4. the author has classified "C" items into sub groups. 3.08. Tho1: ± annual consumption figures are generally considered for ABC analysis. etc. Though classification of items into three categories A. C2 237 and C 3.. if required. Cl. to rationalize control. the ABC curve is similar in shape for different industries.800 7 4 . supplies. B and C is adequate for control. R ange of T o tal an n ual P e r c e n t a g e an n u a l u sa g e u s a g e a n n u a l u s a g e -C a t e g o r y A boveR s 30.000 1. quarterly or six monthly consumption figures can be considered. The ABC curve is a lopsided distribution.4% 10.5 % 15. the items may be classified into more than three categories. 4.20 0 14. Therefore.000 -30. Separate ABC analysis each product is error prone.000 2 2.
Materials Management Policies of control for A. Large inventories should be maintained to avoid stockouts. to enable the shops to help themselves. There are a number of ways in which ABC classification can be made use of: 1. Someone at the senior level should be made responsible for the regular reviewing of these items. Areasonably good analysis for order points is required for "B" items. This may look like encouraging pilferage and wastage. Up-to-date and accurate records should be maintained for these items. internal and external lead time by closer follow-up at the home plant. by placing open orders (or orders covering annual requirement) and arranging supplies in staggered lots. 238 . Degree of control A items. due to its selective approach. as discussed earlier. "B" items should be brought under normal control made possible by good record keeping and periodic attention. The inventory should be kept at a minimum. Quite a number of inexpensive "C" items can be placed in a convenient spot in the stock-room or on the shop floor. They should be subjected to frequent reviews to reduce unwarranted stockouts and the possibility of overstocking. better vendorvendee relations and market research for alternate sources of supply. who may be directly incharge of stores. but the cost of wastage will be much less as compared to the saving in time and effort otherwise spent by the stores personnel. but the stocks may be reviewed less frequently. Ordering procedure "A" items require careful and accurate determination of order quantities and order points based on exact requirements. ABC analysis makes this possible with considerably less effort. Little control is required for "C" items. 2. 5. account for the bulk of the annual usage value and hence must be given the utmost attention. Individual postings should be replaced by group postings. Replenishment work should be delegated to the lower level staff. B and C categories: Any sound stock control system should ensure that each item gets the right amount of attention at the right time. Every attempt should made to reduce both.
Quite a bit of time and effort can be saved. S to c k r e c o r d s Detailed records of goods ordered. A moderate policy is required for "B" items. No such detailed records are necessary for "C" items.pt at a ranging maland relations >d record legated to ies should iby group t spot in the s. Normal office procedure should suffice. ties and order tent reviews to asonably good iy be reviewed icand uldbe xurate . frequent reviewing and more i Dressing. S t o r e s la y o u t ABC analysis can be efficiently utilised for the stores layout as well.y the stores 5 . These items should be bought in bulk. "C" items. Tight control and accurate records are also required for scrap. This may /ill be much . ican No such computations are necessary for "C" items.Unit 10 Fundamentals of Inventory Management It Of fort. Safety stock should be less for "A" items. safety stock being neither too high nor toolow. Safety stock All items of consumption are equally important from the production point of view. Shortage of a bolt worth a few paise can be as damaging as the shortage of a casing worth afew hundred rupees. loss and rejection of such items. Safety stock is provided to safeguard against these shortages. should have sufficient safety stock to eliminate progressing and to reduce the probability of stockouts. 23 9 . The possibility of stockouts can be onsiderably be cut down by closer forecasting. Their stock may be reviewed only when major changes occur. received. if both are production items. Most of these items will belong to "A" category. 3 . Any routine method that ensures good and accurate records (not as detailed as "A" items and also not as loose as "C" items) is enough for "B" category of items. on the contrary. Shortages do occur even when accurate and realistic order points have been computed. "B" items which are active can be put slightly farther. issued and goods on hand should be maintained for "A" category of items. which otherwise would be lost in locating fast moving items near the point of issue. 4. Two-bin-system is most suitable for these items. provided that it can give a fairly reasonable estimate of annual consumption for the year and the indication when replenishment should be happen.
"B" items every three months and . on the contrary. 6. Physical stock-taking "A" items may be checked more often and "C" items. One of the decisions can be to check "A" items every two months. Such items may also be located in readily accessible areas.I • Materials Management i. Most of the "C" items can be put in the less accessible areas except those few which might have fallen in to the "C" category because of their low unit price and not because of their low consumption . least often.
7. The process of stocktaking can be further simplified by verifying the stock of "A" items at the time that they are ordered. The usage value classification (ABC Analysis) is a useful step . it is essential to select those items for value analysis which offer the highest scope for cost reduction. Afurther modification will be to verify "A" items by units and "C" items by boxes. since their physical stock is then low. tins. Value analysis To secure the maximum benefits."C" items every six months. etc. weight.
"Medium" and "Low"." the "price" criterion is used. the items are listed in the descending order of their unit price. except that instead of "usage value. For example. To classify. the management may decide that all items of unit . Only "A" and "B" items are selectedfor detailed value analysis and the former is given priority over the latter. HML Analysis H-M-L analysis is similar to ABC analysis.in this direction. "C" items should not be value analysed. The cutofflines are then fixed by the management for deciding the three categories. The items under this analysis are classified into three groups which are called "High".
high priced items like bearings. 1000 will be of "M" category and those having unit price below Rs. those with unit price between Rs. to keep control over consumption at the departmental head i level (for example. worm shafts.price above Rs. worm wheels. 100 and Rs. etc. 240 . 100 will be of "L" category. n. indents of high and medium priced items are authorised by the departmental head after careful scrutiny of the consumption figures). HML analysis helps to : i assess storage and security requirements (for example. require to be kept in the cupboards). 1000 will be of "H" category.
if it's stockout can cause a heavy production loss. The analysis classifies the Hi . "Difficult" and "Easy".as into three groups called Vital. S-D-E analysis classifies the items into three groups called "Scarce". for example. iv. considering the effort and expenditure involved in the procedure for import. Such items are best procured a limited number of times in . And "Desirable" group comprises items which do not cause any immediate loss of production or their stockout entail nominal expenditure and cause minor disruptions for a short duration.of "A" items r modification value analysis [fication (ABC ire selected for 2" items should "Vital" category encompasses those items for want of which production would come to halt. and reliability of suppliers. "Scare" classification comprises of items which are in short supply. For example. least often. excess supply other than the order quantity may not be accepted for "H" and "M" groups while it may be accepted for "L" group. ards).. 24 1 .i . S-D-E Analysis S-D-E analysis is based on the problems of procurement." the "price" iroups which are n the descending vt for deciding the ems of unit price reen Rs. indents ital head after careful geographical location suppliers.-. imported or cannalised through government agencies. items every . to delegate authorities to different buyers to make petty cash purchases. due.tlysis represents classification of items based on their criticality. . "H" and "M" category of items may be purchased by senior buyers and "L" category • of items by junior buyers. "Essential" group includes items whose stockouts cost is very high.ot because iible areas. . to evolve buying policies to control purchases. The information so developed is then used to decide the purchasing strategies. VED Analysis YEP 'i. VED (Vital-Essential-Desirable) analysis is carried out to identify critical items. : ft determine the frequency of stock verification. An item which usagewise belongs to the C-category may be critical from the production point of view. namely: i non-availability « scarcity • longer lead time . For example.-. For example.Unit 10 Fundamentals of Inventory Management ew which . etc.. v.he year. 100 and 100 will be of "L" • • items like bearings. Essential and Desirable. high priced items are checked more frequently than low priced items.
fall into this category. Transactions with this category of suppliers involve moderate delivery time and availability of credit. * The "NG" (O in GOLF analysis) group comprises items procured from "Non-Governmen" (or Ordinary) suppliers. "G" group covers items procured from "Government" suppliers such as the STC. Transactions with this category of suppliers involve long lead time and payments in advance or against delivery. the MMTC and the public sector undertakings. S-D-E analysis is employed by the purchase department: (i) to decide on the method of buying For example.Materials Management "Difficult" classification includes those items which are available indigenously but are not easy to procure. (ii) to fix responsibility of buyers For example. The transactions with such suppliers: 242 . "L" group contains items bought from "Local suppliers. Senior buyers may be given the responsibility of "S" and "D" groups while items in "E" group may be handled by junior buyers or even directly by the storekeeper. f I "F" group contains those items which are purchased from "Foreign" suppliers. "scheduled buying" and "contract buying" for the "Easy" group. namely. The analysis classifies the items into four groups. Even those items that are difficult to manufacture and are manufactured by only one or two sources only belong to this group. items where the supply exceeds demand and others which are locally available fall into this group. Suppliers of such items require several weeks of advance notice." The items bought from local suppliers * are those which are cash purchased or purchased on blanket orders. Also items which come from a long distance and for which reliable sources do not exist. usually in the range of 30 to 60 days. G-NG-LandF. is based on the nature of the suppliers. Items produced to commercial standards. "Easy" classification covers those items which are readily available. G-NG-LFAnalysis/GOLF Analysis G-NG-LF analysis (or GOLF analysis) like S-D-E analysis. Forward buying method may be followed for some of the items in the "Scarce" group.
Such an analysis helps to identify: i active item s w hich require to be review ed regularly. raw m aterials for cigarette and paper industries. F or exam ple. O ff S easonal). S (slow m oving) and N (nonmoviiis). is recorded. are low er duringthe harvest tim e. Toconduct the analysis. how ever. T he analysis identifies item s w hich are: i »asonal and are available only for a lim ited period. w hichever is later. T he item s under this anaH s are classified into three groups: F (fast m oving). i surplu s item s w ho se stocks are high er th an their rate of con sum p tion . is taken into account and the period. and i non-m oving item s w hich are not being consum ed. ' " « require the m aking of arrangem ents for shipping and port clearance. usually in term s of the num ber of m onths that has elapsed since the last m ovem ent. i require the opening of letter of credit. agriculture produce like raw m angoes. w hose quantity is decided on different con sid eration s. T heir prices. T he quantity of such item s requires to be fixed after com paring the savings due to low er prices if purchased during season against cost the higher cost of carrying inventories if purchased throughout the year. The last tw o categories are 243 review ed further to decide on th e dispo sal action to deplete th eir sto cks and thereby release Com pany's productive capital. are available for a lim ited tim e and therefore such item s are procured to last the full year.U nit 10 F undam entals of Inventory M anagem ent • involve a lot of adm inistrative and procedural w ork. i no n-seaso nal item s.e. etc. i seasonal but are available throughout the year. the last date of receipt or the last date of issue. >' . S-OS Analysis S-03 analysis is based on the seasonality of the item s and it classifies the item s into tw o groups-S (seasonal) and O S (i. • necessitate a search of foreign suppliers. F-S-N Analysis F-S-N analysis is based on the transaction frequency of the item s.
inventory investment). Dispose of as early as possible Y Deplete the stocks further at good price * (to reduce Liberalise control clerical cost) Dispose of as early * as possible even at ' lower prices. No further action is necessary . X-Y-Z Analysis X-Y-Z analysis is based on value of the stocks on hand (i. with regard to yearwise stocks. XYZ analysis when combined with ABC analysis is used as under: Class of items X Efforts to be made to reduce stocks to Z category Efforts to be made to convert these to Z category B Efforts to be made to convert them to Y category * Steps to be taken to dispose of surplus stocks Control may be further tightened Stock levels may be * reviewed twice a year XYZ analysis when combined with F S N analysis helps to formulate specific strategies.e. 244 * Items are within control. Usually.Materials Management Further detailed analysis is made of the third category. non-moving for 3 years. non-moving for 5 years and so on. Items can be sub-classified as non-moving for 2 years. as mentioned below: Class of X F items Tighten control Deplete stocks to a very low level N Dispose of immediately at an optimum price. Items whose inventory values are high are called X items while those inventory values are low are called Z items. And Y items are those which have moderate inventory stocks. X-Y-Z analysis is used in conjunction with either ABC analysis or HML analysis.
set-up cost and stockout cost are the four major costs for the inventory decisions. Selective control advocates control-by-exception. taxes and insurance. procurement cost. X Y Z and F S N classification may by utilised to reduce obsolescence. For example. above all. postage and travelling. Inventory control helps to strike an optimal balance between these opposing costs and thereby ensures the availability of the required items at a minimum total cost to the company. F S N categorisation considers consumption pattern. H M L classification utilises price criterion. Uniform treatment of all items gives diffused effect.7 KEYWORDS______________________________________________ Capital Cost: Capital cost is either the cost of borrowing capital or the cost of diverting the company's funds to invest in inventories. Items should be classified so that a major portion of effective managerial time is spent on those materials which are more important than others. Inventory carrying costs are the costs incurred in connection with the holding of stocks and they include capital cost (interest or opportunity cost on the capital invested in stocks). Procurement costs are the costs incurred in connection with the replenishment of stocks and they include costs of printing and stationery. V E D analysis employs the criticality of the part. loss of profit. obsolescence and. Obsolescence is the loss from reduction in inventory value of the items/components that are rendered unusable by the company due to changes in design or due to the developments in the field. telephone and trunkcalls. fuel and maintenance expenses of the vehicles employed to collect/deliver materials from/to vendor's/transporter's plants/gowdowns. 246 . loss due to obsolescence and deterioration. On the other hand. loss of goodwill. Various methods of classifications are available. At times. loss of production. ABC analysis emphasises annual usage. For example. Each method emphasises a particular aspect. the cost of the capital required in financing stocks. in conjunction with each other. £ 10. Deterioration and Obsolescence: Deterioration is the loss from reduction in the inventor* value due to keeping it beyond the life of the stock. Stock-out costs are usually difficult to estimate and they are situation dependent. A B C and V E D classification may be used for spares. besides being expensive.Materials Management deterioration. it may be advantageous to use more than one criterion. Inventory carrying cost. it costs money to run out of stock-idle wages. telexes and telegrams. Stock-out cost is the cost incurred in the event of the nonavailability of the item when required. and so on. and storage and handling expenses. etc. S D E analysis relies on problems faced in procurement. premium shipments and expediting to overcome the disorganisation following a shortage.
etc.e. cost of preservation. W hat are inventories? State and define the various types of inventories found in a manufacturing firm. Stockout Cost: Stockout cost represents the cost of going out of-stock (i. Stockout results when the stock of the itt-1 gets depleted before the receipt of fresh supply. Q2 W hy is inventory control important for every business firm? W hat are the objectives a scientific inventory control? of Q3. cost of record keeping and cost of1 periodic/annual stock verification.e. Insurance Cost: Insurance cost is the prem ium paid or payable to cover the com pany against loss due to unforeseen acts such as fire. loss incurreddue to the non-availability of the item when it is required). cost of m aintenance and repairs. sub-assem blies or assem blies which are purchased from outside suppliers or those parts which are manufactured at the com pany's own plant from the basic raw materials to be used for the final product. I Storage C ost: Storage cost includes cost of storage space. W hat are the different types of costs that require to be considered in the S47 inventory decisions? W hat elements constitute these costs? How are these elements assessed? . since receipt from the suppliers.8 SELF-ASSESSM ENT QUESTIONS Ql. etc. Inventory Carrying Cost: Inventory carrying cost refers to the cost of holding stocks. work-in-process) or are yet to be utilised/consumed in the production of goods and services. R aw M aterials : R aw m aterials are those basic unfabricated m aterials w hich have undergone no conversion whatsoever. Inventories: Inventories represent the aggregate of those item s which are either held for sale in the ordinary course of business or are in the process of production for sale (i. W ork-in-Process: W ork-in-process com prises item s that are in a partially com pleted condition of manufacture. theft. cost of storage facilities. 10. Finished G oods: Finished goods are the final products ready to be shipped.U n it 1 0 F u n d a m e n ta lsvo f to r y M a n a g e m e n t In e n Finished Parts: Finished parts are those parts.
4. 33.Q4.66. : 50 years jj : Rs. 31.270 Rs.ft. 50 years Rs. ft.57.ft.298 Rs. 1.212 Rs. Storage area: Raw material store Components store Rs.29.10. a) What are inventory carrying costs? What elements constitute inventory carrying cost? b) The data extracted from the financial and other statements of a company are revealed the following: Capital deployed (Share capital + Reserves +Secured Loans etc. Rs.) Profit before tax Average inventory investment Value of obsolete & dormant stock written off during the year Insurance on stock held during the Year.574 10'x 20' 20'x 20' + 64' x 20' 32' x 12' 2264 eq.084 . Receipt & Despatch Construction cost Life of building Expenses by way of maintenance 248 Life of building Expenses by way of maintenance of stores including cost of preservation. 90 per sq. stock records etc.048 Rs.32. 77. 42. 90 per sq.
Ba % t nk len Calculate inventory carrying cost for the company. What is meant by the selective control of inventories? What different methods are 14 used for selective control of inventory items? . What do you understand by procurement cost ? What are the major elements of e procurement cost? : Q6. di 2 ng rat Q5.
This implies that this cost will be high if the item is procured frequently in small lots. Graphical analysis of economic lot size Cost to be optimised There are two major costs associated with any order quantity (i) procurement cost and (ii. on the contrary. The right quantity to order will be the one that strikes an optimal balance between these two opposing costs. 252 . on the contrary. Therefore. An illustration on the graphical method The monthly consumption of an item costing Rs. As a general rule. a rational approach is needed for determining the order quantity of an item. 13. the total cost is minimum and the resultant quantity is termed as the economic order quantity. Further. inventory carrying cost. 13. The stock of A-category of items. The annual inventory carrying cost (the product of average inventory investment and inventor}' carrying cost). should be kept low by ordering frequently. When these costs have been properly balanced. Ordering small lots frequently keeps the investment low but increases the administrative work. The annual procurement cost varies with the number of orders. This will keep the inventory investment low and will not increase administrative work (because of their limited number). it may be observed from the graph in Fig.1 INTRODUCTION TO EOQ One of the basic decisions that must be made in any stock control system is that of determining the quantity to order. are diametrically opposite to each other. This has been graphically demonstrated in Fig.per unit has been estimated at 1(X units. falls when the quantity ordered per occasion is small because of low capital investment. without capital being locked. items of C-category can be procured in bulk. therefore. Ordering large lots infrequently reduces the administrative work but increases investment in stocks. and is commonly abbreviated as EOQ. The two costs.Materials Management 11. since investment in inventories largely depends upon the quantities in which the items are ordered for replenishment. 3/.1.1 that the lowest total cost occurs at the intersection of the procurement cost curve and the carrying cost curve.
of orders per year] x [procurement cost per year] procurement per order J 1 cost _ [ A n n u a l c o n s u m p t io n X I o rd e r q u a n tity = [ L 100 x 12 x 30 400 Annual inventory cost = R s.1 5 = R s.U nit 11 E conom ic L ot Size Inventory carrying cost and the procurement cost for the company have been computed at 15% and Rs. 30 per order respectively. uuuuuuuu) Determine the quantity to be purchased to optimise the total cost. t t t t t t tC)a l c u l a t e t h e a n n u a l i n v e n t o r y c a r r y i n g c o s t f o r t h e a b o v e i t e m . Solution: •' ' i i o costs are affected by the size of the order quantities: annual procurement cost and annual inventory carrying cost. Table 11. f o r t h e d i f f e r e n t v a l u e t of order quantities and construct a graph for annual inventory carrying cost versus order quantities. a s s u m i n g d i f f e r e n t v a l ) o f o rd e r q u an titie s (sa y in ste p s o f 1 0 0 ) a n d c o n stru c t a g ra p h fo r a n n u al p ro c u re m e n c o s t v e rsu s o rd e r q u a n titie s. Asample calculation for an order quantity of 400 units is shown below: Annual procurement cost = [No. s s s s s s sCs a l c u l a t e t h e a n n u a l p r o c u r e m e n t c o s t f o r t h e a b o v e i t e m .9 0 .1 is developed for these costs for different values of order quantities (in steps of 100units).90 _ n_ L2 unit order quantity price peri J = [ Average T Inventory inventory investment] x [Inventory carrying cost] L carrying cost1 = x 4 0 0 * 3 x 0 .
T h e d em an d fo r th e item o ccu rs u n ifo rm ly o v er th e p erio d a t th e k n o w n rate. eco n o m ic o rd er q u an tity o f th e su b ject item is 4 0 0 u n its. an d is ex p re ssed as a p ercen tag e o f th e av erag e in v en to ry in v e stm en t.) Procurem ent cost per order (Rs. th ere b ein g n o fear o f d eterio ratio n o r sp o ilag e. T h e p rice p er u n it is fix ed an d is in d ep en d en t o f th e o rd er size. w ith the size of the inventory.2 B A S IC (O R W IL S O N ) E O Q M O D E L ______________________________ A s s u m p tio n s u n d e rly in g th e E O Q m o d e l: i. ii T h e tim e th a t ela p se s b e tw e en p la c in g a re p len ish m en t o rd e r an d rec e iv in g th e item into stock. T h e co st fo r p lacin g an o rd er an d p ro c essin g th e d eliv ery is fix ed an d d o es n o t v ary with the lot size. Symbols used: A m y consum ption of the item (units) Price per unit (Rs. \IL i h e item h as a fairly lo n g sh elf life. th ere b ein g n o restric tio n o f an y kind. to ta l co st is m in im u m w h en th e o rd er q u an tity is 4 0 0 u n its. T h erefo re.I'n ii 1 1 E co n o m ic ize t SLo A s ev id en t fro m th e g rap h . vi. T he inventory carrying charges vary directly and linearly. iv . 1 1 .. is zero. \i T h e ite m can b e p ro cu red in th e q u an titie s d esired . called lead tim e. T he rep len ishm en t o f th e sto ck is in stantan eo u s.) : : : S Cu Cp Inventory carrying cost as a percentage ot average inventory investm ent (decim al) Order i : quantity (units) Economic order quantity q q o 2 5 5 . ?.
ost.i . Using the form ula: illustration An \.5% of the average inventory investm ent respectively.C u i C u .C u . C pC u . qo = er order] 25 .. >. 36 and 1. x Cu x i x .(4) In w hat econom ic lots should the item be purchased to m inim ise the annual total cost? Solution: Economic order quantity is given by the formula. o m p a n y u se s 7 5 n u m b e rs o f a n ite m p e r m o n th .(6) .. we must alive to zero. (5) and (6)..(5) Annual inventory carrying '2 .U nit 11 Econom ic Lot Size Proof of optim al buying: To give proof of optim al buying. w e m ust calculate the annual procurem ent cost and annual inventory carrying cost w hen the quantity ordered per occasion equals the econom ic order quantity. E a c h u n it c o s ts Rs. c o m p a n y th e 25/-.C p .i S . The cost of putting through each order and inventory carrying charges per m onth are com puted atR s.COSt Annual procurement cost -xCp q S x Cp /2 .i . i S .. It is evident from the above tw o equations.C p . S . that the best buying results w hen te annual procurem ent cost equals annual inventory carrying cost.S .C u (S in c e a t E O Q le v e l q =C q o ) u. .
it is desirable to calculate order quantity in rupees instead in units.).Cp. qo = '1 x 900 x 25XQ. we get: 2.18 100 Substituting the values in the EOQ formula.i S= A 258 . Rt. In this formula. procurement cost per order (Rs. 367Price or cost per unit (Rs. kgs.) Rs.18 for EOQ when consumption is specified in An alternate formula 120 numbers. we get Sq.S. (This being so when the annual consumption of the items are specified in terms of monetary values.) The formula for "economic order quantity in rupees" can be obtained as under: Let A = Annual consumption in rupees (called annual usage)= Qo Economic order quantity (Rs.Materials Management Annual consumption (units) where S Cp Cu = = 75X12 900 numbers.) Multiplying both sides of the equation (4) by unit price. Cu. Rupees The basic formula for the EOQ (equation 4) suggests the quantity (in terms of units) to be purchased to optimise the costs involved.i 2. consumption figure (s) is considered in units (i..) Rs. however. 257Inventory carrying cost per year (decimals) x 12 = 0. At times. meters etc.e.Cu2Cu2.Cp qo x Cu = Qo = x C u Cu.A. numbers.
This is not always true. therefore. Quantity discounts reduce the material cost and the procurement cost but increases investment in inventories (i. is to be made whether the buyer should stick to the economic order quantity or to raise the same to take advantage of the price break. List the factors because of which the EOQ is required to be modified in practice. 11.Materials Management £$ Activity B . some of which may occur at price break level while others may occur within a price range. irrespective of the order quantity. 260 . we must investigate all local minima (global minima). suppliers offer a discount if higher quantities are purchased.3 EOQ WITH QUANTITY DISCOUNTS Rational of quantity discount Basic economic order quantity formula is based on the assumption that price per unit is fixed.e. This implies that in order to establish the optimum quantity. When quantity discounts are offered. Often. A decision. increase inventory carrying cost). List all the costs to be considered for EOQ. the total cost function no longer remains uniformly continuous but becomes stepwise continuous. g$ Activity C. the management needs to decide whether they should buy a quantity larger than determined by the EOQ formula to take advantage of the discount If the price per unit is variable (as in case of a quantity discount situation.
9R s. 1} D ecide the quantity to be purchased at each price level.85 0 261 . this being one w hich entails the low est annual total cost.. This equals EO Q or the p ice break quantity. we must also consider the annual material cost (S x Cu) in the cost calculations. 2. The latter being necessary if EO Q at a particular price level w orks out to be lower than the corresponding price break quantity.. 3. Price Per Unit R s. Calculate the annual total cost including the annual material cost at the quantities fixed under step (2).. while making a comparison on the basis of annual total cost. \] Select an optim al purchase quantity. Therefore.U n it 1 1 E c o n o m ic L o t S iz e Considering the step-wise continuous nature of the total cost function.Rs. 2. the general formula for the annual total cost becomes: '4 ATC = SxC u+xS x Cp + qx Cuxi q 2 ' . .a cost of at per unit.00 R s. Procedural steps Calculate EOQ at I) different price levels. 25 Inventory carrying cost as a percentage of average inventory = 20% investment Determine economic order quantity of the item.. which is as follows: Order Quantity Less than 500 units to 1250 units 500 1250 units or more The cost of placing an order and executing the delivery once = Rs..(9 ) . It has now received price schedule from the vendor. An illustration Acheraical firm buys 2500 units of a particular item annually from a vendor.
Graphical representation of the model: Replenishment of inventory under this system. which is constant. = C p model: Symbols used: Annual requirement of the item (units) Manufacturing cost per unit Setup cost per production run Daily production rate (units) Daily demand rate (units) Duration of production run (days) = P = d = t .Materials Management Assumptions underlying the model: vvvvvvvv)The item is consumed at the known demand rate. stock replenishment is gradual) e) The item can be manufactured in the desired quantity free from restrictions of any kind such as tool stand up time. xxxxxxxx)The inventory carrying charges vary directly and linearly with the size of the inventory and are generally expressed as a percentage of the average inventory investment. IL It increases the economic lot size since average inventory is no longer—but less than qo Mathematical treatment of the 2 = S Annual total cost for the same annual requirement is less than the annual total cost = Cu under the instantaneous receipt method. occurs over the period 't' while the usage occurs over entire cycle T. risk of obsolescence. as mentioned earlier. yyyyyyyy)The inventory does not increase by the quantity on the shop order but rather gradually at a rate (p-d) where 'p' is the production rate and 'd' is the demand rate or the production rate is finite (i.e. space restrictions. etc. wwwwwwww)The cost to set up a machine (or a group of machines) and order writing is fixed and does not vary with the lot size. This gives two effects: i.
') q =quantity produced during a production run = p x t) al to tal co st :. M axim um inventory at the end of production run = ( p-d)t = i = q = qo is of any :. C = [No. Average inventory (units) = (P-d) \ = i (P-d) x <L iie p erio d it less than ('.-1 C u. of production runs] x [Set-up cost per production run] = p .U n it 1 1 E c o n o m ic L o t S iz e and rentory nent.xCp q Annual total cost (ATC) = A nnual set-up cost+A nnual inventory carrying cost. Vinual inventory carrying cost And annual set-up cost 2 . ad u ally 5 o r th e Inventory carrying cost as a percentage of average inventory in vestment Quantity per production run Economic manufacturing quantity P reparation of the m odel: In v en to ry u n d er th is sy stem b u ild s u p at th e rate (p -d ) an d is m ax im u m a t th e en d o f production run.i P S . + q .
i (10) (11) 26 5 ./ ! _ _ d _ \ -C u .
Q dq q2 .S.i Pj ' 2.Cp (j.. Cu...S . To minimise annual total cost.Cp 1 orqo = .dlCu.Materials Management Optimisation of the model: Optimisation of the inventory model implies fixation of batch quantity that minimises annual total cost (ATC). d (A T C ) _ ..i = 0 or S.i P' .Cp qo2 _ 1_ 2 =0 When d(ATC) = 0 then q dq > J qo qo2 = 2.S.(1 2 ) An illustration: '("I) d_\ ..C u . . we must differentiate ATC with respect to the decision of the variable q and equate the first derivate to zero.
96/-. The production process is such that the company can produce 60 units perday. the average usage being 40 units per working day. I . zzzzzzzz) hat quantity should be produced in each run? W J aaaaaaaaa) ow frequently should production runs be made? H .266 A company uses 12. 8.000 units of a particular time. Each item made in the plant costs the company Rs. The cost of set-up and orderwriting works out to be Rs. The inventory carrying cost is estimated at 15% of theaverage inventory investment.
6 KEYWORDS____________. Inventories: Inventories represent the aggregate of those items which are either held for sale in the ordinary course of business or are in the process of production for sale (i. What is economic order quantity? Describe the development of EOQ formula.Materials Management 11. When these costs have been properly balanced. The right quantity to order. i The formula above represents the basic EOQ model. Cp C u . S . t 2 . .procurement cost and inventory carrying cost . while ordering small lots frequently keeps investment in inventories low. and cost of periodic/annual stock verification etc. Storage Cost: Storage cost includes cost of storage space.e. cost of maintenance and repairs. but increases the procurement cost. 11. which may be extended to cover many other situations. therefore. 11. The two costs . cost of storage facilities cost of preservation cost of record keeping. the total cost is minimum and the resultant quantity is called "economic order quantity" for which the formula is as under: Economic order quantity (qo) = SQ. work-in-process) or are yet to be utilised/consumed in the production of goods and services.are diametrically opposite to each other. RT. Ordering/Procurement Cost: All the costs associated with preparation of order and purchasing the item is termed ordering cost. Inventory Carrying Cost: Inventory carrying cost refers to the cost of holding stocks. to a large extent depends on the quantities in which the items are ordered for replenishment. _________ ^ _ _ _ _ _______________ EOQ : Economic Order Quantity is that quantity where the total cost of ordering and inventory is optimised to give the minimum cost. Ordering bigger lots infrequently reduces the procurement cost but increases investment in stocks. step by step.5 SUMMARY Investment in inventories.7 SELF-ASSESSMENT QUESTIONS_____________________________ Q1. is the one that strikes an optimal balance between these two opposing costs.
T h e c o m p a n y h a s to sp e n d R s.8 0 0 e n tin it cost itity to Dosing incline nder. A nd inventory carrying charges areper percent 16 annum. (a ) q o = 2 5 0 0 . (a) W hat is the total annual cost of existing inventory policy ? 26 9 . 1 2 . to c o v er ie rin g a n d herheldfor for sale (i.5 0 p e r k g .0 4 . and cost of Q 4. (a) D eterm ine the optim al order quantity and inventory cycle duration for the pain balm. A co m p an y requ ires 20 00 k gs o f" 1. U sage rate is 300 nos. A ns.e.: (a ) (b ) qo= 1697 kgs. i of order and in te n a n e e a n d ng.. and services. T he unit price is R s. 1 0 0 . cold d raw n b ar stock" m aterial per m o n th w h ic h c o sts R s.? *v>? \ bbbbbbbbb) hat is the approxim ate econom ic order quantity? W ccccccccc) hat is the annual total cost W (i) excluding purchase price.. ..3 m o n th s (b ) 4 (c ) R s. E n 8. 3 . (b) H ow m an y orders are placed each year? vc) W hat is the m inim um yearly inventory cost? A ns. T h e co standard 2 m p an y 's rate of return on w orking capital funds is 11/3 % per m onth.2 4 2 3Q form ula. 48 per order. 1 5 0 fo r processing and executing an order for the supply of raw material. 24 per unit. Iding stocks. The m anagem ent of a com pany has established a policy of turning inventory four tim es a year.. step Q 5.000 bottles of pain balm every year. W hat is the im portance of EO Q in inventory control? W hat are the lim itations of EO Q concept? Q 3 A trading com pany buys and sells 10.U nit 11 E conom ic L ot S ize . Tphysical of he cost storage of pain balm is fixed. O rdering cost is R s.sure I cost Q 2. a n d th e co st o f p lac in g an o rd e r is R s.. (i)A T C = R s. per m onth.4 24 2 (ii)A T C = R s. T he cost per b o ttle is R s.. ' (ii) including purchase price. Interestcosts storage and total 20%.
It is a general practice to mail requests for quotation (tenders) simultaneously to all suppliers and indicate therein the specific date and time up to which their offers will be considered. Time required by the purchase department to convert a purchase indent into a purchase order When an indent is received. washers : . 3. Time required by the indenting department to convey requirements to Purchase Materials may be required as a routine replenishment or for a specific use. They are discussed below: 1. 2.Materials Management 12. Several distinct elements comprise lead time. The request for quotations. This sets the duration of this time element. the time considered is maybe two days for all such indents. Purchase indents of A and B items may be initiated by the stores department but reviewed by someone at the senior level. handwheels. This activity is usually not performed for the standard items and for those procured from established suppliers. Purchase indents for non-stock items are generally initiated by the user department. 274 Time required by the supplier to route the buyer's order through his administrative channels and fill the same The duration of this time element depends largely on the conditions of manufacture. therefore.1 LEAD TIME AND ITS ELEMENTS Lead time is the time that elapses between the realisation of the need for the item until the fulfillment of the need. who can supply the goods of right quality. is mailed to certain selected vendors. at the right price. Therefore. Purchase indents of 'C items may be initiated and sent directly to the purchase department by the store keeper. the total time necessary to replenish the stock of an item. bolts. The duration of this element depends on the channels through which a purchase indent is made to pass. Purchase indents for regular items are generally raised by the store as soon as their stock falls to or below a pre-fixed level. It is. and at the right time. The purchase order is then raised on the supplier whose terms are better than those of others. Manufacturers of standard items such as hinges. One day is usually considered enough for such indents. the purchase department invites quotations. samples (wherever asked for) are tested to ascertain quality and terms of delivery are looked into. nuts. Such a procedure enables the purchase department to select a supplier.
dd e ee e e e e ee ) o rd re c e ip t q u a n tity o n sto c k -ca rd a n d w o rk o u t th e b a la n ce .. I Tim erequired by the store departm ent to take goods into stock and updates to c k re c o rd s T h e tim e o f th is e le m e n ts in c lu d e s tim e to d d d d d d d v e r) i f y t h e q u a n t i t y o f m a t e r i a l s r e c e i v e d a g a i n s t G R .U nit 12 R eplenishm ent S ystem s etc. The duration of this element equals the delivery period quoted by the supplier.the distance and the mode of transport . items requiring dimensional checks require less time to inspect than those requiring metallurgical and/or performance checks. 5. Tim e required by the receiving departm ent to inward goods Incoming goods are received and verified for quantity by the receiving department. Transportation time is less if the vendor is located nearby. 4. as they can be supplied by the vendor from his ready stock. S ffS . Transit tim e for the goods to reach the buyer's works The transit time which depends on two major factors . The department verifies the markings on the packages before accepting the delivery. materials dispatched by road transport generally take lesser time than by rail transport. (i. unpacks and verifies contents to ensure that the quantity on the challans and quantity actually received tallies before inspection and prepares the necessary documents like Goods Receipt Report. Comparatively longer delivery period is quoted when the item is a non-standard one and needs to be manufactured to the buyer's design. if the manufacture involves the procurement of special materials.has the greatest bearing on the lead time of an item. do not require longer lead time. Similarly. Similarly. r c f f f f f f f fafr)r a n g e f o r s t o r a g e o f m a t e r i a l s i n t h e i r r e s p e c t i v e b i n s o r c o n t a i n e r s . An even longer delivery period is quoted. R . Tim e required for inspection to verify the quality of goods Time for this activity depends on the criticality of the item and its quality description. etc. Items procured to commercial standards and brand names require less time than those procured to performance standards.
broaches. taps. the fresh supply shall be received as soon as the stock of an itei drops to zero. the higher is the working as well as the safety stock. Developing local suppliers Negotiating annual contacts with staggered deliveries iii. iii. Selectively delegating powers Better paper work procedures iii. ii.) while lead time for A and B category of items should be assessed individual itemwise. SDE analysis may be made for item groups of C-category and for individual items of A and B category. non-standard hobs. Selecting efficient and faster mode of transport to achieve overall economy iv. Lead time should be reviewed periodically especially that of A and B category and adjustments in stock levels should be made accordingly. inserts. standard hobs. Fixed targets for individual activities of lead time External lead time can be reduced by the following activities of the management: L ii. This is possible only if- . Making suppliers carry inventory at their plants Estimation of Lead Time General rules for estimation of lead time are as under: i. How lead time information is utilised for inventory control? Under ideal conditions. the management must make a deliberate and determined effort to reduce lead time. Lead time for C-category of items should be estimated item group-wise (say drills. milling cutters etc.Materials Management Control of Lead Time Lead time of an item has a major influence on the investment in inventories. The longer the lead time. SDE (Scarce-Difficult-Easy) analysis should be carried out prior to the estimation of lead time. Internal lead time of an item can be reduced by the following actions of the management: i ii. Therefore.
of course. Trigg er point is that level of stock at which the store keeper is authorised to raise an indent for replenishment of an item . we m ust have information on lead time. Demand does increase! Lead time.U nit 1 2 R eplenishm en t System s 1 the replenishment action is taken at the i there is no increase in dem and during the lead tim e. Both these assumptions are unrealistic and almost 180° apart from the true situation. The first condition is satisfied by fixing a trigger point called as the re-order level.2.1: Replenishment Process under Ideal Conditions It is clear from the above discussion that to fix up the re-order level.1 Y tme. Re-order level under ideal situations therefore equals lead time' consumption. Re-order level (P) = Lx C w here L = lead tim e in days/w eeks/m onths. . right ti P 0 Lead tim e consum ption L time Fig. And C = daily/ weekly/ monthly consum ption. 12. i there is no delay in getting the supplies (delivery). Sym bolically. is tardy adhered to! This gives rise to stockouts and production stoppages as show n in Fare 12. Let os now analyse the other two assumptions.The process of replenishment is shown in figure 12.
! 1 U n it 12 J ' R eplen ish m en t S ystem s \ &A ctivity B . demand during lead time. A nd fixed the quantity to be ordered either be "fixed" or it can be "variable. The salient characteristics of this system are: j in Re-order quantity is alw ays the sam e. every w eek or every m onth). The tw o m ain replenishm ent system s are: (i) fixed-order-quantity system and (ii) fixed'. replenishm ent actionbe initiated w hen stock level drops to a pre-fixed level) or to it can be according to "pre tim e scale" (i. d| Re-order level equals safety stock plus average consum ption during lead tim e. k] Safety stock is kept to take care of any increase in dem and during lead tim e as w ellas to m eet dem and w hen the lead tim e is extended. 1 12 R E P L E N IS H M E N T S T E M S SY A replenishm ent system is a m eans to decide w hen to order and how m uch to order.Working of the system: Under this system.orderpoint system. the stock of an item is replenished when it approaches or falls 279 below a He-fixed i • el called re-order level."The tim e of ordering can either be according to "stock level" (i. .e. The form er ^presents "tim e of ordering" and the latter represents "quantity to be ordered.e.-' < - M ention the steps that you can take to reduce the lead tim e. s 113 FIX ED -O R D E RU A N T IT Y SY ST E M Q I Fixed rder quantity system is also called fixed-order system or m in-m ax system or re. . . w hich is usually the econom ic order quantity(or econom ic order quantity m odified in the light of constraints). order-interval system. . ' • > ." Different can systems differ in these tw o aspects only. ! b) R eplenishm ent action is initiated w hen the stock on hand is just sufficient to m eet.
The safety stock is meant to absorb other contingencies such as delay in delivery.. The stock equal to lead time consumption is intended to satisfy average demand during lead time.4 : Graphical Representation of Re-order Level System The system is very simple and easy to operate. Re-order levels is located somewhat above the minimum level. and rejection in the incoming consignments.4). Safety Stock t Re-order Level 280 Fig. 12. 1 o t I \ Lead time cons. Fig. The daily issues of the item are posted on . is the sum of safety stock and the average lead time consumption. which is commonly abbreviated as R.L. The quantity ordered (re-order quantity) in his system is fixed and is usually the economic order quantity (or the same might have been modified to suit business constraints).O. 12. increase in consumption.Materials Management Re-order level. (Ref.
is a commo (vi) Individual issues and receipts should be posted. order level (it (v) Arithmetical errors should be avoided. its re(iv) Entries must be made on the correct cards. otherwise the decision is postponed until the next and issue. appropriate bins and their stock cards must be posted for goods inward notes and which material return notes for the quantities physically received. ed with (iii) The balance on the stock cards should be periodically tallied with the physical stock. . stock balance To operate the system efficiently.its n practice to write re-order level of the item on its stock card for ready reference). The essentials of this system are: is worked (i) Incoming materials and materials returned from shops must be deposited in out. &. stock Replenishment action is initiated if the sum of stock on hand and quantity on pipeline card falls to or below its re-order level. is compar (ii) Items should be issued in correct quantities. stock cards must be kept correct and should be posted regularly for receipts and issues.
= m + LxC • ... The 'pventory carrying cost and the procurement cost for the company have been UK .. M a x im u m sto ck (M ) u n d er th e sy stem : U n d er th e re-o rd er lev el sy stem ...... t* (a) Re-order level. equals the sum of mi nimum stock and average lead time consumption... is either half of the sum of minimum stock and maximum «k or merely the sum of minimum stock and the half of the re-order quantity.. m + qo/2 ...\n illustration on the working of the system : monthly consumption of an item whose unit price of Re... Basic parameters to operate the system There are two basic parameters required to operate the system. .U nit 12 R eplenishm ent S ystem s .... 1 has been estimated at 300 its. v .e..'. as mentioned earlier. (B ) ~r ysical stock... j A verag e in v en to ry u n d er th e sy stem : ' Average inventory.. (A) Re-order level Where L = I ix J (units) m = minimum stock or safety stock (units) 1 « lead time (days/weeks/months) '.. th e m ax im u m lev el is th e su m o f m in im u m sto ck an d th e re-order quantity....... Average inventory (I) = = = l V&(m /2 (m + m + qo) -. in general. C = daily/weekly/monthly consumption )ostedon rder level for ready nantity on d until the 1 be posted appropriate terial return (b) Re-order quantity (q) under this system is fixed and is normally the economic order quantity (EOQ) or modified economic order quantity (MOQ).. then . i.....and nded rther ming mum ly the aints).. . M ax im u m sto ck (M ) = m + q o ...v -nornic order quantity.. \ Symbolically. If ra=rninim um stock and qo =........
28 1 .
= Inventory carrying cost as a percentage of average inventory investment (decimals) = 0.S.i Where S = Annual consumption (units) = 300x12 = 3. 36 per order. If the company adheres to the policy of one month safety stock.Materials Management computed at 18% and Rs.600 units = Procurement cost per order = Rs. and kkkkkkkkk)average inventory.18 = 2. assuming re-order level system of replenishment Solution: (a) Re-order quantity under re-order level system is fixed and is generally the economic order quantity (which might have been modified in the light of constraints) and is given by the relation qo Cu. Calculate ggggggggg)re-order quantity hhhhhhhhh)minimum level iiiiiiiii)re-order level jjjjjjjjj)maximum level. 36 per order respectively.Cp j ' 282 . Stock records show that this item can normally be procured within a period of one month.
1 8 1200 units llllllllM in im u m le v e r (m ) w h ic h a ls o k n o w n a s sa fe ty . 0. which may (d) Maximum level (M) which is the sum of minimum stock and re-order quantity will be be incon venie M = Safety-stock + R e-order quantity nt to = 300+1200 the = 1500 units. * ( e ) Average inventory (I) which is the sum of minimum stock plus half the re-order In (i) quantity cas will be 1 = m + qo/2 = 3 0 0 + 1 2 00 /2 = 3 00 + 6 0 0 = 90 0u nits e of ite ms wit ha lon g lea d D isadvantages the fixed-order quantity system : of . ( 3 0 0 u n i ts ) m = 3 0 0 u n i ts . raised at R. sup plie •'".s to c k is g iv e n to b e e q u a l l) (i) The to o n e replen m o n th 's c o n s u m p t io n . $< = 600 units. = Safety-stock+Lead time consumption irregu = 300 + lar interv 300 als. * ! • |. ishme m m m m m m m m m-)o rd e r le v e l ( P ) . orders w ill be are IV . . rs. we x 2 get 3600 x 36 qo = 1 x 0 . L. w h ic h is th e su m o f s a f e ty s to c k a n d a vntra g e le a d Re e tim e c o n s u m p tio n .U nit 12 R eplenish m ent System s Substituting the values in the above relation.
283 .tim e. more than one order will be pending with the and there is every supplier possibility that he m ay fill up all pending orders at one time.
Suitability of the system: Fixed order quantity system is generally suitable for: (i) B-class of items. (ii) The consumption rate should be fairly uniform. y (m) Since re-order points in different items occur at different times. clerical and freight costs. (iv) Stock records must be accurate. (iii) Individual receipts and issues must be posted. .-'••. Basic requirements to operate the system : (i) The cycle time of consumption should be more than the lead time. (iv) There is always a possibility that the stock level of an item has approached or dropped below the re-order level but the store clerk has failed to take note of it.-. which can be made possible through continuous stock verification.M ate rials M an ag em e nt ': ' . in which case a stockout may occur. they cannot be ordered at one time and as such for each item group. a large number of orders would be raised which increases purchasing. Mention the factors which will affect the parameters for operating the fixed order quantity system. . (ii) Low-value items ordered infrequently in large quantities )J g$ Activity C.
5 : Graphical Representation of Two-bin System j Hie fresh supply. The issue clerk is less likely to j w iookthe fact that the first bin is empty and thus the item needs to be re-ordered. The fust bin contains enough stock (order quantity-lead time consum ption) to satisfy the demand between the receipt of materials and the placing of the next order. the inventory clerk fails to report when the stock falls to or below the re-order | level. is once again physically distributed between the two bins j asperapre-fixedratio. Situations are not uncommon when they fail to make entries or make errors while 1 posting. The second bin contains stocks equivalent to re order level (minimum stock plus lead time consumption) and is deemed to be sufficient to satisfy probable demand during the period necessary for replenishment. M any j atim e.U nit 12 Replenishm ent System s 12. I a a fc Lead Time Consumption S afety S tocJ k Time Fig. To start with. 12. . which operates on the principle of re-order level. physically segregates the entire stock of any item into two bins. Two bin-system safeguards against these errors. The emptying of the first bin indicates that the stock has reached the re-order level and the same is to be replenished. The stock in the second bin is then utilised until the receipt of fresh supply.4 TW O -BIN SYSTEM W orking of the system: The two-bin system. the stock from the first bin is consumed. j Is system has a number of advantages over the conventional paper work systems. when received.
ooooooooo) econd-bin quantity which is equivalent to a re-order level.(Q (c) First-bin quantity as mentioned earlier. since the system ensures a high degree of automaticity.Materials Management The system also drastically cuts down the work involved in keeping the records. i.. /. equals minimum S stock plus average lead time consumption...(E) I* Average inventory. This implies that the first bin will have stocks equivalent to order quantity minus the lead time consumption..... First bin-quantity = Order quantity .e... M = (m + LxC ) + (qo-L xC ) = m + qo . Second bin quantity = m + LxC . The need for maintaining perpetual inventory records is avoided.M Average Inventory in two-bin system: .Lead time consumption = qo-LxC Maximum stock in two-bin system: . which is the average of minimum plus maximum stock. Basic parameters for operating the two-bin system: There are basic parameters required to operate the two bin system: nnnnnnnnn) e-order quantity in the two-bin system is fixed and is generally the economic R order quantity. contains enough stock to satisfy the demand between the receipt of material and the placing of the next order... equals: I = V4(m + M) = = Vi (m + m + qo) m + qo/2 .(D ) Maximum stock (M) in two bin system equals the sum of quantities in both the bins....
.. (li) me order aim stock . we get qo = j2x60xl2 V 8x0. computed from financial documents and information su pplied by the purchasing departm ent.Cp C u. The managem ent during the study.......U n it 1 2 R ep lenish m en t S yste m s Tie need jsahigh An illustration of two-bin system : The annual consumption of an item called 'Xylene' is 60 Kgs. fi) Calculate different param eters necessary to operate the two-bin system . The inventory carrying cost and the procurement cost.i A nnual consum ption (units) 60kgs. tib = Inventory carrying cost as a percentage of average inventory investment (decimals) = 0. The item can norm ally be procured w ithin a period of tw o m onths... Solution: u'j The basic param eters necessary to operate the two-bin system are re-order quantity...(D) where S = ie bins... 12 per order respectively.(E) luals: relation.e.... i . i... w orks out to be 15% and R s. second-bin quantity and first-bin-quantity.15Substituting the values in the above .15 = 3 5 ... tK Cp t = Rs. P rocu rem en t co st per o rde r = = ie demand ies that the isumption... It is normally the economic order quantity in and is given by the following relation qo =k 2.( Q Calculate the m axim um stock and average inventory from the param eters. ... And its unit price is Rs.. Thesecan be calculated as under: (a) Re-order quantity this system is fixed.... 8 per kg...S. agreed to have the safety-stock at tw o months consumption.. 12 per order..
The total. so obtained sets the m axim um level (M ) of the stock to be maintained. m + (R + L)C.12 Replenishment Systems 12. is fixed either for each individual item or for a group of item s. Safety stock (m) is added to the above to take care of variations in demand during the review period and lead time as well as to meet demand when lead tim e is extended. so obtained. W hen the lead time is less than the review period. like the EO Q in the fixed order quantity system. The salient characteristics of the system are : (') The order-interval is fixed either for each individual item or for a group of item s. sets the maxim um level of stock to be maintained. Basicparam eters for operating the system : I Basic parameters to operate fixed-order interval system are the review period (R).5 FIXED-ORDER INTERVAL SYSTEM I Fked order interval system is also called the "periodic ordering system" or "periodic review 1 system" or "order cycling system. M aximum Level (M ) is meant to put the maximum ceiling on the inventory level. fiv) Stock of the item is reviewed at periodic interval and quantity (q) which will bring the stock on order up to the m axim um level (M ) is ordered. Symbolically. The total. M = m + (R + L)C . m+ „ (R+L)C. the re-order quantity equals maxim um stock minus the stock actually held at the time of review. in) A forecast is m ade of the average consum ption during review period (R x C ) and . A forecast is made of the average demand during the review period (R x C) and during lead time (LxC). in Review period (R). lead tim e (L xC ) liii) Safety stock (m ) is added to the above stock to take care of contingencies like variations in consum ption during the review period and the lead tim e.(F) Re-order-quantity (q) depends on the relationship between the review period and the lead time. R eview period." . . maximum levels (M) and reorder quantity (q). also called order interval. can either be determined (economic review period being the one that minimises the sum of annual procurement cost and annual inventory carrying cost) or it can be fixed by judgment.
e. Procurement cost per order and the inventory carrying cost are estimatedatRs. under fixed-order interval time is meant to provide for variations in demand (i. increase in the rate of consumption) during the review period and the average lead time plus average consumption during an increase in lead time. 36 per order and 1. of (a) Fix up necessary param eters to operate the fixed-order interval system • (b) W hat would be the re-order quantity if the stock on hand at the time of first review is 650 numbers? i c) And what would be the re-order quantity at the time of second review. Assuming review period of one month. A verage inventory under the system : Average Inventory (I) in any replenishm ent system is equal to the minim um stock plus m aximum stock.5% per month respectively. M aximum inventory (M ) is attained if there is no consumption during lead time. The above said item can normally bepra ired within a period of one month. also called safety stock. and the quantity ordered previously (i. per month. if the stock on hand is 200 nos. at the time of first review)is yet to be received? 291 . 1/2(m !/2 (M inimum stock + M aximum stock) + m + (R(R + L )C (H) An illustration the system : on M onthly consum ption of an item costing Rs. M aximum inventory under fixed order interval system is attained just after the receipt of fresh supply and is equal to the maximum stock level (M ) minus lead time consumption. Safety stock equivalent to half of the lead time consumption is considered sufficient to take care of any increase in demand and/or extensionlead time. 12 each is estim ated at an average of 400 nos.e.Unit 12 Replenishment Systems M inim um level under fixed-order interval system : * Minimum stock.
350 nos.e. quantity ordered previously but not received yet) = 0 q = 1000-650 .(Ih + Ip) where Ih = stock on hand at the time of review (2nd review) 200 292 .7) = m + (R + L) C Safety stock where m half of lead time consumption '72x400 l /2 x Lead time consumption 200 nos.(Ih + Ip) Where M = Maximum level 1000 units fli = stock on hand at the time of review 650 Ip = quantity on the pipe line (i. R Review period (months) 1 Lead time (months) 1 C Average monthly consumption (units) M 200 + (1+1) 400 1000 (b) Re-order quantity at the time of first review: Re-order quantity (Equation 40. (c) Re-order quantity at the time of second review: Re-order quantity (q) = M .Materials Management Solution: 'H i (a) n Fixed-order interval system requires two basic parameters: (i) review period (R) and (ii) maximum level (M): Review period (R) = 1 month (Given) Maximum level (M) (equation 40.9) (q) = M .
. in se rts e tc .. re am e rs. (i) estab lish m en ts (e. tim e w hich includes the tim e 293 . tap s. F ix edo rd e r in te rv a l s y s te m g e n e ra lly g iv e s h ig h e r c o n tro l th a n th e fix e d . p ro v id e d th a t th e re -o rd e r p e rio d (o r re v ie w p e rio d ) is s h o rt. 116 SUMMARY _________________________________ L ead tim e is th e to tal tim e n ecessary to rep len ish th e sto ck of an item an d it can b e d iv id ed in to tw o parts.g . entering into contracts etc.e . h o b s. nam ely th e in ternal lead tim e and th e ex tern al lead tim e. and the receiving n s. g rin d in g w h e e ls. fit) item s w h ic h are req u ire d in d iffere n t siz e s (fo r ex am p le . (i) h ig h -v a lu e ite m s (a c a teg o ry o f item s) req u irin g stric t c o n tro l o n sto ck le v e ls. d rills. te n d s to p u sh u p in v e n to ry in v e stm e n t.(2 00 + 35 0) 450 nos.o rd e r q u a n tity ste m . E c o n o m y in w p u rc h a s in g in th e I fo rm o f q u a n tity d is c o u n ts a n d re d u c e d w o r k lo a d c a n b e r e a lis e d b y re v ie w in g th e sto ck s o f all item s in th e ran g e at th e sam e tim e.Unit 12 Replenishment Systems IP q q u an tity o n th e p ip elin e . (i. In ternal lead tim en sists o f th e serv icin g tim e w h ich in clu d es th e tim e req u ired fo r co o b tain in g q u o tationegotiating price. : * . # A ctiv ity D : L ist d ow n th e facto rs w h ich w ill affect th e p aram eters for op erating th e fix ed order in terv al system.o r d e r in t e r v a l s y s t e m : T he fix ed o rd er in terv al sy stem is u sed fo r. o n th e c o n tra ry . S u it a b ili ty o f t h e f ix e d .. q u a n tity o rd e r e d a t th e tim e o f f irs t re v ie w ) 10 00 . h e re a w e e k ly o r m o n th ly re -o rd e r p e rio d is u se fu l. A sy lo n g re v ie w p e rio d .) an d p ro c u re d fro m a sin g le so u rc e . retail sto res) procu rin g a w id e rang e o f item s from a sin g le su pp lier. • 3 5 0 n o s .
Fixed Order Interval System : Under this system. on the contrary.Materials Management needed for uncrating and inspecting goods. Lead Time: Lead time is the time that elapses between the realisation of the need for the item and the fulfillment of the need.The quantity ordered (re-order quantity) in this system is fixed and is usually the economic order quantity (or the same might have been modified to suit business constraints). called the re-order level ." The two-bin system is best suited for the C-class of items. Fixed-order interval system generally gives greater control than the fixed-order quantity system. Replenishment System: A replenishment system is a means to decide when to order and how much to order. manufacturing and delivery times required by the supplier. The fixed-order quantity system is suitable for the B-class of items and low-value items ordered infrequently in large quantities. therefore. the stock of an item is replenished when it approaches or falls below a pre-fixed level. the total time necessary to replenish the stock of an item. A replenishment method helps to determine the time when a replenishment order is to be raised and the quantity that should be ordered on each occasion. External lead time comprises administrative. 12.________________________________ Fixed Order Quantity System: Under this system. The other method. Lead time can be shortened through a determined and deliberate effort by the management. iI -xu ." Re-order Level: Re-order level is the sum of safety stock and the average lead time consumption. Lead time information is required to fix the reorder point. Two basic methods for the purpose are: (i) fixed-order quantity system and (ii) fixed-order interval system. The fixed-order interval system is useful for high-value items (the A category of items) requiring a strict control on stock levels. the orders are placed at predetermined intervals and the order quantity is equal to the difference between the maximum stock and the actual stock. is "the two-binsystem. tends to push up the inventory investment. which is a modification of the basic method. safety stock and modify the economic order quantities. moving them between stores and making entries in stock records.7 KEYWORDS______________. A long review period. provided that the review is kept short. It is. The former represents the "time of ordering" and the latter represents the "quantity to be ordered.
What is lead time? Which activities are considered in the making of lead time? How and where is this information used in inventory control? Q2. rtened through it order is to be ic methods for al system.The quantity tic order quantity j placed at pre en the maximum if the need for the •y to replenish the de when to order ig" and the latter iverage lead time Q4. per month.8 SELF-ASSESSM ENT QUESTIONS ___________________ Ql. Procurement cost per order and the inventory carrying cost are calculated at Rs. explain the working of the system. Q3. when it is re-ordered for 400 nos. provided 5 to push up the >asic method. ppppppppp) Calculate the necessary parameters. U nit 12 R eplenishm ent System s Two Bin System Two-bin system operates on the principle of re-order level. (a) W hat is the re-order level system of replenishment? W hich parameters are necessary to operate this system? How are they calculated? | (b) Establish the param eters for the re-order level system from the data given below: Monthly consumption (units) = 1 00 . (Ans. Assuming re-order level system of replenishment. qqqqqqqqq) Using the parameters calculated above. 36 and 18% respectively.: (a) Re-order level = 300. The e items ordered for high-value is. re-order qty = 400. Lead time can be shortened by deliberate and determined effort by the management. It physically : segregates the entire stock of any item into two bins." Do you agree? Justify your answer with examples. Safety stock equivalent to one month's consumption is desirable to take care of contingencies. The second bin contains stocks equivalent to the re-order level. is if items. The monthly consumption of an item costing Rs. Fixed-order Astern. (b) Item to be issued until stock approaches/drops below level of 300. W hat is fixed-order interval system (or review system)? W hat parameters are necessary to operate this system? How are these parameters calculated? Q5. The first bin contains enough stock (order quantity-lead time consumption) to satisfy demand between the receipt of materials and the placing of the next order. W hat is fixed-order quantity system (or re-order level system )? W hat are its parameters? How are they determined? n is replenished vel. 3 is estimated at an average of 100 nos. 12. The above said item can be procured within aperiod of two months.) Q6.naking entries g and delivery reorder point.
determine the quantity to be kept in the first and second bin (quantity to be kept free and in the plastic bag) and the quantity to be ordered for an item for which the following details are available: Item Average monthly consumption Price per unit A resistor part number 051183 200 Rs. explain the working of the system.Materials Management Price per units (Rs. . until the same is exhausted and the store clerk is forced to issue from the quantity kept in the plastic bag. An electronic firm utilizes the 'Two-bin system" to replenish the stock of its various items. fiii) The item.3/- n . According to the system: ^ (i) The quantity equal to the second-bin quantity is put into a plastic bag which in turn is sealed and placed in the rack in which the left over quantity in loose form is stocked. Re-order qty. (Ans: Re-order level = 300. An indent is then raised to authorise the purchase department to procure a fresh supply of the item. in the meanwhile.) Lead time = 3 = 16% = Rs. is issued from the plastic bag until receipt of the fresh supply. IB t = One month consumption Using the parameters computed above.) Inventory carrying cost as a percentage of average inventory investment Cost of order writing and processing of a delivery (Rs. Considering the above features of replenishment system. 32 = One month • Safety stock . (ii) The issues are made out of loose quantity. = 400) Q7. • • .
: (i) R = 4 months (ii) R = 4 months and M = 2100 nos. Qty. Rs. ' (ii) Fix up necessary parameters to operate: fixed-order interval (review period) system.48/tock of its various »• astic bag which in quantity in loose exhausted and the )lasticbag. in the first bin = Balance (i.: Re-order qty. Qty.. increase in consumption or rejection in the incoming consignment (i) Calculate the economic review period of this item. 48 and 2 % per month respectively. fiii) What will be the re-brdefquantity If the stock on hand at the time of review is 800 units? (Ans. = 620 nos. Procurement cost per order and the inventory carrying cost are calculated to be Rs. per month.) > until receipt of the mine the quantity to id in the plastic bag) -details are available: . Lead time Safety stock to be maintained to meet contingencies Procurement cost per order One month One month system.is estimated at an average of 300 nos. (iii) 1300 nos. in the second bin = 400. tment to procure a Inventory carrying cost : 20% [Ans.Unit 12 Replenishment Systems consumption . The said item can normally be procured within a period of two months.e. 620-400 = 200)] . I/. The monthly consumption of an item costing Re. Minimum stock equivalent to half of the lead time consumption is desirable to take care of possible contingencies such as delay in deliveries.
im ber 051183 .
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^ d is c u s s th e d if fe r e n c e b e tw e e n J I T p u r c h a s in g a n traditional purchasing.I Introduction to JIT•\2 Techniques of JIT v v v v v v vJvI v )P u r c h a s i n g T w w w w w w wSw m )m a r y uw x x x x x x x x xe)y w o r d s K y y y y y y y y y )f-a sse s sm e n t Q u e stio n s Sel f I . r .JUST-IN-TIME (JIT) •# Objectives After completing this unit. r r discuss the push pull system . use the techniques of JIT. you will be able to: *" state the m eaning of JIT. "" discuss the Kanban system . organise JIT purchasing. d Structure B.
rather. working and managing to eliminate waste. parts and working time absolutely essential to the production. It is a philosophy or an approach to productivity which is applicable to all facets of manufacturing process. JIT drastically cuts down the inventory at different stages. manufacturing. Further. distribution and all other support activities of a manufacturing enterprise. is a complete business philosophy and process of thinking. fabricating/purchasing parts just in time to go into sub-assemblies and procuring raw materials just in time to be transformed into fabricated parts. defines waste as "anything other than the absolute minimum resource of material.Materials Management 13. is not just an inventory control or inventory reduction technique.2 TECHNIQUES OF JIT__________ • • • • • • • Set up time reduction Autonomous or modular cells JIT layout ' _____________ Techniques used to reduce non-value added activities include: The pull system (the Kanban system of production control) Continuous improvement Buffer Stock removal Total productive maintenance . an authority on JIT." Edward Hay." JIT. yet it is not just a way to reduce the inventory. it is not restricted to the manufacturing activity alone but can be successfully applied to an office system as well. materials. the originator of the JIT concept. JIT. including material. making sub-assemblies just in time to be assembled into finished goods.1 INTRODUCTION TO JIT II 1 Just-in-Time refers to the concept of producing and delivering finished goods just in time to be sold. in fact. reduces or eliminates waste from purchasing. machine and manpower required to add value to the product. when applied systematically. 13. it is a means of solving problems that block the building of an excellent manufacturing organisation. The JIT approach. defines waste as "anything other than the minimum amount of equipment. therefore. Toyota.
• Qu ali ty• • at-source Just-In-Time purchasing Employee involvement .
." echnique." solute minimum product.lt is a rf manufacturin g cally.ds just in time lished goods. ttocuring raw cuts down the y. rather.e. w orking and U n it 13 . pull system to link operation). it is a ig organisation. Visit a nearby bank and and list the JIT activities being carried on there. subasse m bl y wor k and the m an ufac ture of parts The Kanban system (The Pull SystemW hatis the ) pull system? An ideal JTT system is a one-at-a-time production flow. S f : W hen isthe pull system (K anban system ) necessary? . ^ A ctiv ity A . Since it is usually not possible to sbTve M $fiM f&ra4S&™ vov^f perfect one-at-a-time flow.1 Just-In-T im e (JIT ) Here we will mainly discuss the JIT techniques used in the materials department. reduces or support activities acturing activity # A ctivity B . wherein each operation pulls the P IM S< ^ < ~ ^ ~ x _ ^ R U 3 c« * ~ J « » ^ m J . . Visit a nearby m anufacturing facility and list the JIT activities being carried on there. Kan ban signa ls are requi red whe n: i asse m bl y wor k.^ ^ ^ ^^ te ^^ ^ n . not require any signals. m the minimum the production.. Kanban signals are used as a com promise (i.
.are carried out at different locations (for example. at different buildings) and it is impractical to move a product one at a tim e over long distances.
At periodic intervals. Kanban is a simple but effective control that helps the JIT production work. Quantities picked up by the customers are the quantities put on the shelves by the employee. there are bottlenecks or quality or capacity problems which do not allow a smooth flow.Materials Management I ii set up time on the feeding operation is higher than the receiving (or using) operation. Kanban is a Japanese word for card and the use of cards is central to many Japanese control systems. the customers pick up the quantities of the goods they need. on what to produce and when. The Kanban system does exactly this. iv. Linking makes the common machines an integral part of each cell on account of the frequent signals from the cell. Kanban signals may be one of the following: i A card on which is written the part number. the size of the container. There is no paper work generated to instruct the employee on what items and in what quantities he should put the stock on the shelves. . including the one at Toyota whose Kanban system has received much attention. an employee checks up to see what has been taken and he replaces the stock. the number of pieces to be held by the container and the number of this card in the system. At the supermarket. iiL one or more machines are common to various work cells and needs to be linked to the cells with Kanban signals. 1 1 What is the Kanban system? The working of the Kanban system can be compared to a supermarket shelf which is continuously monitored and refilled as the customers help themselves.
In a double card Kanban system. . Metal plates are useful in an oily environment and they display the same kind of information as on the cards. -' Two types of Kanban systems exist . iii. The containers themselves.ii. Computer-to-computer Kanban signals. A withdrawal Kanban specifies the kind and the quantity which the subsequent process should withdraw from the preceding process while a production Kanban specifies the kind and the quantity of the product which the preceding process must produce. ••"''! -: '"' iv.the single card Kanban system and the double card Kanban system. M e t a l p l a t e s a f f i x e d t o t h e containers. two cards are used: a withdrawal Kanban (C-Kanban) and a production Kanban (P-Kanban).
Cards are the mere mechanism for establishing a pre-determined inventory buffer between consecutive work centres. if some defectives parts are discovered by the subsequent process. (or Box) TV'ir l rules concerning the double-card Kanban system are: a • The subsequent process can withdraw the parts from the preceding process in the right quantity (required quantity). Any withdrawal without a Kanban (C-Kanban) is not permitted. an xk.ir 2) operation. ork. Kanban No. Kanban jr. lie intervals. » Work Station (From) . . • Defective parts must be removed/corrected but not sent to the subsequent process. it can be concluded that: The key to the "Kanban System" does not lie in the Kanban cards but in the philosophy imbibed in it. lention. Kanban is a coiitrol systems. Work Station (To) • • t shelf which is he supermarket. jily environment Quantity Container No. no parts can be made unless there is production Kanban (P-Kanban) authorising production. i to be linked to an integral part to produce and allow a smooth The contents of the Kanban are: • • • Partname Part No. However. In case of the double card Kanban system. The preceding process may produce the parts in the quantities withdrawn by the subsequent process. d the double card jd: a withdrawal Kanban specifies rom the preceding ty of the product • From the above discussions. the number of e system. Apre-determined buffer equals the number of Kanban cards. at the right time (required time). • i Production greater than the quantity withdrawn (in case of the single card Kanban system) is not permitted. one card for each container of parts. The buffer advises the workman at .Unit 13 Just-In-Time (JIT) . they should be returned to the preceeding process to prevent the reoccurrence of such defects. Only standard containers are to be used and they are filled with the prescribed small quantity. There is no lat quantities he are the quantities is.
the preceding workman stops work and when buffer is not full. When the buffer is i!i. . he works.the preceding work centre as to when to work and when not to work.
it is never good enough and it never stops. suppliers' quality. does not necessarily mean "Zero" inventory. suppliers' self certification etc are adopted. "Low buffer" (low inventory). cannot be seen if there is too much of a buffer (i. procurement system. If a supplier delive rs a bad batch. Immediate solution to the problems. it must be remembered that JIT is not possible for each and every item held as inventory. quality improvement. is necessary to maintain the smoothness in production (or smoothen in-flow of purchased material).e. Quality at Source JIT's success depends on the high quality of incoming materials. One has to appreciate the difference between planned and unplanned inventory. excess inventories). JIT advocates that there should be an attempt to let problems surface so that they attract the attention of the management. the water (buffer) in the production stream must be lowered to expose the hidden rocks (problems). Zero inventory is a goal which may or may not be attained. Suggestion schemes are therefore strongly encouraged and supported. however. JIT seeks plant-wide involvement in the work improvement projects. That is why a lot of attention is paid. Buffer Stock Removal 1 Buffer (inventories) in a conventional system is considered necessary for smooth production.Materials Management 1 • If Drawbacks of the System: Any significant disruption at any work center results in the stoppage of work flow and thus idling of the succeeding work centres. Continuous elimination of buffer stock is recommended to highlight production/purchase problems previously shielded by high inventory levels. so also the supply. setup time reduction. the whole produ ction line will stop. Continuous Improvements JTT is not a one-time effort. If smooth production is to take place. supported at all levels of the staff. inventories are considered an inefficiency and a mechanism to hide problems. This reduces the incidence of disruptions. Also. It embodies the concept of continuous improvement. Just as one cannot see the rocks if the water is deep. and measures like productive maintenance. no sooner they are identified. But in a JIT concept. etc. A key element of JIT is continuous improvement. transportation. This fear of line stopp age in the event of rejecti on in the purch ased/s ubcontra cted materi al and the lack of confid ence in handli ng such contin genci es has been one of .
the major hurdle s in the imple menta tion of JIT.*• aru . The .
E f f f f f f f f fPf r o v i d i n g f e e d b a c k o n t h e n a t u r e o f d e f e c t s a n d h e l p i n g t o r e d u c e / e l i m i n a t e ) re je c tio n . getting bad pieces segregated/rectified and expediting replacements) is too expensive to practise in a competitive situation. etc. the suppli J IT Q u a lity a t so u rc e in v o lv e s e ig h t b a s ic p rin c ip le s . 8 A d o p tin g T Q M a s th e p h ilo so p h y o f co n tro l a n d re p la c in g e rro r-d e te c tio n b a s e ds y s t e m b y a n e r r o r . . underlines the concept of "Quality• at source" which eliminates wastes at all stages of procurement. nooth production. . L e e e e e e e e e en) c o u r a g i n g s u p p l i e r s t o i n t r o d u c e a p r e . n a m e ly : ers of D S e l e c t i n g s u p p l i e r s b a s e d o n t h e i r c a p a b i l i t y f o r q u a l i t y a s s u r a n c e . on the contrary. JIT. s a m p le v a lid a tio n a n d p ilo t/b u lk s u p p ly s ta g e a n d u p to e s ta b lis h in g re g u la r s u p p lie s . d d d d d d d d d de )n d i n g t h e m s p e c i a l g a u g e s a n d t o o l s . Zero .e.U nit 13 Just-In-T im e (JIT ) rk flow and thus d. remembered that 5 to appreciate the State at least five action s that you can zzzzzzzzz)eliminating the incoming inspection take a a a a a a a a a v )o i d i n g t h e n e e d t o p a c k a n d r e t u r n a n y d e t e c t i v e s t o t h e s u p p ltoe r f o r a i motiv re ctific a tio n / ate rep la c em en t. se le c tio n o f m e a su rin g in s tru m e n ts a n d g au g e s a n d th e m e th o d s o f in sp e c tio n . mooth production jred to expose the ) duction/purchas e >n to the problems.s h i p m e n t q u a l i t y a u d i t .p r e v e n t i o n b a s e d s y s t e m . suppliers' self traditional approach to leave the quality to inspectors (i. ugh and it never Drted. echanismtohid e us surface so that rocks if the water nent system. and measures it.l i t y E a req u irem en ts. JIT helps to eliminate waste by jment. inspecting every consignment. c c c c c c c c c c )o r k i n g c l o s e l y w i t h t h e s u p p l i e r r i g h t f r o m t h e s t a g e o f a s s e s s i n g W th e te c h n ic a l c a p a b ility o f th e su p p lie rs . th ro u g h th e v e n d o r d e v e lo p m e n t s ta g e . supported ivement projects. g g g g g g g g g g )c o u r a g i n g s u p p l i e r s t o i m p r o v e t h e p r o d u c t i v i t y a n d q u a l i t y b y En ad o p tin g th e JIT c o n c e p t a t th e i r p l a n t s . JIT suppl b b b b b b b b b bd)u c a t i n g a n d t r a i n i n g s u p p l i e r s o n t h e v a r i o u s a s p e c t s o f q u y. in production (or o" inventory. Through its "Do it right the first time" concept. £ f A c tiv ity C .
The .it supplier delivers a age in the event of idence in handling ntationofJIT.
Buyer and seller should jointly identify problems and activities which do not add value and initiate the actions to achieve continuous improvements. For example. etc. Rejections interrupt supply chain and hence must be eliminated. stock-out costs. a technique for eliminating waste in the purchase function by developing long term. order processing costs. It aims at: i eliminating waste in the purchase process (for example. The entire JIT purchasing hinges on the suppliers' quality. . packaging and packing costs. Thus. Locating. v.) in. if the firm carries higher spare inventory to guard against machine breakdowns. The major elements of JIT purchasing are as follows: 'J. This will eliminate the need to carry inventories. etc. freight costs.3 JIT PURCHASING JTT purchasing is wrongly perceived as the activity of pushing inventory on the suppliers. rejection costs. costs of handing defects. iL Long term (since it takes a long time to solve the problems) and mutually beneficial relationships (since only mutual beneficial relationships can be long term) with fewer (as no company has the resources to solve long-term problems with many suppliers) but better suppliers are necessary to eliminate the waste of incoming inspection. iL eliminating waste at the supplier's end (transport costs. mutually beneficial relationships with fewer but better suppliers. then JIT recommends the organisation to analyse/take steps to prevent the occurrence of machine breakdowns. It is.Materials Management 13. in fact. iiL Delivery lot size should be just enough to satisfy the immediate higher level requirement. iL Problem solving: The key to the successful application of JTT lies in solving problems. eliminating purchased inventory. inventory reduction results as a by-product of JIT. i. followup costs. JIT purchasing is based on the following fundamental principles: L The supplier's facilities are an extension of the buyer's own facilities. selecting and developing suppliers of high quality assurance so that line rejection do not take place. iv.
Fewer suppliers are necessary because no company has the 1 resources to mutually develop mutually beneficial relationships with thousand of suppliers. Emphasis should be more on performance rather on design specifications.) Early supplier involvement: The supplier should be involved in the decision stage of the product. nerlevelrequirement. The aim should be to * progressively move from Blanket orders. ies which do not add nts. on his part. as early as possible. . thereby permitting suppliers loose specifications without compromising ! '» on quality. The buyer. ies. System contracting is an important step towards successful JIT purchasing. the supplier should be prepared to reconsider cost. .integral part of the purchasing system and the supplier gets the status of member of & the value analysis syndicate. vil Self certification of quality: True JIT purchasing requires an effective supplier self-I certification programme which guarantees that quality specifications are met before I the components leave the suppliers' works. however. follow-. Fewer suppliers: The number of suppliers of any component or material should be restricted to one or two. ies in solving problems. must share the cost information with the buyer. Both are.lt developing long aims at: iing costs. since it takes a long time to solve the problems. morally bound to protect the confidentiality of the information provided to him. In JIT purchasing. The buyer should provide the supplier information on the market demand and trend of growth or the decline of business. to JIT Contracts and to the extreme-handshake. etc. The supplier should also commit to quality and cost improvements over the foreseeable future. on the other hand must protect the supplier from competition and guarantee worthwhile return on the suppliers' investments of time and capital. to Requirements contracts.osts. Close co-ordination must take place between the buyer's design department and the prospective supplier. Long term relationships are necessary. while finalising specifications. Both. This drastically cuts down the lead time. buyer and seller must open their books. and share information on product prices and the company's development plans. vi.Unit 13 Just-In-Time (JIT) nthesuppliers.uard against machine se/take steps to prevent aate the need to carry ctofJIT. costs of handing . to System contracting. since they f get more flexibility in taking decisions. assurance so that line n the suppliers'quality. If the buyer has price constraints. iv Long term contracts: One of the most important requirements of the JIT implementation is to enter into long contracts covering 18 to 36 months renegotiable every 6-12 months. Self certification by the supplier eliminates receiving inspection at the buyer's plant and last minute running to replace/rework/ return defectives. mutually beneficial ng term) with fewer /ith many suppliers) ning inspection. value analysis forms an "•''. The supplier. v. Pricing: The success of JIT hinges on mutual trust and confidence in each other. Loose specifications enable suppliers to be more cost effective.
makes it easy to count the quantity. inspection and so on. they usually deliver directly to the point of use on the production line. Ease in verification of the quantity of part/component. Targets must be set for quality measured in parts-per-million and the supplier himself having the ultimate responsibility of measuring quality. iiiiiiiiii)JIT is not suitable for low cost'C class bought out items. at times. funds. similar to an egg carton.(i. ix. Use of standard containers to protect product and simplify counting of goods: Both buyer's as well as supplier's manufacturing operations should make use of standardised containers or packages. in addition to protecting the product. which will enable the suppliers to reach a stage where they can self certify their products. An ideal container will have a standard number of spaces. thereby improving the quality of products or components with time. Batch production units may require change from batch to flow methods.5 Suitability of JIT purchasing: hhhhhhhhhh)JIT is more suitable for flow production. counting. the buyer and the seller must appreciate and subscribe to the concept of mutual dependence. with consequent changes in systems to support the new methods. the supplier's and the buyer's plant should be under process control. transportation. Delivery to the point of use: Since the suppliers are totally responsible for the delivered quality of the product.Materials Management viii. Automatic signal to the supplier to replenish stock Better co-ordination between departments/firms Mutual dependence: Both. workers' training and other support including quality management of their processes. The buyer's company needs them as much as they need the buyer's company. may require to provide anything from techniques and quality inputs to machines. 3) 4) x. The benefits to be realised from the use of standardised containers are: • • • • XL Elimination/minimisation of transit damages. . This eliminates the added handling. which. The buyer's company. direct supply line-DSL basis). packaging and packing.e. buildings. Process control to improve and maintain quality: Manufacturing operations at both. 13. The buyer must look upon suppliers as partners in the buyer's company performance.
fabricate/purchase parts Justin time to go into sub-assemblies and procure raw materials just in time to be transformed into fabricated parts. 13. S u b sta n tia l tra in in g to b r in g in a c h a n g e o f c u ltu (a d o p tio n o f JIT c u ltu re ) is a m u st fo r th e su c c es s o f JIT p u rc h a sin g . reduces waste from purchasing. wherein acii operation pulls the previous operation and makes it produce at the rate needed. Many a business executive carries the wrong impression that JIT is a means of reducing inventory. y require change support the new 1. even the service organisations can benefit from the use of the technique. J& A ctivity D . JIT is a scientific approach to productivity and is applicable to all facets of manufacturing processes including materials. make sub-assemblies just in time to be assembled into finished goods. The JIT approach. Inventories are indeed reduced significantly as a result of applying JIT yet this is not its primary focus. .4SU M M A R Y e and subscribe diers as partners hem as much as squire to provide funds. just in time to be sold. sin c e JIT re q u ire s th e in v o lv e m e n t o f p e o p le fro m a ll t d is c ip lin e s in th e o rg a n is a tio n . manufacturing. workers' rocesses.t of use on the Ided handling. Inventory reduction is a by-product of JIT. •om the use of k k k k k k k k k I T c a n b e p r a c ti s e d o n ly i n t h o s e o r g a n i s a ti o n s t h a t h a v e r e m o v e d th e b a r r i e r s Jk) b e tw e e n its d iffe re n t fu n c tio n s.5 KEYWORDS__________________________________________________ JIT: Just-in-Time is to produce and deliver finished goods. distribution and all other support activities of a manufacturing enterprise. In fact. when applied systematically. ting of goods: d make use of mdard number ig the product. operations at ntrol. Since it aims at reduction/elimination of non-value added activities (called wasteful activities). which their products. Fanban/Pull system: An ideal JTT system is a one-at-a-time production flow.[isibleforthe . thereby nustbesetfor ig the ultimate Unit 13 Just-In-Time (JIT) j j j j j j j j jJj I T i s a l s o n o t s u i t a b l e f o r i t e m s w h i c h e x p e r i e n c e p e a k s a n d v a l l e y s i n d e m a n d ) and m a n u f a c t u r e r s o f s u c h i t e m s h a v e t h e m o n o p o l i s t ic s i t u a t i o n o r i n s i s t o n l o n g d e l i v e le a d tim e . . State five benefits of JIT purchasing. This is not true.
justify your stand with suitable examples.6 SELF-ASSESSMENT QUESTIONS Q1. . "Just-In-Time is much more than an inventory control or inventory reduction technique. What do you understand by Just-In-Time (JIT)? What benefits can occur to the company from the application of the JIT technique? Q2.Materials Management Unii 13. What are the techniques of JIT? Name each technique and discuss it briefly. Q3." Do you agree? If yes.1 .
NOTE S xurtothe •y reduction tiples. briefly . .
Materials Management .
Structure l l l l l l l l l Il n t r o d u c t i o n t o C o m p u t e r i s a t i o n ) m m m m m m m m m tm p s i n C o m p u t e r i s a t i o n S e) m n n n n n n n n nC o m p u t e r A p p l i c a t i o n s i n M a t e r i a l s n) M anagem ent o o o o o o o o oM ) n a g e m e n t R e p o r t s o n oa M a te ria ls | 1 4 .COMPUTERISATION OF MATERIALS MANAGEMENT i O bjectives After completing this unit.a s s e s s m e n t Q u e s tio n s s ~ . '•s make use of computerisation for various materials activities. ®° computerise the materials process. "" address the queries related to the materials department using computers.5 S u m m ary j 1 4 . you will be able to: ®° discuss the concept of computerisation.7 S e lf. ^ discuss the process of computerisation.6 K e y w o r d s 1 4 . ^ generate reports for materials management.
purchase orders. purchase enquiries. (ii) standardising pertinent data and terminology.C. as quick availability of data according to the requirements. make-or-buy decisions. (vii) eliminating duplicate data files (each department can use the same computerised files). prices and other variables. pending GRRs with Q. . helps in a great measure to quickly process the information in accordance with the needs of the various levels of the management. The importance of the computer control system lies in the ability to acquire and assimilate a large amount of information with speed. (iv) improving communication and report within the materials department and with other departments of the plant (for example. order amendments. value analysis. non-productive clerical functions common to manual systems. wastage reduction. ete. (iii) providing instant availability of information from records. in view of the enormous amount of administrative work involving thousands of requisitions. etc. accuracy and flexibility.Materials Management 14. (vi) saving in equipment and floor because of the virtual elimination of filing. Benefits of Computer Systems Benefits of computer system include: (i) freeing lower and middle management from filling. goods receipt reports and other documents. A bulk of this work being of a routine nature. on the contrary. cost-price analysis. they can safely be performed by the machine.) (v) ensuring adaptability and fast response to a change in priorities. The computer. expediting communications. (ix) enabling better control over operation because of timely availability of information for sound decision-making as well as the flexibility of handling vast quantities of details. Computers are finding increasing acceptance in Materials Management. (viii) reducing inventory investment due to speed and more accurate response time. accounts payable.1 INTRODUCTION TO COMPUTERISTION Information is the essential ingredient of management control and a continuous flow of information is of the utmost importance to the company. cannot be made available. The traditional methods do not serve the purpose. thus leaving enough time to the Materials Manager / buyers to concentrate on more a productive activities like vendor development.
(ix) Develop system specifications. (vii) Prepare a project report on justification and obtain management approval for the proposal. evaluate alternatives and select the best supplier. (v) Develop a conceptual design.) and conduct a cost benefit analysis of each alternative. there is no single universally applicable computerised system for a materials department. leasing. (HI) Install the system.Unit 14 Computerisation of Materials Management 14. Each company needs to have a computer system tailor-made to suit their needs. (i) Audit output reports. The steps involved in the installation of a computerized system may be summarised as under (i) Analyse an existing manual system and identify weak spots (if any).2 STEPS IN COMPUTERISATION Since procurement procedures and their requirements vary widely. (vi) List alternatives (buying vs. buying vs. prepare comparative statement. Obtain quotations. (iv) Collect information for a preliminary system design. 315 . hiring capacity etc. (in) Constitute a project team (also called steering committee). (HV) Rehabilitate the employees affected by the introduction of the computerised system. (vii) Design the necessary system. (ri) Define the objective(s) of the system. (id) Train employees.
JS^ Activity A;
List ten areas where computers are useful in your daily life.
JS$ Activity B ;
State five reasons why computerisation must be done for Materials Management.
Database for Materials Management System
A database is a collection of information processed by the computer. The database to be created for the materials management system include:
F o r p u rc h a sin g
Supplier database, offer database, standard text passage database, statistics database, receiving department database and invoice database. For inventory Item master database, lead time database, unit of measurement database, group code database, receiving department database and invoice database. 14.3 COMPUTER APPLICATIONS IN MATERIALS MANAGEMENT Applications of computers in Materials Management can be classified into three groups:
(i) Operating systems
Operating systems process data for the routine operations of the department such as maintaining status of purchasing actions, typing request for quotations and purchase
Computerisation of Materials Management
orders, filing and sorting vendor lists, and maintaining commodity price and vendor history files.
R eporting system s
Reporting systems process data, often drawing on data files set up for operating systems and report these data to the management. Some typical examples include purchased part history, vendor delivery record, purchased material price variance, inventory transactions, analysis of purchase orders, vendorwise purchases, items below re-order levels and above maximum level.
(iii) Decision support systems
Decision support systems incorporate data into an analytical framework, utilising scientific techniques such as regression analysis, simulation, etc. and present data in the form of select alternative actions and thereby assisting materials people to select from among the alternatives. Some typical examples include quotation analysis, price discount analysis, forecasting, forward buying, ABC/XYZ/FSN analysis, etc.
Activities M aterials M anagem ent Covered by Com puterisation of
The various activities of Materials Management that are frequently covered by computerisation are detailed below:
1 , P u r c h a sin g
Computer system can be applied to the purchase activities for: (i) preparing forecasts of materials, based on their past usage. (ii) providing historical information on suppliers, prices, past purchase orders, etc. (I) selecting the most efficient source of supply, based on the analysis of suppliers' quotations for variables such as quantity discount, payment terms, freight, excise, sales tax, geographical location of the supplier, multiple plants to be served, etc. (iv) typing of purchase orders and delivery schedules. (v) providing control on receipt of quantities higher than the order quantity and/or the delivery schedule. (vi) comparing actual receipts against the delivery schedule and producing memos and reminders to the vendors for the pending delivery of materials.
(vii) keeping up-to-date record of receipts of materials and providing information on outstanding orders. (viii) matching suppliers' invoices with purchase orders and goods receipt reports, auditing price, discount, freight, taxes, etc. and performing the monotonous activity of bill passing. (ix) verifying payment terms, printing out cheques and holding onto them until payment on the due date.
Computers can be programmed to: (i) verify that quantities received from suppliers are strictly according to the delivery schedule/purchase order. (ii) prepare goods receipt reports (GRR) for the materials received from suppliers. (iii) update inspection results and compute pending quantities against a purchase order. (iv) analyse the number of GRRs pending with the Quality Control department, awaiting inspection. (v) find the status of the GRRs awaiting updation in the stock ledger. (vi) compute stock on hand, compare against the re-order level and generate purchase indents. (vii) prepare consumption statements and month-end stock ledger (inventory reports), (viii) effect stock adjustments based on physical stocktaking.
Inventory control and material planning:
Based on the regular updating of the stock ledger, computers can be programmed to do the following: (i) Replace manual inventory valuation by the machine. (ii) Carry out inventory planning and materials budgeting activities.
Computerisation of Materials Management
(iii) Fix operating levels of inventory such as minimum, maximum and re-order levels and initiate purchase indents based on these levels. (iv) Generate exception reports, consumption reports and stock reports. r
(v) Carry out ABC, FSN and XYZ analysis on a periodical basis, for example, once or twice a year. (vi) Anaylse the consumption data and project future requirements based pastthe on data. (vii) Study past data on prices to forecast future trends. & Activity C; List the activities that you would like to computerise for a large scale manufacturing company.
& A ctivity D ;
Visit a bank nearby and list the output reports that it generates from computers.
14.4 MANAGEMENT REPORTS ON MATERIALS _____________________ To keep track of the various operations in the materials department, different types of reports are required. The computer can produce all these reports at a very high speed and accuracy. Typical reports usually required for management control are: • • Vendor delivery record Purchase material price variance -;
• • • • • • •
Analysis of purchase order 'Vendorwise purchases Items below re-order levels and above maximum levels Materials consumption for the period Expenditure due to materials used by various departments Inventory transactions and stock status Accounts payable (agewise)
Specific Reports pppppppppp)Pending purchases indent report to highlight indents which are yet to be converted into purchase orders. qqqqqqqqqq)Pending purchase order report to highlight purchase orders against which supplies are yet to be received or partly received. rrrrrrrrrr)Purchase orders released during the current month report. The statement is generated every month to know the financial commitment made during the current month. ssssssssss)Pending GRRs report to indicate number of GRRs against which the material is yet to be taken into stock. These GRRs may be pending for QA clearance and/or stores updation. tttttttttt)Price variance report to highlight the variance in the price of an item ordered on different suppliers. Another type of price variance report is to find the price variance of the items procured in different periods. uuuuuuuuuu)Stock transaction report provides information on the consumption of the items in the previous periods and stock-on-hand. The statement is prepared monthly. The data is useful for the purpose of inventory planning of indirect materials and review of the stock levels of regular production items. vvvvvvvvvv)Low stock item report provides information on items whose stock
is low and therefo re require s to be expedi ted, failing which they are likely to cause stocko ut/prod uction stoppa ges. Low stock statem ents require to be prepare d more freque ntly (for exampl e, weekly ). h) High stock item report provides information on items whose stock is more than their
rateo is usu; 1) List oi perioc arepn Listl List 2 List3 List 4 Thelii j) Listoi last loi listed i cancel materi k) Physic physic stock a after tii contim accura D ABCc on con; on inve
Prepare the 1 of your com]
Computerisation of Materials Management
rate of consumption, (i.e. disproportionate to their rate of consumption). The report is usually prepared annually or six monthly. i) List of inactive items provides information on items which have not moved over the period. The list is prepared in the descending order of the inventory value. The lists are prepared agewise: List 1 to record items not moved for over 5 years. List 2 to record items not moved for over 3 to 5 years. List 3 to record items not moved for over 1 to 3 years. List 4 to record items not moved for over six months to one year. The lists are prepared periodically - six monthly or yearly. The lists are scrutinised by the team and disposal action is decided to reduce inventory. List of surplus items provides information on items whose stock-on-hand is likely to last longer than the normal period of consumption (usually six months). The items are listed in the descending order of their value. The list is scrutinised and the decision to cancel/modify/ suspend the supplies of the items on the list is taken. This helps the materials manager/purchase manager to keep the inventory investment under control. k) Physical inventory slips (PIS) report is a document used to correct discrepancy in the physical stock and in the book balance of an item. A positive value of PIS means stock addition and negative value means stock reduction. The list is prepared annually, after the stock verification (in case of annual stock taking) or periodically (in case of continuous stock taking). The statement provides the management an insight into the accuracy of stock records and the quality of store transactions.
ABC classification categorises the store items into three groups A, B and C, based on consumption value of the items. The classification helps to exercise selective control on inventories. The report is prepared annually.
& A ctivity E;
Prepare the list of reports which you would like to generate for the materials management of your company.
M aterials M an ag em en t
'( f ( - • K\
Queries The computerised system also offers the facility of querying on various aspects. Typical queries which are frequently raised, are as follows: • • • • • • • • • • • Location of the item Stock-on-hand Quantity required for the order Weighted average price Pending quantity with QC for inspection Alternate material Transactions of the item during the period Consumption during the month till date Yearly total consumption till date Quantity requested by the indenter Quantity pending to be procured.
14.5 SUMMARY__________________________________________________ The Materials function provides an excellent scope for computer applications, as the bulk of the work is routine in nature and can be easily performed by the machine. Applications of computers in Materials Management can be classified into three groups: operating systems, reporting systems and decision support systems. Anumber of activities concerning purchase, stores, inventory control, materials planning, etc. can easily be computerised. Also, computers can produce a large number of reports with high speed and efficiency. 14.6 KEYWORDS_________________________________________________ Database: A database is a collection of information processed by the computer. Decision support systems: Decision support systems incorporate data into an analytical frame work, utilising scientific techniques such as regression analysis, simulation, etc. and present data in the form of select alternative actions, thereby assisting materials people to select from alternatives.
15. the success or failure of an organisation largely depends upon the effectiveness (or performance) of its materials function. The performance parameters must have the following characteristics: (i) Measurability The indicator must be measurable. Even if 1% of this expenditure is reduced. cases as high as 70-80%. the gross profit of the company could increase by 8 to 10%. can be taken. if necessary. in some. so that corrective action.Materials Management . This is as important as it is obvious. method of obtaining information and method of recording information should be such that. essential to measure this performance and analyse it at periodic intervals. in most of the manufacturing units. The constraint on measurability includes availability of data. It is. it should be possible to confirm the value of the indicator through an independent check. (iii) Timely The indicator should correspond to a suitable time span. It should highlight the areas requiring remedial action. people's willingness to provide information. (iv) Action oriented It should be possible to use the indicator for analysis. Hence. 326 . therefore. The data elements used in definition should retain their meaning over a wide span of time. constitutes a large and significant portion of a company's total expenditure. this could be anywhere between 50 to 60% and. skills available in the machinery for collecting and analysing data. wherever necessary. Depending upon the nature of the industry. (vi) Stability Each indicator must be defined properly and precisely. (v) Verifiable Record keeping. Salient Features of the Evaluation System A good performance appraisal system should evolve performance parameters which will help to measure the contribution of the department in achieving the set objectives.1 INTRODUCTION TO EVALUATION SYSTEM ___________ Material cost. (ii) Accuracy The evaluation system should be accurate.
1 Revise targets .'• (vii) Easy to understand The indicator must be easy to understand.1 gives a flow chart of the steps in the measurement process. 15. 15. the lesser is the practical utility of the indicator. Steps in the Measurement Process Fig.U n it 1 5 E v alu atio n o f M ate rials D ep artm en t •< •'. The lower the understandability. (viii) Cost effectiveness ~ ~ The indicator should be such that it will not cost much to collect the data. List down key activities Decide measurements Assess current level (Collect data) Set targets Decide corrections Prepare action plan Analyse cause Implement Review performance erformance as desired? Fig.
of GRRs with discrepancies Total number of GRRs % defectivedeliveries (c) Effectiveness of "return of defective material" function measures the effectiveness of "timely return of defective material" and "completeness of accounting. How to measure? (a) Efficiency of materials inwarding analyses the • • • Efficiency and cost consciousness exercised in the collection of materials. Administrative cost effectiveness. Three indicators employed for the Demurrage paid during the period purpose are:i index = Value of purchases made from outstation suppliers during the period i Collection index from = Transport cost incurred in collection of materials godown per period Value of purchases made from outstation suppliers during the period E Processing time of a GRR = Average time to clear a GRR Demurrage (b) Effectiveness of control on suppliers' quantities measures the care exercised on physical receipt of quantities.Unit 15 Evaluation of Materials Department • • Efficiency in return of defective material."Two basic indicators for the purpose are given as under: 329 . Speed and efficiency in taking materials in stock. of GRRs where quantities are excess than schedule as per schedule ~ Total number of GRRs No. Quality of control on quantities. Two indices used for the purpose are: L % deliveries not No.
of rejected GRRs wherein material returned is partial or nil (ii) Defective material accounting index = Total number of GRRs • (d) Administrative cost effectiveness measures the ability of the department to keep the expenses within limits which can be measured by analysing the "clerical cost per GRR. of rush orders Total number of purchase orders x 100 330 . (v) "Cost improvement" effectiveness. of GRRs (per period) 15. Rush order percentage = No." (i) Clerical cost per GRR = Expenses (per period) of the receiving stores No. Effectiveness of administrative control mainly concerns analysis of the orders. (ii) Quality and delivery performance of the vendors.3 EVALUATION OF PURCHASE FUNCTION What to measure? The purchase department requires to be assessed for the effectiveness in the following areas: (i) Effectiveness of administrative controls.Materials Management (i) Average period of returning defective material back to supplier: No. development and retention of suppliers. Rush orders and cash purchase orders should reduce while contract orders and blanket orders should increase. (iii) Promptness in return of defective materials. Administrative effectiveness also considers the function of selection. How to measure? The performance criteria to be used are given below: 1. (iv) "Administrative cost" effectiveness.
as early as possible. Effectiveness of efforts of indigenisation can be measured by the following ratio: Import substitution Index = Value of stores purchases indigenously Total value of purchase Value of imported stores Total value of purchase 2. of rejected GRRs where material returned in partial or nil (ii) Effectiveness in= Total number of rejected GRRs accounting of rejection . of zero defect suppliers Total no. of suppliers No. quality of vendor development and maintenance of relations with the vendors to ensure that they effect delivery of right materials at the right time: (i) Vendors' Quality Index = No. of lots supplied (ii) Vendor Delivery % Deliveries on time No. Delivery and quality performance measures the effectiveness of purchase followup. of lots delivered (iii) Vendor's overall rating = % Suppliers with over 95% rating or or 3. of lots delivered on schedule Total no. of lots accepted Total no.Unit 15 Evaluation of Materials Department Every organisation must attempt to reach as high an indigenous content as possible.' Two basic indicators sufficient for the purpose of measurement are: (i) Average period of returning rejected material back to the supplier: No. "Return of defective material "function effectiveness This aspect measures effectiveness in timely return of defectives materials and also the 'completeness of accounting.
"Cost improvement" Analysis The purchase department is a profit centre.. if handled effectively.. of orders placed during the year 5. which can be measured by analysing purchase order cost.Materials Management 4. can result in improvement in purchase cost. . Buying function. Cost savings may be achieved by • • • • • • • • • • • • Substitution of materials Reduction in inventory investment Economic scrap disposal Value analysis Make-or-buy decisions Import substitution Better price negotiations Better credit terms Quantity discounts (Bulking of orders) Transport charges Development of new vendors Change of suppliers . Administrative cost effectiveness Administrative cost effectiveness measures the ability of the department to keep the expense within limits. Total purchase department expenses per period Cost per purchase order = No. Various indices to measure "cost improvement" by purchase department are: Annual savings by purchase department (i) Purchase cost saving index = Total value of purchases (ii) Value analysis index Savings due to value analysis project Total material cost . .
of items codified Total number of items (iv) Codification index 15. of items after standardisation No. Material consumed during the period Average inventory during the period Opening stock + Purchases .4 EVALUATION OF INVENTORY FUNCTION What to measure? Inventory function requires to be assessed for effectiveness in the following areas: (i) Optimisation of capital lock-up (ii) Continuity in availability of materials for production How to measure? The performance criteria to be used is an under: 1. Optimisation of capital lock up measures the effectiveness of inventory control techniques measured in terms of inventory turns. inventory turns may be studied for total inventory and separately for • • • • • Raw materials + Bought-outs + Works-made parts Finished goods Work-in-process Spares Vendors' stock Inventory turns .Unit 15 Evaluation of Materials Department (iii) Standardisation effectiveness index = No. of items before standardisation No.Closing Stock l/2 (Opening stock + Closing stock) For better control.
of times requisitioned 334 . Average inventory of company's material with the vendors Vendor's inventory turns 2.Materials Management (i) Finished goods inventory turns = Average = Average business) (ii) Raw materials + Bought-out (Cost of materials + Bought-out parts + parts+Works-made parts Works-made parts consumed during the year) = Average inventory of raw material + Bought-out parts + inventory turns Works-made parts. of times out of stock (i) Out-of-stock The analysis needs to be made for A and B class of items (ii) Production loss due to stock-outs Hours of production lost due to non availability of material Total scheduled production time No. (iii) Work-in-process inventory turns (iv) Spare parts inventory turns Value of production during the year Average work-in-process inventory investment Cost of spares consumed during the year Average spare parts inventory investment Annual sales finished goods investment number of days of sale (or OR Spare parts index (v) Spare parts inventory investment Value of capital goods Annual value of purchases of parts / components on labour charge basis. The effectiveness can be measured by calculating either "out of stock index" or "production loss due to stock-outs." No. Continuity in availability of materials for production measures the effectiveness of the inventory control techniques in avoiding or in minimizing stockouts.
5 EVALUATION OF STORES FUNCTION What to measure? Stores function requires to be assessed for effectiveness in the following areas: (i) Effectiveness of administrative control (ii) Effectiveness of cost control 1. of non-moving items Total number of items Obsolescence and pilferage Average inventory investment Average inventory investment 2.Unit 15 Evaluation of Materials Department 15. pilferage etc. — The different ratios used for the purpose are as under: Obsolescence (value) (i) index Value of non-moving items in inventory Average inventory investment OR Obsolescence (items) index ~~ (ii) Storage loss index = No. lock up of money in obsolescent and dormant stock value of discrepancies between the physical stock and book balance. _________Expenses of store ___________ Value of discrepancies Total value of materials received and issued Area used for storage Total (1) Stock verification index = storage area available (i) Stores cost index = (ii) Space utilisation index = . Effectiveness of administrative control concerns analysis of • • • loss due to obsolescence. deterioration. "Effectiveness of cost control" criterion Effectiveness of cost control measures the ability of the department to keep the expenses per item within limits which can be measured by analysing the "stores cost" index.
namely. setting targets.8 SELF-ASSESSMENT QUESTIONS________________________________ Q1. collection and analysis of data finding current level. 15. Evaluation involves deciding measures. so that corrective action. wherever necessary. State the parameters that should be considered for the evaluation of performance in the materials department of a medium scale manufacturing company. purchasing. . determine training needs.6 SUM M ARY _________________________________________________ Evaluation of Materials Management forms an integral part of the material function.7 KEYWORDS________________________________________________ Evaluation Evaluation is the process designed to measure the performance and : analyseit at periodic intervals. 15. W hat performance parameters would you recomm end to ensure the efficientfunctioning of materials department? Suggest your recommendations with reasons. inventory management and stores. finding gaps.Materials Management J& liA ctiv ity E . What do you understand by performance appraisal? Why is it needed? What shouldbe the salient features of a good performance appraisal system? Q2. receiving and inspection. 15.-336 . Evaluation may be carried out separately for five main sub-functions of M aterials Management. It helps to identify weak spots. deciding on counter the measures and performance appraisal and corrections. perform inter-firm comparison and induce individuals to improve their performance. can be taken. measure contribution of quantitativetechniques.
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