MATERIAL MANAGEMENT

DR. Vinoth Kumar V

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 Project Buying-PROJECT IMPORTS
Heavy Customs duty on imported machinery for projects make the initial project cost
very high and project may become unviable. Hence, concept of ‘project Import’ has been
introduced to bring machinery etc. required for initial setup or substantial exemption at
confessional customs duty.

The goods are classified under Customs act, though the machinery and its parts may
actually fall under different tariff heading. This simple method is adopted, as otherwise,
classifying each machinery and its parts in different heads and valuing them would have
been cumbersome and would have delayed clearances, which would cause demurrages.

DUTY PAYABLE:-
Duty on project imports is basic 25% + CVD(Countervailing) of 16% + of SAD 4%.
Basic customs duty for fertilizer projects, coal mining projects and power generation
projects is 5% - ‘project import’ is relevant only in case of where basic duty is 5%.
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 Project Buying
ITEMS ELIGIBLE FOR PROJECT IMPORTS:-
The items eligible are specified in Customs Tariff Act.
All items of machinery including prime movers, instruments, apparatus and appliances, control gear and
transmission equipment, auxiliary equipment (including those for research and development, testing and
quality control); as well as components or raw materials for manufacture of these items and their
components; required for initial setting up of a unit or substantial expansion.

PROJECTS ELIGIBLE :–
(1) Industrial Plant
(2) Irrigation Project
(3) Power Project
(4) Mining Project
(5) Project for oil or mineral exploration
(6) Other projects as may be specified by Central Government.

Under this head, Central Government has specified various projects like Mumbai Water supply, Mathura-
Delhi- Ambala-Jullunder Pipeline, Nhava Sheva port Gas pipe line project, Konkan Railway project etc.
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 Project Buying
REGISTRATION OF CONTRACT :-
Contract for import has to be registered with Customs.
Application for registration of Contract must be made before importation and contract
must be registered before order for clearance of goods is made from Customs. The
contract can be amended if required.
Documents to be submitted while registering contract are specified in Customs Manual.

FINALIZATION OF CONTRACT :–
After contract is completed, importer has to submit a statement giving details of goods
imported with proof of value and quantity within three months of clearance of goods.
If necessary, Plant Site Verification may be carried out in case of large project contract
exceeding Rs. 1 crore.

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 Vendor Rating and Source Location
• Vendor rating is a process where the suppliers are provided with a status or a title based on
several factors.

• Factors could be credibility, delivery time, price, quality of the goods supplied, and a set of
such mixed variables.

• The vendor ratings are based on the vendor’s performance. They can have several levels:
good, average to best, or anything that the firm decides.

• Composite Vendor Rating

• Vendor rating is a composite plan which considers all essential factors so as to ensure the
buyer the required product quality standards at economic cost and in scheduled time.

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 Vendor Rating and Source Location
• The three essential factors namely quality, delivery and price form the basis of rating the
supplier.
• The weightages given will however vary according to the situation as judged by the
purchasing manager.

• The following definition indicate the scope of these factors in the overall rating:
• Quality- it is the measure of the material not in conformance with the given
specifications. It considers the number of defects and intensity of defects.
• Delivery performance: It means the promptness of the vendor in keeping schedules of
delivery, removing of rejected materials and the nature of response to other mutual
activities.
• Price and Service:

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 Vendor Rating and Source Location
Large organization are bound to have multiple vendors for their daily requirements. To get
the best vendors we need to track their performances and rate them individually on the
following parameters:
Quality performance:

(Number of lots accepted/number of lots supplied)*100=Weightage

Delivery performance:

Time: (Number of deliveries made in time/Total number of Scheduled delivery)*Weightage

Quality: (Quality supplied/scheduled delivery)*weightage

Price performance:

(Minimum price offered/Vendor’s price)*weightage

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Vendor Rating

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 Vendor Rating and Source Location
• Categorical plan: managers from various verticals make a list of factors that are crucial for a
vendor to own based on their personal experiences, and vendors are compared based on the
same.
• Weighted point plan: factors are categorized, and weight is assigned to each factor based on
vendor performance.
• Cost ratio plan: Supplier rating is done based on different costs incurred for procuring the
materials from different suppliers. The cost ratios are ascertained for the various rating variables
such as quality, price, timely delivery. The cost ratio is calculated in percentage based on the total
individual cost and the total value of the purchase.
• Eavastons’s vendor selection: previous performances of the vendor are considered for
choosing them.
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 Vendor Rating and Source Location
• Forced decision matrix: the attributes of rating like quality, service, price, reliability of the vendor, lead
time of supply are identified first. Then these factors are compared between themselves. If something is
more important, it will be assigned with one’s weight, and the other will be zero for evaluation.

• Service cost ratio: subjectively measuring other intangible aspects of a supplier’s services. Aspects to
consider could be Labour stability, financial stability, flexibility in production for rush orders, research, and
development (R&D).

• Bell quality rating system: This is developed by the bell helicopter company, Lot Quality Index(LQI). It
assesses lots received against lots rejected.

• IBM quality rating system: It uses quality costs as the basis for rating vendors. The formula is VGR=
Desired cost of inspection/Actual cost of inspection x 100 bschool.cms.ac.in
 Vendor Involvement in Product Development
In order to overcome the challenges of the new product development, organizations involve their
vendors.
The vendors are involved early in the stages of NPD to avoid complexities in market conditions,
and technological changing scenarios(Technological know-hows).
Positive effects in terms of reduction in cost of development time and increase in the product
value and quality.
Negative effects could also be observed in terms of communication barriers, knowledge and skill
barriers and commitment issues.
The main advantages of Supplier Involvement in PDP are being able to reach the company’s long
term objectives through the improved supplier technology access and significant contributions to
product differentiation
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 Negotiations in Purchasing
Negotiation is communication between two or more parties with the
desired outcome of reaching a mutually satisfactory agreement.

There are a number of reasons for negotiations:

Costs - To reduce the cost of acquisition by achieving a lower price.
Value – To achieve added value such as reduced lead or cycle times.
Performance – To improve performance through KPIs’ and SLA’s
Conflict – To resolve conflict through reaching understanding.
Problem – To solve a problem by open discussion.
Quality – To achieve optimum quality through reducing defects.
Agreement – To reach mutual agreement in a collaborative style where all parties
are satisfied.

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Negotiations in Purchasing

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 7 Stages of Negotiation
Preparation - Arguably the most important step is preparation. Without thorough preparation
including research, knowing the objectives, understanding the concessions and having a
BATNA(Alternative), the negotiation is unlikely to reach the optimum outcome. See Negotiation
Preparation and checklist.
Opening - This is where both parties explain what they want as a result from the negotiation.
Testing - This stage is where parties try and understand what is really important to each other
and where concessions could be made. Effective communication is very important at this stage,
ensuring that good listening skills are put into play to gather as much information as possible as
well as reading body language from the other parties.
Proposing - This is where each party puts forward their proposals of what they would like to
achieve having heard the opening stage and been involved in the testing.
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 7 Stages of Negotiation
Bargaining – This takes place where each party offers to give up something in return
for something back i.e. tradeables. If one party has to give something up but receives
nothing back in trade, this in known as a concession.
Agreement - Once bargaining has been completed it is expected that an agreement can
be made. Agreement has to have acceptance from both parties to be legally binding.
Closure - The final stage is closure. This stage includes the documentation of what has
been agreed, whether that is a contract or minutes from a meeting. Closure is an
important stage – without the documentation the agreement is open to interpretation.

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Tips for Negotiation

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 Make or Buy decisions(UNIT-2)
The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier).

The buy side of the decision also is referred to as outsourcing.

Make-or-buy decisions usually arise when a firm that has developed a product or part—or
significantly modified a product or part—is having trouble with current suppliers, or has
diminishing capacity or changing demand.
Make-or-buy analysis is conducted at the strategic and operational level.
Strategic level include analysis of the future, as well as the current environment-government
regulation, competing firms, and market trends.
 Firm should make areas of core competencies in which they have competitive advantage.
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 Make or Buy decisions
The increased existence of firms that utilize the concept of lean manufacturing has
prompted an increase in outsourcing. Manufacturers are tending to purchase
subassemblies rather than piece parts, and are outsourcing activities ranging from logistics
to administrative services. Items that fit under one of these three categories are considered
strategic in nature and should be produced internally if at all possible:

(1) the item is critical to the success of the product, including customer perception of
important product attributes;

(2) the item requires specialized design and manufacturing skills or equipment, and the
number of capable and reliable suppliers is extremely limited; and

(3) the item fits well within the firm's core competencies, or within those the firm must
develop to fulfill future plans.
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 Make or Buy decisions
Make-or-buy decisions also occur at the operational level. Considerations that favor making a part
in-house:
 Cost considerations (less expensive to make the part)
 Desire to integrate plant operations
 Productive use of excess plant capacity to help absorb fixed overhead (using existing idle
capacity)
 Need to exert direct control over production and/or quality
 Better quality control
 Design secrecy is required to protect proprietary technology
 Unreliable suppliers
 No competent suppliers
 Desire to maintain a stable workforce (in periods of declining sales)
 Quantity too small to interest a supplier
 Control of lead time, transportation, and warehousing costs
 Greater assurance of continual supply
 Provision of a second source
 Political, social or environmental reasons (union pressure)
 Emotion (e.g., pride)
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 Make or Buy decisions
Factors that may influence firms to buy a part externally include:

 Lack of expertise
 Suppliers' research and specialized know-how exceeds that of the buyer
 cost considerations (less expensive to buy the item)
 Small-volume requirements
 Limited production facilities or insufficient capacity
 Desire to maintain a multiple-source policy
 Indirect managerial control considerations
 Procurement and inventory considerations
 Brand preference
 Item not essential to the firm's strategy

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 Make or Buy decisions
The two most important factors to consider in a make-or-buy decision are cost and the availability
of production capacity. Elements of the "make" analysis include:

 Incremental inventory-carrying costs

 Direct labor costs
 Incremental factory overhead costs
 Delivered purchased material costs
 Incremental managerial costs
 Any follow-on costs stemming from quality and related problems
 Incremental purchasing costs
 Incremental capital costs

Cost considerations for the "buy" analysis include:

 Purchase price of the part
 Transportation costs
 Receiving and inspection costs
 Incremental purchasing costs
 Any follow-on costs related to quality or service
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 Outsourcing Management
Outsourcing is the process of finding an external third-party supplier to take on the management
and provision of a service.

It is generally used for non-core activities and used when a business may not have the skills or the
expertise in-house for a product or service, which is often linked with a lack of critical scale, or an
in-house investment is needed which can’t be prioritised or may need to get something to market
quickly.
Outsourcing allows for scaling up or scaling down according to need.
Procurement outsourcing has undergone a considerable rise over the past 10 years, with supplier
selection, contract negotiation or specification management becoming more widespread.
Outsourcing these activities provide customers with a range of benefits.
Outsourcing strategy must be based on the sourcing opportunity map to determine what should
be outsourced. This map can be prepared on the degree of commonality with industry and the
extent of proprietary nature of the material/function. Only if the item has no or low degree of
proprietary nature and high degree of commonality (standardization) that it becomes a good
candidate for being outsourced.
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 Outsourcing Management
Gottfredson et al. (2005) have developed a capability assessment map to know how strong are the capabilities of the
manufacturer to produce an item within and the cost at which it is produced as compared to the industry norms. Based on
these twin aspects, the following outsourcing scenarios are obtained:

1. If cost of production is above industry median and capability is not good enough, outsource to increase capability at a
lower cost.
2. If capability is sufficient but cost per item is at industry median or higher, then outsource it primarily for reducing costs.
3. If costs are below industry median and capability is better than it needs to be, a new core competency in producing this
item can be explored along with the present core business.
4. If the company’s capability to perform the function is low, then outsource it even if it is more expensive to do so.

Ex:Fasteners, tires, and carburetors are the items in an automobile manufacturing which fit into this “sourcing opportunity map” and
hence must be bought rather than manufactured within.
Microsoft decided that the customer relationship management (CRM) and software design are its core processes while design and
manufacturing is not core to its business.
Bharti Airtel decided that CRM was its core business but network management was not.-However, Idea and Vodafone have continued to
handle this in-house

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Outsourcing Management

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Source: gep.com
 Outsourcing Management
Benefits:
Cost Reduction

Operational Efficiencies

Flexibility

Focus

Expertise

Savings and Compliance Tracking

Stakeholder Satisfaction

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 Application of Cloud Computing
The cloud, in its simplest form, provides the ability and access to store data and programs
via the internet, rather than downloading it to your computer’s hard drive.

Essentially,this means that if you have an internet connection, you can access the
information on the cloud anytime and from anywhere.

While implementing a cloud procurement system across business operations is definitely

more complex than using the cloud as a single user, the organization of cloud services is
becoming easier to understand and navigate.

Most companies are painfully aware that legacy systems and manual tools are not the
best options to handle the complex procurement cycle.

 Business with cloud services can efficiently handle the process of requisitioning,
sourcing, procuring and handling payments for services.

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Application of Cloud Computing

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Application of Cloud Computing

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Application of Cloud Computing

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 Application of Cloud Computing
The procurement process requires flexibility, especially with globally-connected economies
tremendously influencing the supply and demand chain. As your process expands, so will the
related data, which is why procurement management will benefit from cloud computing. The data
can be used to expand your products and services to other countries. It requires many of your
procurement management components such as database software, tracking and logistics
applications, inventory control, and more to be shifted to cloud-based technology.

For businesses that want to keep up with the always-changing internal purchasing demands,
cloud technology makes it easy to analyze procurement data with the simple click of a mouse.
Ultimately, reducing supply chain disruptions and enhancing supplier and vendor relationships. It
also makes it simple to create, implement, and analyze policy changes on the go.

The technology helps you plan and implement price strategies, marketing campaigns, and logistic
routes in a cost-efficient manner that not only meets the needs of your customers, but also your
business.

Tasks such as purchase order creation, inventory documentation, supplier transactions, and more
can be documented and managed using a cloud solution.
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 Components of Cloud Computing - eProcurement

One of the concerns of buyers and suppliers on both ends of the supply chain is that cloud-based
eProcurement platforms may also contain fewer essential components found in conventional software
programs. Developers, however, have merely condensed all the same features into a more compact, low-cost
system without eliminating the necessary elements. You’ll be able to utilize all the same features in the cloud
such as:

Spend Analysis: Cloud-based apps can collect, cleanse, classify, and analyze expenditure data to show you
where you can reduce costs and improve the overall performance of the eProcurement process.
RFQ: The key to eProcurement is efficiency and accuracy when requesting quotes or bids. Cloud computing
can put all buyers and suppliers on the same page and allow everyone to view the necessary information
during the RFQ process.
Reverse Auction: Cloud-based apps offer reverse auction features that give buyers the leverage they need
to drive purchase prices downward from suppliers.
P.O. and Invoice Automation: Today’s buyers are more mobile than ever. Cloud-based technology allows
you to send P.O. or invoices from any device. This speeds up the purchasing process and ensures that the
supply chain is running smoothly.
Contract Management: Cloud computing allows you to monitor past purchasing performance with any
supplier so that you have negotiating power when drawing up future contracts. You and the supplier have
on-demand reports that you can request directly from the cloud no matter where you are.
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 Application of Cloud Computing
Most cloud-computing services fall into one of three general categories:

Software-as-a-Service (SaaS): SaaS platforms offer the ability to subscribe to and

access a service over the internet, like Salesforce.

Platform-as-a-Service (PaaS): PaaS offers the option to create a custom application

that your entire business uses.

Infrastructure-as-a-Service
(IaaS): IaaS offers the option to utilize the structure built
by companies like Amazon, Microsoft, and Google.

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 Application of Cloud Computing
Cloud-based procurement- the new standard of purchasing:

Cloud-based platforms are the new standard of business procurement.

Allowing team members access from anywhere and anytime creates transparency from
high-level executives.
It’s also a more intuitive and organized way to streamline supply chain interactions and
your company’s spend culture.

Advantage:
To achieve cost savings
Centralize All Communication
Greater Visibility
Ensures Compliance
Reduces Unnecessary Spending By Reducing It Support Costs
Helps Your Business
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