Module 3: Materials Management

Materials Management – Functions – Material Planning,

Inventory control – Types of Inventory –Safety stock-ABC Analysis
-VED, HML, FSN,SDE, GOLF, SOS,JIT and KANBAN, Concept and
behavior of ordering cost, carrying cost, shortage cost. EOQ –
definition, basic EOQ Model, EOQ with discounts, Material
handling principles and equipments. Purchase functions and
Procedure- Managing Vendors; Vendor Analysis, Rating and
Selection – Procedure and Criterions.
 MATERIALS

The term material refers to all commodities which are consumed in the
production process.
The materials which can be consumed in the production process can be basically
classified as:
○ Direct Materials
○ Indirect Materials
➔ Material is generally called raw material.
➔ Inventory is a name collectively given to raw material; work in process and
finished goods.
In a manufacturing business, inventory is not only the final product manufactured and
ready to sell, but also the raw materials used in production and the semi-finished goods in
the warehouse or on the factory floor.

Example: For a cookie manufacturer, inventory will include the packets of cookies that are
ready to sell, the semi-finished stock of cookies that haven’t been cooled or packed yet, the
cookies set aside for quality checking, and raw materials like sugar, milk, and flour.

In a service industry, since there is no exchange of physical stock, the inventory is mostly
intangible in nature. So the service industry inventory mostly includes the steps involved
before completing a sale.

Example: For a research consultancy firm, inventory consists of all the information
collected for a project. In the hotel industry, a vacant room is inventory for the owner.
 INVENTORY CLASSIFICATION
Classification of inventory is done on this basis and thus, the different classifications of inventory are as follows:

1. Raw materials: Raw materials are input goods intended for combination and/or conversion through the
manufacturing process into semi-finished or finished goods. They change their form and become part of the
finished product.
2. Components and parts: Just as raw materials are converted to finished goods in a manufacturing operation,
components and parts are assembled into finished goods in an assembly operation.
3. Maintenance, repair and operating inventories (MRO): These include parts, supplies and materials used in or
consumed by routine maintenance and repair of operating equipment, or in support of operations.
4. Work-in-process goods: These include goods in the process of manufacturing and only partially completed. They
are usually measured for accounting purposes in between significant conversion phases. In-process inventories
provide the flexibility necessary to deal with variations in demand between different phases of manufacturing.
5. Finished goods: These represent the completed conversion of raw materials into the final product. They are goods
ready for sale and shipment.
1. Resale goods: These are goods acquired for resale. Such goods may be purchased by a wholesaler for resale to
distributors, or by distributors for resale to consumers, etc.
2. Capital goods: These are items (such as, equipment) that are not used or consumed during a single operating
period, but have extended useful lives and must be utilised over multiple operating periods. Tax laws require
that such an item be capitalised, and a predetermined percentage of its cost be recognised as an expense, each
operating period, over a predetermined time frame, according to equipment classes.
3. Construction materials: These are raw materials and components for construction projects such as a building,
bridge, etc.
4. Hard goods/soft goods: What one identifies as hard goods and soft goods will vary depending on the industry
involved. For example, in data processing, hard goods include apparatus such as, computers and terminals,
while soft goods include software, data storage media and the like.
5. Fuel and lubricants: Fuel and lubricants are used for the oiling purpose for the equipment used in the process
which again varies with the type of industry.
6. Stationery goods: It includes writing material like, paper, pen, ink, etc., which are used by the people involved in
the process.
7. Primary packing material: Packing material like, plastic, paper, etc. are used to pack the finished goods for sale
 FUNCTIONS OF INVENTORY
● To meet anticipated customer demands

● To smooth production requirements

● To reduce the risk of stockouts

● To hedge against price increase

● To take advantages of quantity discounts

NEED OF INVENTORY
Inventories are important to all types of firms:

● They have to be counted, paid for, used in operations, used to satisfy

customers, and managed
● Too much inventory reduces profitability
● Too little inventory damages customer confidence
● It is one of the most expensive assets of many companies representing
as much as 50% of total invested capital
● Need to balance inventory investment and customer service
ORDERING POLICY: When and how many units to order of each material
when orders are placed with either outside suppliers or production
departments within organizations?

ISSUING POLICY: how to issue units from inventory? (FIFO, LIFO, random?)
Why Do We Want to Hold Inventory

➔ Improve customer service

➔ Protect against hazards in demand, supply, or delivery that might cause
stock-out
➔ Take advantage of economies of scale, & reduce:
◆ Ordering costs
◆ Acquisition costs
◆ Fixed costs (e.g. fixed ordering costs)
➔ Contribute to the efficient and effective operation of the production system, e.g.,
➔ Reduces the number of costly set-ups and reschedulings
➔ Smoothing and stabilizing resource utilization

6 Why We Do Not Want to Hold Inventory

➔ Certain costs increase such as
◆ Storage costs
◆ insurance costs
◆ outdated costs
◆ cost of production problems
➔ Hides productivity and quality problems
➔ Risk of getting stuck with unsalable goods
 MATERIAL MANAGEMENT
“Material management is the planning, directing, controlling and coordination of all
those activities concerned with material and inventory requirements, from the point
of their inception to their introduction into manufacturing process.”

Materials management is defined as “the function responsible for the coordination

of planning, sourcing, purchasing, moving, storing and controlling materials in an
optimum manner so as to provide a pre-decided service to the customer at a
minimum cost”.
 OBJECTIVE

The fundamental objectives of the materials management function are

acquisition of materials and services:
•of the right quality
• in the right quantity
•at the right time
•from the right source
The key objectives of material management are as follows:
• Buying at the lowest price, consistent with the desired quality and service
•Maintaining a high inventory turnover, by reducing excess storage, carrying costs and
inventory losses occurring due to deteriorations, obsolescence
•Maintaining continuity of supply, preventing interruption of the flow of materials and
services to users
•Maintaining the specified material quality level and a consistency of quality.
•Minimising the overall cost of acquisition by improving the efficiency of operations and
procedures
•Hiring, developing, motivating and training personnel and providing a reservoir of talent
•Developing and maintaining good supplier relationships in order to create a supplier
attitude and desire furnish the organisation with new ideas, products, and better prices
and service
1. Materials planning and control: Based on the sales forecast and production plans, the materials planning
and control is done. This involves estimating the individual requirements of parts, preparing materials budget,
forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to
production and sales.

2. Purchasing: This includes selection of sources of supply finalization in terms of purchase, placement of
purchase orders, follow-up, maintenance of smooth relations with suppliers, approval of payments to suppliers,
evaluating and rating suppliers.

3. Stores management or management: This involves physical control of materials, preservation of stores,
minimization of obsolescence and damage through timely disposal and efficient handling, maintenance of stores
records, proper location and stocking. A store is also responsible for the physical verification of stocks and
reconciling them with book figures. A store plays a vital role in the operations of a company.

4. Inventory control or management: Inventory generally refers to the materials in stock. The interval
between receiving the purchased parts and transforming them into final products varies from industries to
industries depending upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of various
kinds to act as a buffer between supply and demand for efficient operation of the system. Thus, an effective
control on inventory is a must for smooth and efficient running of the production cycle with least interruptions.
5. Other related activities

(i) Standardization: Standardization means producing maximum variety of products

from the minimum variety of materials, parts, tools and processes. It is the process
of establishing standards or units of measure by which extent, quality, quantity,
value, performance etc. may be compared and measured.

(ii) Simplification: The concept of simplification is closely related to standardization.

Simplification is the process of reducing the variety of products manufactured.
Simplification is concerned with the reduction of product range, assemblies, parts,
materials and design.
(iii) Specifications: It refers to a precise statement that formulates the requirements
of the customer. It may relate to a product, process or a service. Example:
Specifications of an axle block are Inside Dia. = 2 ± 0.1 cm, Outside Dia. = 4 ± 0.2 cm
and Length = 10 ± 0.5 cm.
 OTHER FUNCTIONS
PRODUCTION SCHEDULE

The requirements of parts and materials are determined as per production schedules. Production schedules are prepared
on the basis of orders received or anticipated demand for goods. It is ensured that every type or part of material is made
available so that production is carried on smoothly.

PURCHASING

This department keeps contracts with suppliers and collects quotations etc. at regular intervals. The effort by this
department is to purchase proper quality goods at reasonable prices.

STORE MANAGEMENT

Non-production materials like office supplies, perishable tools and maintenance, repair and operating supplies are
maintained as per the needs of the business. These stores may not be required daily but their availability in stores is
essential. The non-availability of such stores may lead to stoppage of work.
TRANSPORTATION

The transporting of materials from suppliers is an important function of materials management. The purpose is to arrange
cheap and quick transport facilities for incoming materials.

Materials Handling:

It is concerned with the movement of materials within a manufacturing establishment and the cost of handling materials is
kept under control. It is also seen that there are no wastages or losses of materials during their movement. Special
equipment may be acquired for material handling.

Receiving:

The receiving department is responsible for the unloading of materials, counting the units, determining their quality and
sending them to stores etc. The purchasing department is also informed about the receipt of various materials.
 MATERIAL PLANNING
Material planning is the scientific method of planning and determining the requirements of
consumables, raw materials, spare parts and other miscellaneous materials essential for the
production plan implementation.

Materials planning is a subset of the overall production planning and control system which
has a broad perspective

Factors influencing Material Planning

1. Macro factors: Some of the micro factors which affect material planning, are price
trends, business cycles Govt. import policy etc.
2. Micro factors: Some of the micro factors that affect material planning are plant capacity
utilization, rejection rates, lead times, inventory levels, working capital, delegation of
powers and communication.
 BENEFITS
1.Materials planning – both quantity and value in terms of rupees – for each item and overall, tries to
avoid the practice of crisis management of struggling in the last minute to procure materials to meet the
production requirements or pressurising unnecessarily the purchase people by sitting on their neck to
get the materials in the last moment.

2.It helps to get things done efficiently and effectively by better forecasting of future material needs and
working proactively rather than reacting to the situations.

3.A well-designed materials planning system provides steps for effective materials budgeting, follow-up
of suppliers to procure materials in-time, thereby avoiding material shortages and its undesirable effects
on production.
TECHNIQUES OF MATERIAL PLANNING
 SAFETY STOCK
Safety stock is an extra quantity of a product which is stored in the warehouse to
prevent an out-of-stock situation. It serves as insurance against fluctuations in
demand.
● Safety stock helps eliminate the hassle of running out of stock. If you hold sufficient safety stock, you
needn’t rely on your suppliers to deliver quickly or turn away customers because of depleted inventory
levels.
● Safety stock protects you against the sudden demand surges and inaccurate market forecasts that can
happen during a busy or festive season. It serves as a cushion when the products you’ve ordered take
longer to reach your warehouse than you expected
● Unexpected delays in production or transportation, such as a bottleneck at your supplier’s end or a
weather-related shipping delay, can cause your products to reach you later than expected. During these
situations, safety stock acts as your defense against a possible stockout scenario and helps you fulfill your
orders until your ordered stock is delivered to you.
● Unpredicted market fluctuations can cause the cost of your goods to increase suddenly. This can be due to
a sudden scarcity of raw materials, an increase in price of raw materials, unexpected demand surges in the
 There are several different methods to calculate safety stock:

Fixed safety stock

Fixed safety stock is a method used by production planners. They determine the amount of safety stock to
keep from the maximum daily usage for over a period of time, but without using a particular formula. The
value for fixed safety stock generally remains unchanged unless the production planner decides to change it.

Time-based calculation

In this method, safety stock levels are calculated over a particular time period, based on the future forecast
for the product. This method includes a combination of actual demand from sales orders, and forecasted
demand based on statistical methods. This method cannot predict business uncertainties, so using it involves
a risk that you might end up carrying too much unwanted stock if your products are moving slower than
forecasted.
GENERAL FORMULAE
 ABC ANALYSIS
ABC analysis in inventory management

It’s not an easy task to manage thousands of stock items that come from a range of suppliers and

get sent out to an extensive customer base. To help control such complexity, businesses can

introduce models to prioritise their management. They can then apply a level of control to each

group, based on their importance to the business. One way to do this is to use a model such as

ABC analysis, also known as ABC inventory classification.

 ABC ANALYSIS
➔ It is defined as a method of classifying clients, events, inventory, items or activities according
to their relative significance and deciding upon this fact that on the extent of importance,
consideration and control one should put on this analysis under such classifications.
➔ ABC inventory analysis (ABC inventory classification) is a method used by inventory
management teams to classify stock items into three categories – A, B and C – based on their
‘value’ or ‘importance’ to their business.
➔ Divided into three categories, i.e. A, B, and C in descending value. The items in the A category
have the highest value, B category items are of lower value than A, and C category items have
the lowest value.
➔ Some items will be more profitable, urgent or critical than others, and so will require more
focus in terms of forecasting, management and replenishment activities. One way to help
differentiate and prioritise items is to segment them into categories (A, B, and C).
 How ABC Analysis Relates to the Pareto Principle
● The Pareto Principle says that most results come from only 20% of efforts or causes in any system.
Based on Pareto’s 80/20 rule, ABC analysis identifies the 20% of goods that deliver about 80% of the
value.
Item A:

● 70 to 80 percent of the yearly consumption value of the company comes from only about 10 to 20
percent of the total inventory items.

Item B:

● These are items that have a medium consumption value. These amount to about 30 percent of the total
inventory in a company which accounts for about 15 to 20 percent of annual consumption value.

Item C:

● The items placed in this category have the lowest consumption value and account for less than 5
percent of the annual consumption value that comes from about 50 percent of the total inventory
items.
● Note: The annual consumption value is calculated by the formula: (Annual demand) × (item cost per
unit)
● Category A: Items in this category are
essential and at times, business-critical for
a company. Typically, these items either
have a high value or large market.
● Category B: Items in this category are
important, but not as important as those in
category A. Typically, these items
constitute mid-range in inventory value and
have relatively lesser market demand.
● Category C: Items in this category are
marginally important and constitute a tiny
portion of the overall inventory value.
 Advantages & Disadvantages of ABC Analysis

1. Better control on expensive items on which large investment is required

2. Cycle counting, which is an indicator of stock replenishment can be effectively used after
completing the grouping
3. Ensures reduction in storage expenses

However, some of the drawbacks of this method are:

1. This method can’t be employed where products can’t be standardized
2. Classification is done purely on the basis of monetary value and other factors are ignored
Example of ABC Analysis

In an inventory management system we can categorize products into ABC classification

depending upon their annual sale or percentage sale of the items. High selling items should
be categorized as A and managing their inventory should be top priority of inventory
management team. A group of items might only be 20% of various types of products
available but their business importance or contribution to revenue is 80%.

PROBLEM
Let us take the example of Susan, who is engaged in the retail sale of handbags. Last year she
decided to expand her product offering by including more varieties of sweaters in her inventory.
Consequently, she purchased 30 different types of handbags instead of just 10. However, later she
realized the demand for the products is seasonal, and she had invested a lot. Hence, she decided to
implement the ABC analysis in her business model to streamline the inventory.

So, Susan classified the inventory into category A, B, and C, primarily based on their selling price
and demand as mentioned below:

● Category A: The handbags that are either highly in demand, generate the maximum revenue
or are trending in the current season were classified under this category of items.
● Category B: The handbags that are essential to the company, but not as much as those in
category A. Probably the demand for these handbags are slightly seasonal and not across the
entire year. So, during the season, the sales of these items are expected to shoot up. Hence,
these set of handbags can’t be neglected and hence category B.
● Category C: In this category, all those handbags are included that are not of high value to the
company. The possible reasons may be a colour combination, pattern, etc. Hence, these
handbags are placed in category C.
 JUST IN TIME

➔ Just in Time (or the JIT) is an inventory management system that aims to make production super-efficient.

➔ Under this, the raw materials and labor are planned to arrive as and when they are needed in the production.

➔ The primary benefit of using JIT is that the company does not have to invest time and money to store the raw

materials.

➔ One can also call JIT as the Toyota Production System (TPS). The Japanese car-maker used it for the first time in

1970. Other companies that use JIT are Apple, Tesla, Zara, Xiaomi, etc.
 JIT IN MATERIAL MANAGEMENT
1. Ordering inventory on an as-needed basis means that the company does not hold any safety stock, and it operates with continuously low

inventory levels. This strategy helps companies lower their inventory carrying costs, increase efficiency, and decrease waste. JIT requires

manufacturers to be very accurate in forecasts for the demand for their products.

2. Just-in-time inventory management is a positive cost-cutting inventory management strategy, although it can also lead to stockouts. The

goal of JIT is to improve a company's return on investment by reducing non-essential costs.

3. Companies using JIT no longer need to maintain a huge expense of warehouse space to store inventory.

4. A firm also no longer needs to spend large amounts of money on raw materials for production, because it only orders exactly what it

needs, which frees up cash flow for other uses.

JIT inventories can bring about disruptions in the supply chain. It only takes one supplier of raw materials who has a breakdown and

cannot deliver the goods on time to shut down a manufacturer's entire production process. A customer order for goods that surpasses the

company's forecasted expectations may cause parts shortages that delay the delivery of finished products to all customers.
 Advantages of Just in Time

1. It helps to reduce the costs as the company does not have to spend on storing the raw materials.

2. Companies make less investment in the raw materials as they order the quantity that they need to meet the

current production process.

3. JIT speeds up the manufacturing as the company has the raw materials ready.

4. It helps to eliminate lead time, and at the same time, deliveries as well.

5. It helps to identify and eliminate any obstacles to speed up the production process.

6. It helps to eliminate all types of wastage, including time, inventory, transportation, processing, waste from

overproduction, and waste from product defects.

Apple

This consumer electronics giant keeps as little inventory on hand as possible. By lowering the amount of
stock on hand, Apple carries a lower risk of overstocking and chalking up dead stock in its warehouses. As
explained by Tim Cook, CEO of Apple, “Inventory is fundamentally evil. You kind of want to manage it like
you’re in the dairy business. If it gets past its freshness date, you have a problem.”

Xiaomi

Similar to Apple, Xiaomi manages a small inventory by releasing limited quantities of its mobile phones
per week. The drawback to this strategy is that eager consumers have to wait for the items to hit the stores
– resulting in potential lost sales. Still, Xiaomi still benefits from keeping costs down and eliminating
wastage.
 INVENTORY COSTS
● Inventory costs are the costs associated with the procurement, storage and

management of inventory.

● It includes costs like ordering costs, carrying costs and shortage / stock out costs.

● Inventory is one of the most important assets for a company or a manufacturer.

● it requires cost for maintaining, storing, replacing and moving inventory.

 Ordering inventory costs
The cost of acquisition and inbound logistics form part of the ordering cost of procuring inventory. These include:

Ordering cost of inventory refers to the cost incurred for procuring inventory.
● It includes cost of purchase and the cost of inbound logistics.
● Time spent finding suppliers and expediting orders
● Clerical costs of preparing purchase orders
● Transportation costs
● Receipt of inwards goods, unloading, inspection and transfer
➔ In order to minimise the ordering cost of inventory we make use of the concept of EOQ or Economic Order Quantity.
➔ One, or many people are responsible for sourcing products, processing orders and paying accounts.
➔ Add to that delivery, receipt of goods and movement of stock through the warehouse. Each step is a cost to the
company.
 Carrying inventory costs
Inventory carrying costs typically include the physical cost of storage such as building and facility maintenance related costs.

Carrying cost of inventory refers to the cost incurred towards inventory storage and maintenance.

The inventory storage costs typically include the cost of building rental and other infrastructure maintained to preserve inventory.
● Financing expenses
● The cost of storage space and warehousing
● Security, which may include securing restricted or hazardous materials
● Insurance against theft, loss or damage
● Opportunity cost – capital tied up in inventory that could be spent elsewhere
● Deterioration, theft, spoilage, or obsolescence.

Building rent and warehousing expenses, including overheads such as electricity, lighting and temperature control, are part of carrying
costs.
 Shortage costs

● Shortage costs are those costs that are incurred when a business runs out of stock, including:
■ (stockouts can be defined as the unavailability of specific items or products at the point of purchase when
the customer is ready to buy.)
● Time lost when raw materials are not available
● Cost of shrinkage, pilferage and obsolescence
● Idle employees
● costs include the loss of business from customers who go elsewhere to make purchases,
● Emergency shipments costs
● Disrupted production costs
● Customer loyalty and reputation
○ Shortage or stock out costs and cost of replenishment are the costs incurred in unusual circumstances.
○ Filling back-orders through expedited shipping or replenishing stock at higher than wholesale prices are some
examples of shortage costs. The most damaging cost of shortage however is a dissatisfied customer and the
temporary or permanent loss of sales through insufficient stock levels.
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 Basic EOQ Model
➔ The Economic Order Quantity (EOQ) model is one of the oldest and most commonly known inventory

control techniques.

➔ This technique is relatively easy to use, but it makes a number of assumptions.

➔ The economic order quantity (EOQ) refers to the ideal order quantity a company should purchase in

order to minimize its inventory costs, such as holding costs, shortage costs, and order costs.

➔ The EOQ model seeks to ensure that the right amount of inventory is ordered per batch so a company

does not have to make orders too frequently and there is not an excess of inventory sitting on hand.
 ASSUMPTIONS
➔ Demand is known and constant. 1. Demand is known, constant, and independent
➔ The lead time - that is, the time between the placement of
the order and the receipt of the order - is known and 2. Lead time is known and constant
constant.
➔ The receipt of inventory is instantaneous. In other words, 3. Receipt of inventory is instantaneous and complete
the inventory from an order arrives in one batch, at one
point in time. 4. Quantity discounts are not possible
➔ The only variable costs are the cost of placing an order,
ordering cost, and the cost of holding or storing inventory 5. Only variable costs are setup and holding
over time, carrying, or holding, cost.
➔ If orders are placed at the right time, stockouts and 6. Stockouts can be completely avoided
shortages can be avoided completely.
 Benefits of Utilizing Economic Order Quantity
➔ Improved Order Fulfillment: When you need a certain item or something for a customer order,

optimal EOQ ensures the product is on hand, allowing you to get the order out on time and keep the

customer happy. This should improve the customer experience and may lead to increased sales.

➔ Less Waste: More optimized order schedules should cut down on obsolete inventory, particularly for

businesses that hold perishable inventories that can result in dead stock.

➔ Lower Storage Costs: When your ordering matches your demand, you should have less products to

store. This can lower real estate, utility, security, insurance and other related costs.

➔ Quantity Discounts: Planning and timing your orders well allows you to take advantage of the best

bulk order or quantity discounts offered by your vendors.

 EOQ
➔ The basis for the EOQ formula assumes that consumer demand is constant.

➔ The calculation also assumes that both ordering and holding costs remain constant.

➔ These assumptions make it difficult, if not impossible, to account for unpredictable business

events, such as changing consumer demand, seasonal changes in inventory costs, lost sales revenue

due to inventory shortages, or purchase discounts a company might get for buying inventory in

larger quantities.
KANBAN SYSTEM
● Kanban is a Japanese word, denotes a card or a visible signal
● Nervous system of lean production system-production control instruction to each and every parts
● Makes JIT a reality
● Mr Ohno -TPS
● Kanban in manufacturing is an inventory organization structure that uses visual cues to move inventory through
various stages of the manufacturing process.
● It is a tool for lean manufacturing that aims to prevent inventory pileup by initiating production only to
restock empty reserves.
● Kanban is a “pull” system, meaning it responds to demand rather than predicting it. More inventory is created
only when old inventory is “pulled” out of stock.
What is a 2 Bin Kanban System?
The 2 bin system is, quite literally, a system which uses two physical bins to manage inventory, usually of small but critical
parts . It’s a simple pull system, where the parts are supplied by two rotating containers.

The system works simply by supplying workers with two plastic storage bins, which contain inventory that they pull from to
fill orders or to provide supplies to various departments. The speed at which the individual items are used will determine how
many of the items are placed in the bins.

The workers pull from one bin until it is empty, and then they switch to the second bin while at the same time placing an
order to replenish the items in the first bin. The number of items required to replenish the first bin is predetermined, so that
there is little risk of running low on stock (which could slow down production).
A Kanban board is primarily a visual
representation of workflow processes and
stages laid out as columns and cards. Cards,
moved from left to right, depict progress and
allow teams to coordinate better eliminating
confusions and misconceptions.
 Kanban cards

➔ Each card system had the specification of sequence and quantities.

➔ Physical and digital
➔ The system was to change the processes from the traditional push to the pull system where the cards would
demand the quantities from the predecessor processes in a controlled and sequential way. So the pull system of
Kanban cards was used. Getting the right balance is a must for the Kanban so that overstocking or limit of
understocking where specified.
➔ There were rules laid down by the Taiichi Ohno for the Kanban system to be effective and efficient.

The rules are as follows,

1. Kanban cards pull system would determine the processes to issue the raw materials or semi-finished goods
or the goods itself.
2. Without the Kanban cards, there will be no supply or order of any items
3. Kanban Cards will indicate both the quantity and sequence.
4. To address the quality control the goods will not pass if there are defects in the goods or services.
5. For the goods or items to go from one processes to another they must have Kanban
6. The processes are demand sensitive and efficient if there are fewer Kanban cards
Below are the main Four core principles of Kanban:

1. Start with what you have now: Kanban system suggests working incrementally and start with what you have
currently. Since one of its practice is to improve continuously, you must improve the system gradually.
2. Agree to Pursue Incremental, Evolutionary Change: Kanban recommends an incremental change in the
process, and you must not make a big change in the process in one go.
3. Respect the Current Process, Roles & Responsibilities: Once again, start with what you have now and change
the process, role, and responsibilities in an incremental manner.
4. Encourage Acts of Leadership at All Levels: Every individual can act as a leader and provide ideas to improve
the efficiency of the overall Kanban system. You should not think that this is a management level activity, and
even the youngest member of the team can act as a leader.
 VENDOR
1. Person/Company that sells goods or services to someone else in the economic production
chain. ie:who sells and supplies products. Vendors are a part of supply chain.

2. A vendor, or a supplier, is a supply chain management term that means anyone who
provides goods or services of experience to another entity.

3. Vendors may sell B2B (business-to-business; i.e., to other companies), B2C (business to
consumers), or B2G (business to government). Some vendors manufacture inventoriable
items and then sell those items to customers, while other vendors offer services or
experiences.
 Vendor Selection Criteria
The criteria for vendor selection include the following:

1. Delivery – an ability of the contractor to procure all required items within desired delivery
dates
2. Quality of the procurement services – an ability of the contractor to provide products with
the expected quality
3. Cost of the procurement services – a comparison of prices provided by several
contractors
4. Past performance – records on the contractor’s procurement activities undertaken in the
past
VENDOR ASSESSMENT PROCESS
 Vendor rating
•The rating done by the following parameters:

1.Quality performance

2.Delivery performance

3.Price performance

Quality performance: A supplier can be judged for quality performance from the
viewpoint of rejected lots. Thus, if a supplier has supplied 100 pieces, and 10 pieces are
rejected from the lot, he has a rating of 90%.

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

•Delivery performance: delivery performance can be made in two ways: (a) adherence to time
schedule, and (b) adherence to quantity schedule.

(a)Adherence to time schedule:

(Number of deliveries made in time / Total number of scheduled delivery) * Weightage

(b) Adherence to quantity schedule:

(Quantity supplied / Scheduled delivery) * Weightage

•Price performance: Price is another very important criterion for evaluating a vendor.

(Minimum price offered / Vendor’s price) * Weightage

 METHODS OF VENDOR RATING
1) Categorical method 2) Weighted point method 3) Cost ratio method

1. CATEGORICAL PLAN
a. This is a very subjective method.
b. Buyer makes out a list of factors important from their view.
c. At periodic intervals, say once in three- months , prepares a performance report.
d. Each of the major supplier is evaluated against each evaluator’s list of factors . Evaluation is done in the terms
of 1. Good 2. Satisfactory 3. Poor

WEIGHTED POINT PLAN

● Uses a point rating basis on the quality of goods received , the promptness of deliveries made & quality of the service rendered
by the vendor.
● Points can be allocated as eg: Quality :50 points Price :30 points Delivery :20 points Total :100 points
● Overall weighted score is then checked to come to a conclusion about the vendors.
● Vendors are classified as A, B and C.
 COST RATIO PLAN

➔ Vendor rating is done on the basis of various costs incurred for procuring the materials from various suppliers.
➔ The cost ratios are ascertained for the different rating variables such as quality, price, timely delivery etc.
➔ The cost ratio is calculated in percentage on the basis of total individual cost and total value of purchase.
➔ The higher the ratio of costs to shipments, the lower is the rating applied to that supplier.
➔ Quality, delivery, service, and price are the usual categories to which costs are allocated, after subdividing each factor into
various elements.
◆ Quality Ratio
◆ Delivery cost ratio
◆ Service cost ratio
◆ Price ratio
Critical Incidence Method

➔ Record of events and occurrences related to the buyer-vendor relationship is maintained in each vendor's file.
➔ The data and comments recorded should be significant, not trivial.
➔ They ought to reflect positive and negative aspects of actual performance.
➔ This kind of documentation can be used as a basis for discussing ways and means of overcoming difficulties, improving
performance, acknowledging the existence of good business relationships, determining the competence of a vendor, and if
necessary, considering termination.
 PURCHASING
“ Purchasing is a term that describes the business activity directed to securing the materials,
supplies and equipments required in the operations of an organization.”

– Westing and Fine

“Purchasing is the acquisition by manufacturer of any necessary primary materials supplies,

equipments and so forth, by any method, whatsoever. Thus, procurement includes extraction
from owned mine, or forests, civilization of owned agricultural lands, manufacture in owned
plants and purchase. Theoretically, the essence of the function does not really consists of
purchasing even though most items are so obtained.” - Lewis
 OBJECTIVES

● To pay reasonably low prices for the best values obtainable, negotiating and executing all the company

commitments.

● To keep inventories as low as is consistent with maintaining production.

● To develop satisfactory sources of supply and maintain good relations with them.

● To secure good vendor performance including prompt deliveries & acceptable quality.

● To locate new products or materials as required.

● To develop good procedures, together with adequate controls and purchasing policy.

● To implement value analysis, cost analysis and make-or-buy decisions to reduce cost of purchases.

● To maintain as economical a department as is possible, commensurate with good performance.

● To keep top management informed of material development which could affect company profit or performance.

● To achieve a high degree of co-operation and co-ordination with other departments in the organization.
 Purchasing Cycle

1) Recognition of Need

2) Description of Need

3) Development or Selection of Sources

4) Determination of Price and Availability

5) Preparation of Purchase Order & Sending to Supplier

6) Acceptance of Purchase Order obtained from Supplier

7) Follow-up is done by purchasing department for timely delivery

8) Checking the invoice and getting it approved for payment

 1) Recognition of Need

•Means by which a needed item is officially brought to the notice of the purchasing
department. Two procedures are:

•The issuance of requisitions or demand notes by the user department or the stores
department.

•The issuance of a bill of materials.

a) Purchase Requisition

•Describes the needed item and becomes the basis for action by the purchase
department.

•Requisitions are usually routed through stores department.

 Description of Requirement

The purchase requisition describes the required item.

•Requisition must include all necessary information in a form that can be readily checked
and verified.

•Record of past purchases, Vendor catalogues.

•Use judgment

•Interpret sketchy descriptions

•Seek clarifications about questionable items

•Even obvious errors have to be clarified

 b) Bill of Materials

•List of all items to be incorporated into a finished product that the company produces.
Such bills are generally prepared at the time when engineering blueprints for the items
are made.

•Under this method of establishing needs, the purchasing department is notified of the
manufacturing schedule by the Production Planning and Control (PPC) department.

•The buyer, then multiplies the items listed in the bill of materials by the total units
planned for production to determine the total requirement.
 Selection of Source

•Register of Suppliers

•Advertising in press inviting tenders from suppliers

Right Supplier

• Delivers materials to the correct specifications on the stipulated delivery dates,

ethically, standing by promises and with high regard to the buyer-seller relationship

•Progressive, technologically updated, reasonable price

•Realizes that their interests are best served through best service to customers.
Determination of Price and Availability

a) Vendor Catalogues

•Buyer can refer the current price listing to check the prices.

b) Negotiations

•Bargaining between a buyer and a seller

c) Inviting tenders or quotations

•A must for government undertakings.

 Placing of the Order
The legal order is placed with the supplier on a form called as a
Purchase order.
Order Acknowledgement

To get a definite commitment from the supplier about the supply of items on time

Follow Up and Expediting

Though a general policy should be established for the entire purchasing department, the
immediate responsibility for expediting is likely to rest on the buyer who placed the order

Checking the Invoice and Approval

•The bill sent by the supplier is compared with the Order and the Goods Received Note that is
made out when the material is received.

•If the bill is correct in all respects, then it is approved and given to accounts department for
payment.
 MATERIAL HANDLING
● Material handling, often called material movement, is the short-range movement of materials from manufacturing
all the way to distribution.
● The goods may go through a system of transportation, then storage, and then distribution. Material handling
happens in the shipping and delivery stages throughout the supply chain, packaging and moving goods in pallets
and other units.
○ Manufacturing
● During the manufacturing process, you have to move and handle inbound shipments and finished goods within
your factories and storage spaces.
○ Transportation
● The manufacturer will send the products to a wholesaler or internal warehouse. The products need to be handled
and set up as units (on pallets, perhaps), for easier shipping.
○ Storage and warehousing
● The products need to be offloaded safely and effectively, as well as moved internally within the warehouse to
different storage racks or shelving so they can be stored until they are needed by the supplier or retailer.
○ Distribution
● The materials will be distributed out to retailers or customers, and have to be packed and combined into shippable
units and loaded onto trucks.
 MATERIAL HANDLING PRINCIPLES
Ergonomic principle
Humans can’t move and arrange heavy objects without help and forgetting that can lead to frequent injuries
among your staff.

SPACE UTILIZATION PRINCIPLE.

Effective and efficient use of available space must be made.

When transporting loads within a facility the use of overhead space should be considered as an option.

AUTOMATION PRINCIPLE.
Material handling operations should be automated where possible in order to improve operational efficiency,
increase responses

Computerized material handling systems should be considered where appropriate for effective integration of
material flow and information management

ENVIRONMENTAL PRINCIPLE.
The environmental impact and energy consumption must be considered criteria when selecting equipment for
handling materials.
LIFE CYCLE COST PRINCIPLE

Life cycle costs include capital investment, installation, setup and equipment programming, training, system
testing and acceptance, operating (labor, utilities, etc.), maintenance and repair, reuse value, and ultimate disposal.
A plan for preventive and predictive maintenance should be prepared for the equipment, and the estimated cost of
maintenance and spare parts should be included in the economic analysis.

SYSTEM PRINCIPLE Material movement and storage activities should be fully integrated to form a
coordinated, operational system which spans receiving, inspection, storage, production, assembly, packaging,
unitizing, order selection, shipping, transportation and the handling of returns.

Systems integration should encompass the entire supply chain including reverse logistics. It should include
suppliers, manufacturers, distributors and customers

UNIT LOAD PRINCIPLE

A unit load is one that can be stored or moved as a single entity at one time, such as a pallet, container or tote,
regardless of the number of individual items that make up the load.
STANDARDIZATION PRINCIPLE

Standardization means less variety and customization in the methods and equipment
employed.

PLANNING PRINCIPLE All material handling should be the result of a deliberate plan
where the needs, performance objectives and functional specification of the proposed
methods are completely defined at the outset.

WORK PRINCIPLE Material handling work should be minimized without sacrificing

productivity or the level of service required of the operation.

Simplifying processes by reducing, combining, shortening or eliminating unnecessary

moves will reduce work
 EQUIPMENTS
Racks: Racks help companies store their
materials in accessible locations and
save floor space.

Mezzanines: A mezzanine refers to a

raised indoor platform that creates
another storage area above the ground.
These mezzanines help companies store
items vertically and free up space on their
warehouse floor.
● Hand trucks: Hand trucks are commonly called
dollies, and they’re a simple piece of equipment
designed to give operators the leverage they
need to roll heavy materials to new locations.
● Sideloaders: Manufacturers craft sideloaders to
fit between narrow aisles, easily picking up items
on either side of them.
● Pallet trucks: Otherwise known as forklifts, pallet
trucks are machines operators can use to lift
heavy pallets. They feature forks designed to slip
under the pallet, lift it up and then secure it as the
operator takes it to a new location.
● Hoppers: Hoppers are large funnel-shaped
objects with openings that close. Companies use
hoppers to pour loose materials into containers.
● Reclaimers: Reclaimers are large machines
designed to pick up loose materials from a
company’s stockpile.
● Conveyor belts: Conveyor belts are an essential
part of a conveyor system. They use drums or
pulleys to rotate their belts and move materials in
bulk from one location to another.
● Stackers: Stackers are key to bulk material
handling. This automated equipment can move
loose materials to stockpiles on their own.
● Bucket and grain elevators: Sometimes referred
to as grain legs, bucket elevators vertically move
bulk materials. They’ll transport these materials
on a production pathway and sometimes store
them.
● Automated guided vehicles (AGVs): AGVs
are computer-operated trucks featuring
sensors and detectors. These vehicles can
be entirely autonomous, moving materials
safely around your facility on preset
pathways.

● Robotic delivery systems: Many facilities

utilize automated robotic delivery systems to
transport materials. Companies typically use
these systems to transport materials on an
assembly line.