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Chapter 2: Logistics and Competitive Strategy

What is Logistics?
Logistics means having the right thing at the right place and at the right time. Logistics is the management of flow of goods, information including people and energy between the point of origin and the point of consumption in order to meet requirements of consumers. It is a channel of the supply chain which adds the value of time and place utility. It is the process of strategically managing the procurement, movement and storage of materials and finished inventories through the organization and its marketing channels in such a way that current and future profitability are maximized through cost effective fulfillment of orders. The different areas of complete logistics should include following: - Vision / Mission Development - Transportation - Vendor Development - Logistics Systems - Competitors - Human resources - Network design for information flow - Supply chain - Information - Option Analysis - Strategy Review - Communications Developing and understanding of all required areas and the needed internal coordination, many companies have successfully created logistics strategy. Developing and or sourcing logistics strategy skills in this regard can be critical in allowing companies to respond in a meaningful way and reap the benefits of understanding the need for logistics strategy.

Objectives of Logistics
Customer satisfaction Understanding the customer Managing the uncertainty Responding to globalization Information flow Cost reduction and improve profits

Customer Satisfaction Basic objective of logistics is to provide the customer satisfaction with the products/ service availability.

It adds value by creating time and place utility. Customer satisfaction is achieved by providing the required product at required place and at required time.

Understanding the Customer It is important to understand the needs and the requirements of the customers.

Apart from the point of view of the product design, it is more essential to understand the time, the place, atmosphere in which the customer needs the product. The companies will be winners who collect information at each point of contact with customer. Those who do not worry about the customers will not exist.

Managing the Uncertainty In competitive environment the uncertainty tends to happen.

It is difficult for companies to predict changes. Supplier, Customer, Partner, Competitors are changing their position and they may join hands to stay in the business. Customers may change their order requirement after placing the order. Companies must be able to meet changing requirement of customers.

Responding to Globalization Day by day, Information Technology is taking such a position that the boundaries of the countries, communities are no more hurdles for businesses.

Businesses are cutting across these borders. The need of any business is now to provide materials, services, products cutting all the borders of nations. The growth of any company can not be just by confining to one country. Time, distance, large and small companies are no more constraints to do business due to new IT findings for the purpose of reaching the far off customer.

Information Flow Information flow is important in organization.

From all the parts of the company, there has to be real time information available to all the people concerned for doing any job. All the people of the organization should be aware with the technologies, strategies being used for carrying out operations of logistics.

Cost reduction and improving profits The manufacturing is not only the function of organizational activity that incurs expenses.

There are many other functions which are rather ignored and good opportunities have to be found in the number of peripheral functions which are part of logistics. Competitive capabilities depend on the relationship and linkages that company can establish and groom with the external organizations. Logistics is driven for fast and efficient service and the need to reduce inventory cost; companies have discovered that their ability to manage the entire supply chain from raw materials to delivery of the finished product or service to the customer is a source of competitive advantage.

Logistics Management Process

Logistics management is the means by which the needs of the customers are fulfilled through coordination of material and information flow that entered from marketplace, through the firm and its operation and beyond that to suppliers. Logistics management has the potential to assist the organization in achieving both cost and value advantage. Under LMP, logistics management process the goal is to link the market place, the distribution center, the manufacturing process and procurement activity in a way that customers are serviced at higher levels and get at lower costs. The goal of LMP is to plan and coordinate those activities necessary to achieve desired level of service and quality at lowest possible price. It is the link between the market place and operating activity of the business. There should be a one-plan mentality within the business which seeks to replace the conventional stand alone and separate plans of marketing, distribution, production and procurement. This is the mission of logistics management. Materials flow







Requirements information flow

Challenging factors or areas of logistics environment

Customer service explosion Time compression Globalization of industry Organizational integration Customer service explosion Customers in todays market are more demanding, not just of product quality but also for service.

As more and more markets become in effect commodity markets, where the customers perceives little technical difference between competing offers, the need is for the creation of differential advantage through added value. Customer service may be defined as the consistent provision of time and place utility. Products dont have value until they are in hands of the customer at the time and place required. There are many facets of customer service, ranging from on time delivery through to after sales support. Those companies that have achieved recognition for service excellence and have been able to establish a differential advantage over their competition are typically those companies where logistics management is a higher priority. The attainment of service excellence in this broad sense can only be achieved through a closely integrated logistics strategy. In reality, the ability to become a world class supplier depends as much upon the presentation of the product, the creation of images and the influencing of consumer perceptions.

Time Compression Time has become a critical issue in management. Product life cycles are shorter than ever.

Industrial customers and distributors require just in time deliveries and end users are ever more willing to accept a substitute product if they dont get delivery instantly. There are many implications for management resulting from this reduction of time in which profits may be made. The concept of logistics lead time is: How long does it take to convert an order into cash? From the moment when decisions are taken on the sourcing and procurement of materials and components through the manufacturing subassembly process to the final distribution and after market support, there are complex activities that must be managed if customers are to be gained or retained. This is the true scope of logistics lead time management. To establish competitive advantage it is necessary to ensure timely response to volatile demand, a new and fundamentally different approach to the management of lead time is required.

Globalization of industry The third of the strategic issues that provide a challenge for logistics management is the trend towards globalization.

A global company is more than a multinational company.

In the global business, materials and components are sourced worldwide, manufactured offshore and sold in many different countries with local customization. Such is the trend towards globalization that it is probably safe to forecast that before long markets will be dominated by global companies. The global companies seek to achieve competitive advantage by identifying world markets for its products and then developing a manufacturing and logistics strategy to support its marketing strategy. The challenge to a global company, Whirlpool therefore is how to achieve the cost advantage of standardization for the local demand for variety. Whirlpool is responding to that challenge by seeking to standardize on parts, components and modules and then through flexible manufacturing and logistics to provide the specific products demanded by each market.

Organization integration In these conventional organizations, material managers manage materials, production managers manage production and marketing managers manage marketing. The challenges that face the business organization in todays environment are quite different from those of the past.

To achieve a position of sustainable competitive advantage, tomorrows organization will be faced with the need to dispense with outmoded labels like marketing manager, manufacturing manager or purchasing manager.

Competitive advantage = Product excellence * Process Excellence


Revised Emphasis Product Excellence Current (%) Emphasis

Process excellence (%) 100 In the past the ground rules for marketing success were strong brands, backed up by large advertising budgets and aggressive selling. This formula now appears to have lost its power. Organizations create superior value for customers and consumers by managing their core processes better than competitors manage theirs. These core processes encompass such activities as new product development, supplier development, order fulfillment and customer management.

By performing these fundamental activities in a more cost effective way than competitors, organizations will gain the advantage in the market place. It is not only in consumer markets that the importance of logistics process excellence is apparent. In business to business and industrial markets it seems that product or technical features are of less importance in winning orders than issues such as delivery lead times and flexibility. This is not to suggest that product or technical features are unimportant rather it is that they are taken as given by the customer. Above figure suggests that for many companies the investment has mainly concentrated on product excellence and less on process excellence. This is not to suggest that product innovation should be given less emphasis far from it but rather that more emphasis needs to be placed on developing and managing processes that deliver greater value to key customers. Product life cycles are getting shorter. The effect of changes in technology and consumer demand combining to produce more volatile markets where a product can be obsolete almost as soon as it reaches the market.

Gaining competitive advantage via Logistics

Of the many changes that have taken place in management thinking, the most significant has been the emphasis upon the search for strategies that will provide superior value in the eyes of the customer. Competitive advantage can not be understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firms relative cost position and creates a basis for differentiation. The value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs and the existing potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply better than its competitors. Value chain activities can be categorized into two types. - Primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) - Support activities (infrastructure, human resource management, technology development, procurement) Support activities are integrating functions that cut across primary activities within the firm.

Competitive advantage is derived from the way in which firms organize and perform these discrete activities within the value chain. To gain competitive advantage, a firm must deliver value to its customers through performing these activities more efficiently than its competitors or by performing the activities in a unique way that creates greater differentiation.

Firm infrastructure

Support Activities

Human resource management Technology development Procurement

M a r g i n

Inbound Logistics

Operations Outbound logistics

Marketing and sales


Primary activities VALUE CHAIN

It is becoming progressively more difficult to compete purely on the basis of brand or corporate image. There is increasingly a convergence of technology within product categories which means that it is no longer possible to compete effectively on the basis of product differences. A number of companies have responded to this by focusing upon services as a means of gaining a competitive advantage. Successful companies seek to achieve a position based upon both a productivity advantage and a value advantage.

Hi Value Advantage Low

Service Leader

Cost and Service Leader

Commodity Market

Cost Leader

Low Hi Productivity advantage

For companies who find themselves in the bottom left hand corner of the matrix, their products are indistinguishable from their competitors offering and they have no cost advantage. These are typically commodity market situations and ultimately the only strategy is either to move to the right on the matrix i.e. cost leadership, or upwards towards service leadership. The cost advantage can be used strategically to assume a portion of price leader and if appropriate to make it impossible for higher cost competitors to survive. There is no middle ground between cost leadership and service excellence. Indeed the challenge to management is to identify appropriate logistics to take the organization to the top right hand corner of matrix.

Factors that provide competitive advantage to the customers

Total Cost Approach Direction for Logistics Logistics Management Aspects of Competition Location Staff and Service Taxation and Government Rules Faster Development of New Products Efficient Development Supplier Packaging Transportation Order fulfillment Inventory Customer Management

Total Cost Approach All relevant functions/costs in moving, sorting materials and products should be considered as a whole, not individually.

It includes following - Customer service - Demand forecasting - Documentation flow - Interplant management - Order processing - Packaging - Parts and service support - Plant and warehouse site selection - Production scheduling - Purchasing - Returned products - Warehouse and distribution center management

Direction for Logistics The businesses reaching a state of maturity started strategic use of logistics: - Involving channel partnerships, interorganizational logistics alliances, more direct interface with suppliers and customers. Logistics as a competitive weapon to secure and maintain customer loyalty by providing more responsive and flexible services.

Logistics Management Logistics management covers several areas where managerial responsibility is assumed. Aspects of Competition As the competition grew the aspects which were never considered before are becoming important in the company. Location The distance of the manufacturing unit from the place the demand exists should be the least for the competitive advantage over the competitor.

E.g. The companies like Larsen and Turbo created their manufacturing

facilities at different locations in India for their products to reach their products to customers easily. L &T opened manufacturing plants at Faridabad, Hyderabad, and Nasik in addition to their basic plant at Powai. Staff and Service The staff has to be such that it does not work as per shift timing. It has to be flexible as well as disciplined.

The staff is the main means of all the activities even when many matters are mechanized and automated.

Taxation and Government Rules There are different tax rules at different places at different times.

Companies are often seen exploiting the situations to make the higher profit margins. It is a part of logistics strategy to keep watch on these rules and regulations.

Faster Development of New Products The customer wants new products quickly.

There is a need to design and develop the new products. This needs improvement of internal procedures within the company as well as feedback from the market field. The total procedure has to be geared up in such a way that the new product should hit the market quickly.

E.g., The companies like Baja Auto, Hero Honda have been bringing new

models in market as a part of their strategy. Efficient Development of Suppliers Outsourcing of the components, sub assemblies or even the complete product has to be done to good suppliers.

In the new business field the supplier management has to be done well. Supplier becomes the extension of the companys production shops.
E.g., The companies like Britannia, Parle have been getting their products

made from captive vendors. Packaging The packaging of the product is non value added activity and the customer does not want to pay for it.

It is required to reach the product to the customer safe and secured.

Transportation The transportation is the main factor of the logistics function, which connects the manufacturer and the customer.

In number of cases where the products are sensitive, the products demand better packaging during transportation as well as skilled persons to handle. Often the transportation needs to be done in special vehicles like cold storage, at hot condition, at specific temperature as per the product need.

Order Fulfillment The company must provide the consignment when required at right place.

The supply of materials has to be done for the materials to reach the same in bunch and not in split deliveries in intervals.

The packs of the material in proper style have to be done only with the best knowledge of customer after discussion. Inventory Inventory is the matter which is called lesser the better.

In the field of logistics management the control on the inventory is achieved by good information system. Number of companies follows highly automated and computerized information system which gives the quick stock position at different locations as well as the demand of the customer.

Customer Management Customers have to be serviced in appropriate way. The place, the time and the product has to match their needs. All the matters can be done by proper data collection.

The data is analyzed and then it is decided as to what can be the strategy to manage the customer.

Logistics Information System (LIS)

To manage your logistics processes effectively, you need a well-designed management system. The basis of successful sales work is the co-ordination of orders, stock status and shipments as well as up-to-date information about the flow of goods. It provides total customer service, order status, availability of product, delivery schedule, inventory level, etc. Logistics planning is a systematic approach to logistics reengineering based on logistics planning. The planning process decides following. - Performance measures and goals - Processes - System requirement - Organization requirements for customer service and other processing - Inventory planning and management - Supply - Transportation and distribution Elements of LIS: - Information source - Information collection system - Storage of information - Processing of information - Retrieval of information - Report generation Activities covered by Internal LIS: - Data flow from external sources - Processing and storage of information within organization - Communication of data to decision makers - Communication of info to customers. Activities covered by External LIS: - Based on cooperation of customers. - Adequate info for advance planning, operations and control of logistics - Order pattern - Reorder point of customer - Ordering procedures. LIS coordinates functions of: - Supply demand coordination - Processing of purchase order, sales orders - Follow up with supplier and other departments for execution of orders. Levels of LIS:


Order registration Order processing Inventory planning Warehousing and distribution Transport and delivery



Inventory management Facility planning Channel integration Outsourcing Vehicle route planning


Capability and capacity planning Customizing Alliances and partnership


Customer service System productivity Cost control Asset utilization

Characteristics of LIS
Accuracy Interactive Availability

Format Timeliness


Principles of LIS
LIS must incorporate following principles to meet management information, needs and support organizational planning and operations. - Availability - Accuracy - Promptness - Exception base - Flexibility - Appropriate format

Availability Information must be readily and consistently available. It is necessary to respond to customers and improve management decisions. Accuracy Information must be accurate and reflect both current status and periodic activities for measures like customer orders, inventory levels, etc. Promptness The information must provide prompt feedback to management on various activities. Any delays in getting information will reduce planning effectiveness. Exception Based The information must be exception based to highlight problems and opportunities. Flexibility Information should be flexible in order to meet the needs of both the system users and the customers. Appropriate Format LIS reports should be appropriately formatted so that they contain the right information in the right structure and in right sequence.

LIS Operations
LIS operations include information relating to activities of receiving, processing and shipping of customer orders. They include following:

- Order management - Order processing - Distribution operations - Transportation and shipping - Procurement Order Management As the order enquires are received, the management enters the order and retrieves required information, edits the same for appropriate values and then returns acceptable orders for processing. Order Processing It allocates available inventories to offer to the customers and initiate replenishment orders. Allocation may take place on immediately or in batch mode Distribution Operations It incorporates LIS functions to guide distribution centers.

The physical activities include product receipt, material movement storage and order selection. Distribution operations direct all the activities within distribution centers using batch and real time assignments.

Transportation and Shipping It includes LIS functions to plan, execute and manage transportation activities.

These activities guarantee efficient transport resources utilization and effective carrier management.

Procurement Integration of procurement and logistics schedules and activities allow coordination of material receipt, facilities and transportation.

For integrated logistics, procurement LIS, track and coordinate receiving and shipping activities to optimize scheduling of facilities, transport and personnel.

Chapter: Warehouse
What is warehouse?
The products are manufactured at factory and supplied for the customer who is at distant place. Because the customers are well spread at several places and many types of products are manufactured, it is not possible to supply the products when required. So it is essential to stock the products. These products are stocked at warehouse. Number of warehouses has become need of a company to give proper service to the customers at remote places. It is an integral part of logistics system. It is a link between manufacturing and customer. Warehouse is location provided with adequate facilities, where bulk shipments are received from production center, which are then broken down to particular order size for shipping to customers as per requirements.


Customer Customer Customer



Customer Customer Customer


Customer Customer

Role/ Need of warehouse

It provides buffer on delays and uncertainty in transportation. Provides adjustments between production time and use of product. It links the production facility and the consumer or suppliers and production facilities It supports production by consolidating inbound materials and distributing them to the production facility at the appropriate time. It helps marketing to serve customers and expand into new markets. It can serve as a transportation consolidation facility. Companies can transport less than loads into a warehouse, consolidate them into full loads and then

transport them out again. This lowers transportation costs because the carrier charges less per unit for transporting a full load. Warehousing also acts as a reservoir for production overflow. This function known as stockpiling can take a variety of forms including seasonal production level demand and level production seasonal demand. Warehouse also acts as product mixing sites. The facility can stock a variety of product lines. When customers order a variety of products, the warehouse picks all the products ordered and transports them as one shipment. Warehouses facilitate production. A warehouse can assist production by receiving a product almost complete and then performing final subassembly based on local customer demand. Warehouses act as safety valves in plant strikes, supplier stock outs or transportation delays. If a carrier strike is likely, the warehouse can store extra inventory to reduce the chances of a stock out at the customer level. Warehouses smooth out production runs. Total production cost per unit can be decreased significantly with long production runs.



Customer Customer Customer



Customer Customer Customer



Customer Customer

Importance: - Supports customer service. - Achieve transportation / production economies - Availing discounts on quantity purchase - Maintain steady source of supplies - Meet changing market conditions - Reduce time and space distance between supplier and customer - Provide mixed products option to customers - Provide temporary storage of materials to be disposed off/salvaged - Support JIT (Just in time) programs throughout the integrated logistics system.

Components of warehouse
Space Equipment People


Space allows for the storage of goods when demand and supply are unequal. Space affects not only warehousing decisions but also the design of a logistic system. If a demand for warehousing space exceeds the supply, the price of storage increases as firms compete for the limited space.

Higher cost of space increases the price of the product. Equipment Warehouse equipment includes materials handling devices, storage racks, dock, conveyor equipment, information processing system etc.

The equipment helps in product movement, storage and tracking.

The type of equipment used in factory depends on the type of product and the interaction between the equipment and the other components of the warehouse. People People are the most critical component of a warehouse.

Space and equipment mean nothing without competent people. Manpower is required in order to run equipments.

Functions of warehouse
Movement Storage Information

Movement Movement is necessary when products are received from factory. It takes place in following four distinct areas. 1. Receiving inbound goods from transportation carriers and performing quality and quantity checks. 2. Transferring goods from the receiving docks and moving them to specific storage locations throughout the warehouse. 3. Order selecting the products for filling customer orders including checking, packaging and transporting to the outbound dock. 4. Shipping the goods outbound to customers by some forms of transportation. Storage Storage refers to the physical disposition of products throughout the factory.

This can be temporary or semi permanent. A temporary basis means storing a product that is necessary for inventory replenishment. Semi permanent storage is used for inventory in excess of immediate needs. This is called safety or buffer stock.

When products are received from factory, it is necessary to move them to appropriate storage place within the warehouse. Generally, products are received in big boxes having large quantity of products. These are to be broken down and the products are to be kept separately. Breaking big packs has to be done with care without spoiling the products.

It is necessary to provide the right and adequate storage and preserve the products properly. Information Information occurs at the same time the product is moved and stored.

Management captures data on inventory levels, inventory locations, throughput, space utilization and other information necessary to ensure that the warehouse is functioning successfully. The information can be used to assess warehousing effectiveness by examining equipment utilization rates, labor productivity and space utilization.

Apart from the above basic functions, other functions are: - Deliver the products to the right place - Keep the records perfectly in discipline - Maintain good housekeeping - Manage the people in perfect discipline - Avoid keeping surplus material - Verification of stocks at regular interval - Coordination and cooperation - Arranging transport

Types of warehouse
Private Public Contract

Private The firm producing or owning the goods owns private warehouses.

The focus of this type of facility is to store the firms own goods until they are delivered to retail outlet or sold. Cost involved: - Fixed capital expense in building, land, equipments, machinery etc. - Manpower - Maintenance - Office and other facilities expense - Repair cost - Insurance premium

Advantages include: 1. High volumes and high levels of utilization favor owning the warehouse because of economies of scale. 2. The firm can maintain lower delivered price or higher profits margins based on such economies. 3. Private facilities offer great deal of control regarding hiring and firing employees, benefit packages and operations within the warehouse. 4. Ability to maintain physical control over the facility which allows managers to address loss, damage and theft. 5. The firm can earn extra income from renting or leasing excess space in private warehouse. Disadvantage include: 1. A private warehouse is a depreciable asset to the firm which reduces net income and income taxes. 2. To make a private warehouse cost effective, the facility needs high product throughput to achieve economies

Public A public warehouse rents space to individuals or firms needing storage.

The services these warehouses offer may vary. Some provide a wide array of services including packaging, labeling, testing, inventory, maintenance, local delivery, data processing, etc. There are many types of public warehouses. A general merchandise warehouse offers standardized services for a wide variety of goods and potential customers. A refrigerated warehouse provides a temperature controlled environment for products like frozen food. A bonded warehouse allows goods to be stored without paying trade and duties until they leave the warehouse. Bonded warehouses are common for international trade goods because the goods can not be accepted into the country until they are inspected. Cost involved - Rent - Charges for facilities utilized Advantages include: 1. It lowers the capital investment needed to establish a warehouse. 2. Leasing offers flexibility. If a firms market shifts to another region, it simply leases space in the new area. It allows for flexibility in the amount of space leased. 3. The firm avoids responsibility for hiring and firing warehousing employees as well as the paper work associated with running warehouse. 4. Leasing offers tax advantage. E.g. no property tax. 5. No permanent liability. Disadvantages include: 1. Huge capital expenditure 2. Lacks geographical flexibility

Contract Contract warehousing is a specialized from of public warehousing.

In addition to warehousing activities, a contract warehouse provides a combination of integrated logistics services thus allowing the leasing firm to concentrate on its capacity. Contract warehousing provides customized services. Contract warehousing is a third party integrated logistics organization that provides higher quality services than are available from public warehouse. Advantages include: 1. Product seasonality 2. Geographic coverage requirements 3. Flexibility in testing new market 4. Management expertise and dedicated resources 5. Reduction in transportation costs Disadvantages include: 1. Direct handling expenses are incurred when moving goods into, through and out of a warehouse. 2. Direct storage costs are incurred regardless of the amount of goods moving through the warehouse. 3. Owning contract warehouse, one has to be dependent on third party performance.

Warehouse Design
In warehouse design, five interrelated variables should be considered. They are: 1. Land and building 2. Management and staff 3. Storage and handling equipment 4. Computers and software 5. Operating methods and procedures. Each of these variables can affect the others, they must be considered in an overall system framework and total cost analysis should be applied in the warehouse design decision. The design should consider following constraints 1. Return on investment 2. Available financing 3. Reuse of existing equipment 4. Flexibility of the facility 5. Existing land and building Other less evident constraints are: 1. Union and staff objection 2. Government regulations 3. Management preference 4. Software requirements The first step in warehouse design in forecasting demand for the companys products. This helps to estimate the required space.

One story facilities are usually better than multiple stories. A single story warehouse allows for single line flows of product. Following figure shows how a typical one story warehouse is laid out. Receiving and shipping docks are separate from each other to decrease congestion. Receiving Dock Storage Area Order Picking and Assembly Shipping Dock

Space utilization is another factor in warehouse design. One major mistake in warehouses is to use floor space fairly effectively but not cubic space. The company pays for all space in warehouse, so it should maximize its use. This leads to lower overall costs and higher productivity. Warehouse must include following trade-offs: 1. Fixed versus variable slot locations for product storage 2. Horizontal versus high rise layout 3. Order picking versus stock replenishment activities 4. Two or multi dock versus single dock layout 5. Aisle space versus rack space 6. Labor intensive operation versus mechanized operation 7. Degree of automation in picking Warehouse layout and design objectives must be: 1. Capacity utilization 2. Protect storage 3. Layout consider space and placement 4. Mechanized and automated as possible 5. High productivity in receiving, storing, picking and shipping 6. Flexible and allow improvements. 7. Adequate safety provisions like fire fighting equipment, alarms, accident control, prevention methods. How many warehouses are needed to effectively serve customers? Theoretically, the more warehouses in or near dense market area, the higher the customer service levels because goods can be delivered to the customer faster. However, warehouses are expensive and the benefits of more warehouses and better customer service must be weighed against higher cost. As the number of warehouses increases, transportation costs and stock out costs tend to decline, but inventory and warehouse cost increase. Following figure depicts these relationships.

Number of warehouses (Warehouse requirement)

Total logistics cost

Total Cost Warehousing costs

Transport costs Number of Regional Warehouses A firm should attempt to optimize organizational performance based on an analysis of the trade offs between increased warehousing costs and improved customer service. Some factors to consider when evaluating the optimal number of warehouse include: 1. The levels of customer service required 2. The number of customers, their location and buying habits 3. The amount and type of electronic data interchange (EDI) taking place between producers and consumers 4. Nature of product 5. Characteristics of market 6. Intensity of competition A trend is to use fewer warehouses to reduce total cost. More warehouses mean higher inventory and more frequent, smaller shipments and higher costs. Firms that reduce the number of warehouses must accurately forecast consumer demand to prevent stock outs and maintain adequate customer service. Logistics information systems like EDI often help to improve consumer demand forecasting and communication with suppliers and customers. Effective EDI application can improve order processing, product receipt and delivery to the customer. Whether to increase or decrease the number of warehouses should depend on the goals of the organization.

Warehouse Productivity
Warehousing affects profits so most firms measure warehouse performance. There are 3 reasons to monitor facility performance. 1. Warehousing cost 2. Warehouses cubic space 3. Warehouse cost and operations Firms should seek to improve warehouse efficiency. Areas of prime importance for efficiency improvement include:

1. Improving forecasting accuracy 2. Reducing or eliminating labor bottlenecks 3. Reducing the amount of product handling 4. Improving the product packaging 5. Smoothing out the variance in product flow in the warehouse 6. Installing improvement targets 7. Decreasing the distances traveled in the warehouse 8. Increasing the size of the units handled 9. Constantly seeking round trip opportunities 10. Improving the cube utilization in the warehouse There are three approaches to warehouse measurement: 1. Productivity 2. Utilization 3. Performance Productivity is the ratio of real output to real input. An example if the number of cases handled per labor hour. Utilization is the ratio of capacity used to measure available capacity. This could refer to the amount of space used by pallets, the number of employee hours logged, or even the amount of cubic space used compared to the amount available. Performance is the ratio of actual output to standard output. Example includes cases picked per hour versus estimated cases per hour and/or equipment hours run compared to estimated equipment hours.

Warehouse Information Systems

Without information transfer, warehouses would operate much less efficiently. Information technology EDI, automatic data collection and radio frequency systems have created advantages in warehousing, including improved customer service, lower costs and improved operations. These advantages come from computer interfaces in receiving, storing, quality control, order picking, error control, packing and shipping. Computerized warehousing operations have been developed and enhanced in requisitions, stock location, open orders, back orders and work standards. Positive results from computerized order picking systems include improved pick productivity, reduced errors, improved throughput, better worker satisfaction, improved customer service levels and a strategic competitive edge.

Electronic Data Interchange Electronic data interchange (EDI) has quickly become standard in warehouse management.

EDI refers to the exchange of machine readable data in a standard format between one companys computer and another companys computer. The result is a paperless transaction that offers several advantages First, simply reducing the amount of paper used can save money.

Second, EDI transactions save time because they are nearly instantaneous and use computers instead of people to move information which reduce errors. A third is improved customer service; data are transferred quicker, the order cycle time is reduced and the product arrives faster. Fourth, there are substantial savings in warehousing operations and delivery costs. EDI is ready made for a just in time environment. Production can be scheduled better with supplier and customer orders. By producing closer to supply and demand timing cycles, inventory carrying costs are reduced. A fifth advantage is reduced effort. Using EDI means that data need to be entered into the system only once. After that computers interface with each other without additional human intervention in transfer of data.

Automatic Data Collection ADC uses computer technology to enter information into a computer system with little or no human involvement.

The process enters data through machine readable bar codes and scanners. The result is a quicker and more accurate reading of data. Most often bar codes or Uniform Process Codes (UPC) are used to transfer data from a package to a computer through the use of an optical reader. Properly installed, ADC benefits warehouse management in a number of ways ranging from lower inventory costs to better quality control

Following are the benefits of ADC 1. Lower labor costs: The elimination of manual data entry reduces labor costs. 2. Reduced inventory costs: Having up to date on sales and production allows for less safety stock, reduced work in progress and fewer obsolete products. 3. Better quality control: ADC reduces quality errors in storing, picking and delivery. 4. Improved customer The better the information, the better the service: service. Errors are reduced, shipments are on time, product quality is consistent and billing statements are accurate. 5. Competitiveness: Being able to better serve customers provides a strategic, sustainable competitive integrated logistics advantage. Radio Frequency Systems Radio frequency technologies consist of terminals, network controllers and radio frequency units.

The terminals can be handled; vehicle mounted or fixed data collectors.

The radio frequency units are transmitters/receivers that communicate with the terminals. Radio frequency is a series of antennas placed under the roof of the facility. RF benefits warehouse operations through increased operator productivity reduced deadheading and decreased errors. Other benefits include better use of storage space, better control of stock rotation, shorter order cycles and better customer service. Following are the application of RF in warehouse 1. Receiving: The operator with a terminal mounted on the forklift can scan the bar code, upload the data into the host computer and make the products available for immediate use. 2. Put away: Once the data from the terminal are captured, the host computer can then instruct the operator where to store the products. Once the picking order is complete, the operator can confirm that the right products are being loaded into the vehicle by scanning the bar codes.

3. Shipping:

4. Stocktaking: Radio frequency systems can reduce the amount of manual stocktaking through the use of bar code scanning.

Chapter: Material Handling and Packaging

What is Material Handling?
Material handling is the movement of raw material, work in progress inventory and finished products within the factory. Material movement is the activity of moving material from one stage to another. Material movement can be inbound or outbound. In factory, when it is in process, received as raw materials in the form of saleable product. All these movements are inbound. As these saleable products move from factory to the hands of the customer, become outbound movement. Management is more concerned about outbound movement because it is necessary to look after customer needs. Material handling is the art and science of moving, packaging and storing materials in any form. A properly managed material handling can reduce cost, labor, increase safety, productivity, capacity and improve service. Handling activities in warehouse are loading and unloading while receiving and shipping, horizontal and/ or vertical movement in and around the storage areas, putting into storage and removing from storage. The physical material form is concerns material handling.

Objectives of material handling

Movement Time Quantity Space

Movement Product movement takes place into, through and out of warehouse.

Efficient movement helps to control cost and improve customer service.

Time Goods, raw materials and products must be available as and when required by the customers, production stations, warehouse etc. Quantity Products must be moved in the right quantity between production stations as well as to the customer. Space Material handling system should effectively use the available cubic space in the warehouse.

Space is expensive and must be utilized fully.

Apart from above objectives, following are the objectives to be considered. 1. Improve logistics management by ensuring efficient materials handling to reduce total logistics and effective customer service. 2. Reduce the number of handling of the material. No material should be handled in more than required time. 3. Develop good working conditions. All the working conditions should be safe and secured. 4. Reduce manual handling of the material. As much as possible avoid load sharing by person. Heavy work must be taken up by equipment or automation. 5. Cost reduction has to be achieved. Damage, wrong dispatch, waste etc are the sources of expenses. It is required to have efficient and effective handling of materials in production plants and the warehouse.

Principles of material handling

Plan well The needs, performance objectives and functional specifications of the proposed methods are completely defined at the outset. Standardization Material handling methods, equipment, controls and software need to be standardized. Minimize the work Same material should not be handled again and again. Right Ergonomics Human capabilities and limitations must be recognized and respected.

Safe and effective operations should be ensured.

Devices should be designed and located and material and material storage locations should be selected so that human effort expended through bending, reaching, lifting and walking is minimized. Selection of equipment Select the equipment with due consideration of movement of material and methods. Training Do not operate the equipment without proper training to the operators, to avoid accidents and damages. Adaptability Employ the equipment that can do wide variety of jobs. Unit Load Size of the load should be configured in a way that achieves the material flow and inventory objectives at each stage in the supply chain. Utilization of space Length, breadth and also height should be used to keep material. Unit Size Increase the quantity, weight, size of a unit load and keep good flow rate. Maintenance Preventive maintenance is must. Scheduled repairs must be done for all handling equipments.

Obsolescence When new improved handling system is brought in remove the old ones one by one to keep the efficiency of operations. System Coordination Operational systems should be followed. Receiving, keeping, dispatch should be well coordinated. Appropriate Automation Reduce human element where feasible at least to carry loads. Reduce potentially unsafe manual labor operations. Environmental Environmental impact and energy consumption should be considered as criteria when designing or selecting alternative equipment and material handling systems. Life Cycle Cost A through economic analysis should account for the entire life cycle of all material handling equipment and resulting systems. Smooth Flow Materials should move through the factory in direct flow patterns.

Reduce/avoid zigzagging or backtracking.

Accordingly production processes should be arranged to provide for direct material flows. Safety Ensure all the operations are safe for working persons as well as for material. Controls See that material handling system is used to improve the control on order fulfillment, production and inventory.

Types of material handling system

Manual Mechanized Automatic

Manual Manual material handling system tends to be labor intensive.

Manpower is involved in movement of material. Typical equipments would be hand dollies, storage racks, gravity flow conveyors, drawers, low racks, palate jacks, bins, etc. Manual handling system yield low throughput because of lack of handling speed. They use cubic space poorly.

Mechanized Mechanized material handling system is the most common type.

The forklift truck is the backbone of mechanized material handling system. It is used in production house and warehouse. It is good in material movement from one place to other because products can be elevated to desired level above the ground level. Other equipments would be conveyors, cranes, counterbalance rider, etc. Machine power, electrical energy, mechanical engineering techniques are used in place of labor.

Manpower is reduced in mechanized material handling system. Automatic Automatic material handling system is the most sophisticated material handling system.

It uses automatic storage and retrieval equipment, item picking equipment, robots, etc Automated material handling system seems superior in most situations but they are extremely costly and create problems when system crashes. In automatic material handling system, manpower is almost eliminated. Computer programs are used to achieve controls on the movement of equipments. Total movement is coordinated and perfectly synchronized. Benefits: 1. Increase storage capacity 2. Increase system throughput due to continuous and tireless use.i.e. Reduce labor costs. 3. The product quality improves due to elimination of human error in identifying materials and avoiding damages. 4. Automated systems identify parts based on bar codes. 5. They have better capability than standard inventory control system.

Material Handling Equipment Selection

If the firm plans to build a new structure, the facility should be designed around the material handling system. The type of system also depends on the type and amount of equipment required. The equipment selection equation is: What + Where + When = Equipment specification What refers to the type of material being handled in the factory. Material variables include handling characteristics, size, shape and stowability. Where refers to everything involved in routing the material throughout the factory. This component includes:

1. 2. 3. 4. 5. 6. 7.

type of movement length of the movement limitations of the movement building limitations mobility requirements transfer requirements the associated in transit operations

When means the material must be in the right place at the right time.

Material Handling Productivity Ratios

Material handling ratios help judge efficiency and productivity of the system. Developing a consistent set of ratios help to compare past performance to current performance. Following are the ratios of material handling.

MHL (Material Handling Labor) To get this ratio, divide the number of people assigned to material handling by the total number of operating personnel.

The numbers can be found by counting employees or through payroll records. Personnel assigned to material handling duties MHL = Total operating personnel

HEU (Handling Equipment Utilization) This ratio is obtained by theoretical capacity.

Theoretical capacity may be either when machines are carrying a full load or when the machinery is in motion. The equation for this ratio is as follows: Items or load weight moved per hour HEU = Theoretical capacity

SSU (Storage Space Utilization) To get this ratio, divide the number of occupied cubic feet of storage space by the total number of cubic feet of storage space available.

A common mistake in developing the total available space is to use only floor space and not cubic space. All factory space is available for storage, not just the floor space. Storage space occupied SSU = Total available storage space

ASP (Aisle Space Percentage) As space becomes more costly, available space must be better utilized.

Aisles are necessary in a factory and should not be used for storage because of congestion problems.

Like the storage space utilization equation, cubic feet of total space should be used. Aisle space ratios should be lower in automated material handling systems than in manual or mechanized systems. Space occupied by aisles ASP = Total space available

M/O (Movement / Operation) This equation shows the overall efficiency of material handling operations.

High ratios point to potential improvement by reducing handling steps or moving to mechanized or automated material handling. Number of moves M /O = Number of productive operations

MCE (Manufacturing Cycle Efficiency) MCE measures the effectiveness of product flows in the factory.

It will provide insight into delays. To get this ratio, divide the time spent in production or storage operations by the time spent in the department. Time spent in factory structure operations MCE = Time spent in the factory structure

DL (Damaged Loads) Damage adds to the overall cost of operation without adding value to the product.

The equation is as follows: Number of damaged loads DL = Total number of loads

Goods require protection as they move through the integrated logistics system. Packaging does not only help to prevent damage but also it helps to promote products and inform the customer. Packaging size, shape, material greatly effect productions labor efficiency as well as it influences the type and material of product inside the packaging. The easier to handle the product, the lower the transportation rate. Packaging varies by mode of transportation. Products transported by rail need more protection than those transported by air. Similarly goods moved by truck require less protection than those moved by rail. A product moving internationally, protection is the most important because goods move by water.

Purpose of Packaging
First most important is product safety. It should reach the customer in proper shape and size. The product should not get damaged, theft during the transportation. For example, products like TV set need to be packed properly to avoid damage during transportation. The product should be protected from environmental abuses till the time it reaches to the customer. This involves protection from damage, pilferage, contamination, physical effects and environmental conditions. During the logistics process, a packaged product can be damaged in transportation, handling and storage. For example, eatable material is packed in the polyethylene bags or foil to preserve against open air effects. Ease of handling the product is provided in the packaging. Odd shaped products are difficult to handle properly. When packed it should be easy to handle. Packaging helps in improving efficiencies of materials handling procedures, transportation, storage and order picking. Packaging the products in the form of master cartons, unit loads and containers promotes handling, transportation and store; efficiencies by speeding up handling, enabling high quantities to be transported, more quantity storage in same place and faster retrieval from storage. Packaging facilitates securing and stacking during transportation, storage and handling. Operative and functional instructions are displayed on the label stuck on the packaging. Packaging enables product identification and tracking, and displays product care information. It is facilitated by labels on the packages. Product identification improves efficiency in receiving and ordering picking. Tracking of the product during the logistic process improves logistical efficiency. Improvements in IT technology enables the utilization of bar code scanners, unproved efficiency in product identification and tracking and the resulting overall logistical efficiency improvement. Packing also provides the facility of displaying handling instructions to ensure proper care of the product during handling, transportation and storage. Making unitized packing. This involves having maximum weight, quantity in one pack to improve the sales. For example, in one pack more number of articles are packed which the client will buy at a time. Packaging also provides the attractive looks to the customer, which improves the selling the value of the product.

Environmental Packaging (Eco friendly packaging)

All products or services have some impact on the environment, which may occur at any or all stages of the products life cycle raw material acquisition, manufacture, distribution, use and disposal. This checklist focuses on the environmental impacts that may be relevant to purchasers of packaging.

The manufacture and disposal of packaging affects the environment through the extraction of virgin resources, emissions associated with energy used in manufacturing, disposal to landfill and litter. These environmental impacts can be reduced by good packaging design. Plastic packaging and coatings are always singled out as the main environmental culprits in our landfills. Packaging suppliers have stepped up their research in the production and sources of biodegradable packaging. Biodegradability is the ability of a substance to be broken down into simpler structures by living organisms, thus reducing its life in the environment. Standards for measuring the speed of this breakdown vary from country to country. Ordinary plastics do not break down. Plastics are made of long polymer molecules that are too large and too tightly bonded together to be broken down during composting. The bonds are permanent and hard to break. However, some companies are finding ways of designing plastics that perform the necessary functions of food packaging, but can be made to biodegrade in landfills after their use is finished. Plastic packaging and coatings are often singled out as among the chief contributors to the current environmental crisis. Technology currently exists to make packaging that is eco-friendly. It is only being used on a small scale, as yet. Eco-friendly packaging ranges from bioplastic containers, stretch wrap, and filling, to natural cellulose foam. Many packaging manufacturers are working on innovative ways to reduce the environmental impact of packaging, including making packaging biodegradable. Many biodegradable plastics are made from plant sources, particularly corn, wheat and potatoes. Not only are plant plastics - bioplastics - biodegradable, they are also made from renewable resources thus reducing pressure on finite petrochemical supplies. Moreover, eco-friendly labeling may serve as an essential point of differentiation for products, especially for those where biodegradable packaging becomes a tangible expression of a product's brand promise. Biota Spring Water sold in biodegradable containers - is one example of bottle decomposition. Lower cost, higher prices, differentiated brandsretailers ranging from Whole Foods to WalMart are taking noteso should marketers.

Assess the packaging using the waste hierarchy (reduce, reuse, recycle) bearing in mind the need for the packaging to do an effective job in protecting and containing its contents. Reduce Favor zero packaging or less material where appropriate. Reuse Reuse for packaging that can not be avoided or reduced, favor packaging that is or can be reused, e.g. containers that are picked up by the supplier for reuse.

Recycle Recycle where reuse is impracticable; favor packaging that is made from recycled material and/or material that can be easily recycled.

Packaging Functions
Contain Unitize Protect

Packaging Should:




Packaging requirements have been changed because of consumer demand for reuse. Many packages serve multiple purposes after the original products have been removed.

Because of environmental concerns, recyclable packages have been developed. Contain Packaging should contain goods to prevent shifting. Protect Packaging should protect products from damage during handling, storing and transporting. Apportion Packaging should apportion goods. This refers to reproducing production output to a size and shape desired by the consumer. Communicate Packaging should communicate. It allows information to be conveyed to the customer, written on packaging. For e.g. ingredients, nutrition facts, quantity etc. should be specified correctly. Convenient Packaging should be convenient allowing the customers to use the product with ease. Unitize Unitization allows packages to be consolidated into larger packages and finally unitized into single unit for shipping.

Unitization makes it easier to handle and transport the product.

Packaging Units
The word package evokes a distinct image in the consumers mind, whether it is a square, rectangle, or circle.

In logistics, the term package is simply one step in the total packaging processes. Building Block First building block is the package itself.

This is what directly contains the product. For instance, pot pies are packaged inside an aluminum or paper container. The container then becomes the package. For efficiency, the individually packaged pot pies are placed into a large carton that can hold many pot pies. The box allows the pot pies to be moved in larger amounts without much work. The boxes can then be palletized. In palletizing, boxes are accumulated and stacked to form a single, large unit. This process is referred to as unitizing, which is defined as the consolidation of individual items into one shipping unit, or the securing or loading of one or more larger items into one structure.


This saves money in handling, transporting, storing, loading and unloading and loss and damage. Container Once unitized, products can then be containerized.

Multiple pallets are loaded into steel containers for further movement. As with palletizing, containerization saves money and increase productivity.

Packaging Tests
Because of the constant handling, moving and storing of products, the packages must be properly constructed. Packages are tested against the situations that can be expected in handling and shipping. Primary tests are: - Vibration - Dropping - Horizontal impact - Exposure to temperature - Moisture - Rough handling - Compression Additional tests are performed for hazardous materials, including radioactive materials. The more protective the package, the lower the loss and damage probability. Transportation and warehousing rates will be lower. Likewise, if the package is easy to load, unload, and store, transportation and warehousing costs will be lower.

Packaging Types
Basic packaging types can be divided into following: - Protective packaging - Flexible packaging - Custom packaging Protective Packaging You need dependable protective packaging to ensure that your products are shipped safely. No matter what your application, sending out an order for your company or mailing a care package, you will want to make sure you have good packaging material.

You can prevent the waste of products, time, and money that occurs when products arrive at their location damaged. You need to ensure that any package you send has been adequately wrapped. Packages should be inspected to make sure it is protected from the bumps it is most likely to take in transit. You should also be aware that packages are sometimes exposed to potentially hazardous weather conditions. There is a wide selection of protective packaging available today, with the type you use depending on what you are shipping. For example, most items will require a few different shipping supplies, while photos can be shipped quite safely in a simple padded envelope. Some of the most common protective packaging includes bubble wrap and insulated containers.

Flexible Packaging Flexible packing includes such things as wraps, bags, and pouches.

One of the advantages of flexible packing is that you can use less and still achieve your desired results. Not only does flexible packaging reduce waste, a goal of most people these days, it allow you much more flexibility than you would have with semi-rigid or rigid packaging options. In addition to reducing waste, another benefit of flexible packaging is that it is less expensive for product manufacturers. Flexible packaging also gives you some great marketing advantages, including innovative designs and allowing the consumer to see the product directly because the product is not obstructed by a bulky box.

Custom Packaging The Internet gives you access to a wide selection of custom packaging firms.

A custom packager is a great business partner for both outsourcing your packaging tasks and designing custom packaging options.

Apart from above basic packaging types, others are: - Paper and carton packaging - Film packaging - Foam packaging - Textile packaging - Plastic boxes and containers

Paper and Carton Packaging Paper and carton packaging is used for different types of goods (food, electronics, toys, shoes, kitchenware and even other packaging materials).

Paper and carton packaging companies produce wrapping paper, inflated paper, sheets, boxes, tubes, pallets, interlayer, corners, edges and custom protective systems (depending on the dimension and shape of the packed good, the carton is cut and modeled to fix and protect the product). Paper can be used to laminate other materials in order to make them stronger. There is also anticorrosive paper that can be used to wrap goods or to laminate other materials.

Film Packaging There are multiple types of films used in the packaging industry, most commonly polyethylene (PE), polypropylene (PP), polyolefin and polyvinyl chloride (PVC) films.

The films usually come on a roll and are used to wrap goods, cover goods, protect boxes and make other packaging products (such as bags, tubes, bubble wrap and sheets). Films can be used for lamination, printed or perforated. They can be anticorrosive, antistatic, shrinkable or nonshrinkable, and slippery or nonslippery.

Foam Packaging Foam used for packaging can be produced on a roll or in sheets of different thicknesses.

The foam is used to wrap goods or make bags (usually laminated with highdensity PE), corners, edges and custom systems. The corners and edges are used to protect flat glass, furniture and sharp edges. Foam can be cut and modeled on the product's shape to fix and protect it. It can be antistatic and has good insulation properties.

Textile Packaging There are some goods that are best protected by textiles. For example, there are custom-made textile insertions used in the automotive industry to protect car parts during transportation.

The textile insert is put on a metal frame that fits into a metal container. There is also textile material used for box covers.

Plastic Boxes and Containers Multiple types of plastic boxes and containers are used in all industries. For example, in the food industry there are plastic containers for goods like ketchup, yogurt, milk and juices.

Plastic boxes are mainly used for transporting goods and are reusable. They can be stacked, folded when empty to save storage space and recycled.

Chapter: Transportation
Introduction to transportation
Transportation links the various integrated activities. Without transportation links, raw material can not flow into the warehouses and plants, nor can the finished product flow out of the plant to field warehouses and finally to the customer. The backbone of the entire supply chain is the transportation management.
Raw Material Storage Movement / Transportation Mov. / Trans. Manufacturing Mov. / Trans. Finished Goods Markets Storage Mov. / Trans.


Plant 1 Plant 2 Plant 3






Transportation interfaces in integrated logistics

Modes of Transportation (Intra-mode)

There are five major modes of transportation 1. Airlines 2. Motor carriers 3. Pipelines 4. Railroads 5. Water carriers

Airlines This mode is used mostly for delivery of high value and low volume goods from distant suppliers.

It is also suitable for emergency item to be delivered for some specific requirement of urgent needs. Savings are generated due to inventory reduction at different stages. Mainly it is used for international transport. They specialize in time-sensitive movement of documents, perishable items, technical instruments, high valued products. Most airline costs change over a short period of time and depend on output, making airlines mainly variable cost carriers.

Advantages Airlines are fastest terminal to terminal mode of transportation.

It is reliable mode of transportation. Predominantly a variable cost carriers. The fix cost of loading, unloading, order processing is lower in total transportation cost. Terminals represent a major fixed cost in other modes, but airline terminals are publicly owned facilities for which the airlines pay user fees. speed.

Disadvantages Airfreight service cost is more than other modes, primarily due to their -

Air carriers provide terminal to terminal service meaning that direct delivery to a consumers door is not possible. Airlines transport small volume shipments rather than large volumes, and packaged products rather than heavy bulk commodities. The physical configuration and cost of air service limit the variety of products shipped by air.

Motor Carriers (Road) The road transport is most popular mode of transport.

This mode is used by suppliers to deliver goods in cost effective manner and best suited for short distances. Many transport companies have expertise for fast delivery, packaging, etc for making scheduled delivery. Container is the best way to transport material on large scale in safe way. It is the new type of design of vehicle on the road. These get restrictions of movement on the broader roads like national highways. So it is essential to design and plan the route of the travel before hand.

Advantages Good speed to expedite the transportation. -

Provides flexibility to provide door to door delivery of the goods and broad geographic coverage. Because trailers vary in length, temperature control and form, motor carriers can carry a variety of products.

Disadvantages High variable cost involved which is next to air transportation. -

Motor carriers rates are high compared with all other modes. They face gross weight and length restrictions as well as other legal limits. Motor carriers are susceptible to delays because of bad weather or traffic congestion.

Motor carriers are not well suited to handle extremely heavy, bulky products because the trailer is not properly constructed to ship such significant weight efficiently even when permits allow the legal restrictions to be lifted.

Pipelines Pipelines are unique mode of transportation.

They are fixed in place and the product moves through them. They can transport product only in a liquid or gaseous state. Types of product transported are gas, water, slurry, petroleum products etc. Petroleum is the number one product moved by pipelines. The construction of a pipeline becomes cost effective only when the high initial fixed cost can be spread over enough volume to keep the unit transportation cost competitive with the other modes.

Advantages This mode can move more tons in a single shipment than any other mode

of transportation.

Pipelines are cost effective where large quantities of liquid products need to be transported. Pipelines offer one advantage that none of the other modes can offer: a pipeline is a continuous flow mode. When the pipeline is full, the product flows to the destination immediately and continues to do so without fail. Pipeline is the most dependable mode of delivery, unaffected by external factors like weather. Slurry pipelines which move solid materials such as coal that is suspended in a liquid, do exist but they have met with considerable opposition from railroads and water carriers. This mode of transportation limits the type of products they can transport. They can transport only product in a liquid or gaseous state. Main disadvantage is high expenditure of installation of the infrastructure for pipeline. There is need to have good protection for the line. Pipelines can rarely deliver the product to the consumers door and the origin and destination of the mode are fixed unless household water and gas lines are taken into account.


Railroads This is the most economical and safe transportation mode.

This is good for long distances transferring of goods. Railroads transport a significant amount of domestic freight.

This is used for delivery of a wide range of goods including coal, iron ore, cement, food grains, sand, stone, grain, automobiles, fertilizes, steel, petroleum products and other heavy goods. Recently, rail has regained some freight lost to motor carriers through increases in inter-modal operations- trailer of flatcar (TOFC) or piggyback and container on flatcar (COFC). The use of standardized containers that can be removed from a ship and placed directly on a railcar for surface transportation has helped rail carriers regain market share. Companies like Godrej, Tisco, Telco or those shipping products like iron ore and heavy machines install a rail line extended up to their dispatch stores, from where the goods can be sent out.

Advantages Railroads haul high density, low valued freight over long distances at rates

lower than trucking and air, but higher than water and pipeline.

It is less expensive mode of transportation. Rail transportation has benefited from significant levels of international inter-modal freight, which currently provides the industry with its highest growth rate and profits.

Disadvantages They lack flexibility and high speed delivery in their standard operation. -

Railroads have been unreliable due to poor scheduling, a substandard infrastructure and unreliable equipment. There is need for the infrastructure, where the set up cost is high same as the pipeline structure. The products dispatched by the railway mode generally need good packaging. Since the routes are laid down. Generally it is difficult to expect the transporter to be nearby the track. So it is required to have combination of modes along with the rail mode.

Water Carriers This is used by firms for delivery of goods from distant suppliers, mostly conducted in containers of varied size.

This is mode is ideal for transportation of heavy and bulky goods and suitable for products with long lead times. Water carriers dominate international transport because of their cost structure and ability to transport large volumes. Bulk carriers are constructed to haul commodities like coal, iron, ore, or agricultural products. Furthermore significant growth in container ships shows the impact containerization has had on water carriage. Standardized containers are loaded, placed on container ships, and shipped across the ocean to their destination.

Water carriers are classified as private or for-hire, domestic or international and tramps or liners.

Advantages It includes long haul capabilities particularly for low valued products

such as coal, stone, grain, ores at low rates.


Since water carriers haul a wide variety of commodities, they operate a variety of ships.

Private or for-hire shippers are available. Disadvantages Inter modal transportation is must for this mode, since the sea shore is not expected at every place.

Allow shippers to compromise on the benefits of each mode used to transport product. This mode can exploit the advantage of different modes, such as containers from ship to train. Mode of Transportation

Cost (1) Speed (2) Reliability (3) Capability (4) Flexibility (5) Capacity (6) (1) (2) (3) (4) (5) (6)

Airlines 1 1 3 4 3 4

Motor 2 2 2 3 1 5

Pipelines 4 5 1 5 5 1

Railroads 3 3 4 2 2 3

Water 5 4 5 1 4 2

1 = most costly 1 = fastest 1 = most reliable in terms of meeting schedules on time 1 = best ability to transport various products 1 = most flexible in terms of door-to-door delivery 1 = ability to carry highest amount of tons in one trip

Mixed modes (Inter-modal transport)

It is not always possible to transport goods by only one mode due to economy of transportation, long distance of transportation. So it is essential to have mixed modes. Inter-modal transportation is using more than one mode of transportation to move goods from origin to destination. Growth in inter-modal movements can be attributed to several circumstances including industry deregulation, global business expansion, and the application of new techniques to improve inter-modal processes.



Air Birdyback

Rail Fishyback Pipeline Water

Inter-modal transportation allows shippers to compromise on the benefits of each mode used to transport the product. Piggyback (TOFC / COFC) For instance, for long distance travel the trailer takes the container up to the nearest railway station and further journey is done on railway track.

This offers economy of railways as well as good accessibility of road vehicles. This is famous with the name Piggyback or TOFC (Trailer on Flatcar). The freight is loaded into a semi trailer and driven to a railhead where the trailer is placed on a flat railcar. The railroad transports the shipment across country to its rail destination. When the railcar arrives at its destination, a motor carrier takes the semi trailer to the receiver. This type of inter-modal transportation allows the shipper to take advantage of less expensive rail rates while maintaining the door-to-door capabilities provided by motor carriage. Piggyback services may use ocean containers with flatcars or with flatbed trucks or both. Containers are taken from a ship with specialized cranes or forklifts and placed on a railcar or flatbed truck for surface transportation. Many rail companies offer double stack cars, which allow two containers to be transported on the railcar. This type of container on flatcar (COFC) service allows a shipper to transport goods over water and surface without having to waste time and money unloading and reloading trailers or railcars. COFC allows for inexpensive and efficient transportation of a wide variety of goods.

Fishy back A popular method to combine the water mode with road vehicle to get benefits of both methods.

This is called as Fishyback. The truck or the trailer rides on the ship for the portion of its journey.


Bill of Lading
A bill of landing is a type of document that is used to acknowledge the receipt of a shipment of goods. A transportation company or carrier issues this document to a shipper. In addition to acknowledging the receipt of goods, a bill of landing indicated the particular vessel on which the goods have been placed, their intended destination, and the terms for transporting the shipment to its final destination. Inland, ocean, through and air way bill are the names given to bills of lading. An inland bill of landing is a document that establishes an agreement between a shipper and a transportation company for the transportation of goods. It is used to lay out the terms for transporting items overland to the exporters international transportation company. An ocean bill of landing is a document that provides terms between an exporter and international carrier for the shipment of goods to a foreign location overseas. A through bill of landing is a contract that covers the specific terms agreed to by a shipper and carrier. This document covers the domestic and international transportation of export merchandise. It provides the details of the agreed upon transportation between specific locations for a set monetary amount. An air waybill is a bill of landing that establishes terms of flights for the transportation of goods both domestically and internationally. This document also serves as a receipt for the shipper, proving the carriers acceptance of the shippers goods and agreement to carry those goods to a specific airport. Essentially, an air waybill is a type of thorough bill of landing. This is because air waybills may cover both international and domestic transportation of goods. By contrast, ocean shipments require both inland and ocean bills of landing. Inland bills of landing are necessary for the domestic transportation of goods and ocean bills of landing are necessary for the international carriage of goods. Therefore, thorough bills of landing may not be used for ocean shipments. Inland and ocean bills of lading may be negotiable or non-negotiable. If the bill of landing is non-negotiable, the transportation carrier is required to provide delivery only to the consignee named in the document. If the bill of landing is negotiable, the person with ownership of the bill of lading has the right of ownership of the goods and the right to re-route the shipment.

Transportation Manager Activities (Responsibilities)

The transport manager plays an important role in controlling the logistics cost. He has to design and plan the shipment in such a way that firstly it satisfies the customers need of timely reaching the goods to right place and further he has to see that the cost to the company is minimum. Following are the responsibilities of transport manager:

Contract negotiations Efficiency improvement Evaluation of customer service quality levels Supervision

- Skill requirements Contract Negotiations Deregulation brought contract transportation industry.







A transportation manager may negotiate to buy transportation services, to sell transportation services or both. The role of buyer requires different preparation from the role of seller. Buyers may focus on the ability of the seller to meet specific delivery requirements or provide special handling of materials. Sellers may focus on profit margin, labor requirements, frequency of shipments, or lane balance. Negotiations should address any items important to the relationship between buyer and seller. Rates, volume, customer service standards, handling of loss and damage claims, the length of the relationship and special services are often featured in negotiations.

Efficiency Improvement Most transportation managers seek to improve operational efficiency.

Increased competition creates pressure to eliminate unnecessary expenses. The cost of transportation may catch the attention of upper management. When this happens, the transportation manager may review operations for potential cost cutting and customer service enhancing opportunities. Managers faced with the need to improve bottom line figures often seek improved asset utilization through increased consolidation and improved routing and scheduling.

Evaluation of Customer Service Quality Levels Transportation managers must measure customer service.

This demands a process to monitor and improve those services. First, the manager must identify the primary transportation customers. A transportation manager at a large retailer might define the retail outlets as customers. A third party might define customers as those who ship freight through them.

A good long term relationship requires continuous improvement of services and of the quality associated with providing those services. The quality is measured by customer standards. Key issues include terms of sale, credit arrangements, transit time reliability or consistency, door-to-door transit time, loss and damage percentages and handling of lost or damaged shipments.

Supervision A key activity for any transportation manager is the supervision of personnel.

While structure varies dramatically by organization, most managers supervise someone. At a small firm, the transportation manager may directly supervise the people executing day-to-day activities (e.g. routing, dispatching, scheduling). An integrated logistics manager for a large international company may oversee supervisors and managers charged with customer service, materials handling, transportation and inventory control. A manager with this supervisory responsibility may act as a transportation manager, warehouse manager, information manager and more.

Skill Requirements A successful transportation manager must understand the transportation industry, as well as the logistics requirements of the firm.

This includes far more than simply buying transportation services from third party providers or contract carriers. Many organizations transportation. operate private carriers, providing their own

The integrated logistics manager and staff must thoroughly understand the management of these services. Even when using purchased, for hire transportation, logistics professionals still need a sound understanding of transportation management. Many careers frequently cross over between integrated logistics and transportation management.

Transportation cost structure

Four basic costs are associated with transportation: 1. Fixed costs 2. Variable costs 3. Joint costs 4. Common costs

Transportation Cost

Fixed Cost

Variable Cost

Procedure Expenses

Loading / Unloading Density

Product related

Market related

Size/ Shape

Space Filling Capacity

Distance To Customer

Freight Traffic

Difficulty in handling Season effect

Fixed Cost The fixed cost is the expenses involved in procedure part.

Govt. regulations

A fixed cost does not vary with a change in output, at least for the period under consideration. In other words, certain costs are constant regardless of the firms activities. This has the cost of paper work and the personnel working for the transportation company. Also all the overheads of the office, rent of the place, etc are considered. Other part is the loading, unloading charges. As per the product needs and the environment these are applied. Example of this would include the capital invested in railroad tracks, airplanes or tractors. Pipelines are categorized as heavy fixed cost carriers. They own their right of way and their terminals. Railroads are fixed cost carriers because they own their equipment and tracks. Economies of scale arise from increased volume, which allows per unit costs to be kept low by spreading fixed costs over more units.

Variable Cost A variable cost changes as output changes.

Fuel costs, wage, maintenance costs, and tire replacement depend on output. The transportation takes almost around 3 to 3.5% of the total cost depending on the type of product.

All costs, in the long run are variable. For instance, a locomotive is eventually no longer usable and must be replaced. For the twenty five year of life of the locomotive, the cost is fixed. When a new locomotive is purchased to replace it, the cost changes; it is no longer fixed. The cost of transportation is comprised of the two types of criteria as follows: 1. Product related criteria 2. Market related criteria Product related criteria o The product related issues are the physical attributes as dimensions of product like density, the shape, and space filling capacity of the product. o Density of sand is more than cotton. o By the law of load transportation, cost per unit weight decreases with the size of the consignment. o For example, 8 kg consignment will cost less than 5 kg consignment on per kg basis. This is due to the fact the other expenses of order processing and execution remains almost the same. o Space filling capacity or Iron flats is more than that of chairs or tables to be carried in the truck. o Difficulty in handling is also related in transportation cost. The product like petrol pump or the electronic items like TVs are difficult to handle since they are very sensitive for getting damaged. With the increase in difficulty the cost rises. Market related criteria o This cost content of the cost is covered by the distance to be traveled. o Longer distance will be costing more. o The principle of the distance indicates that the cost decreases with the increase in the distance if the load is take at one stretch instead of taking in two or more gaps. o If 100kg load is taken to 700 km in one stretch it will cost less against 100kg load taken to 500 km in two or more gaps. o Government regulations, octroi, road taxes, toll are covered with respect to market issues.

Airlines are a variable cost mode because they do not own their rights of way. In keeping with the definition of variable costs, airlines pay take off and landing fees only when they take off and land. Other large variable costs include fuel, wages and maintenance. Motor carriers do not own the way, or path, of travel. They are variable cost carriers. Water carriers are variable cost carriers because they do not own the waterways.

Joint Cost A joint cost occurs when the production of one product or service requires or offers the production of another product or service. For example, a railroad moves goods from city A to city B. It now has engines available in A to provide back haul service to B or additional transportation from A. The cost of placing the train in A is a joint cost with B to A run and whatever run follows it. Fixed and variable costs can also be joint costs. Common Cost Common costs can not be directly associated with a product or activity.

Modal Characteristics and Selection

Rail, water, truck, pipeline and air transportation all offer advantages and disadvantages. The choice of mode depends on the nature of the goods, access to carriers, price, speed or transit time, security of the goods, government regulations, safety and fit with integrated logistics strategy.

Nature of the goods Low valued bulk goods seldom fly.

A dump truck load of sand will not bear the freight cost of flying; neither will it package well for handling in air freight operations. By the same token, diamonds and silicon chips rarely move by tramp steamer. The transit time is too uncertain, the value of the goods too high, and the chance for loss or damage of the package too great in ocean freight handling. Items like flowers, food articles have to be carried by air mode of transportation only. These extremes illustrate how the nature of the goods and the nature of the shipment affect modal choice. Such choices rarely require much analysis to lead to a decision.

Access to carriers Not all shippers can readily access all modes of transportation.

Moving iron and copper by water would make economic sense. The ores have bulk, require no protection and will tolerate slow transit times. The navigable water system for the India does not reach all points. There is a saying in trucking industry that if it got there, a truck brought it. However, motor carriage is expensive, so the truck may carry the goods only a short distance.


Air transportation costs more than motor transportation, which costs more than rail, which costs more than water, which costs more than pipeline. Taking transportation costs alone into consideration, costs relate directly to speed the higher the cost, the higher the terminal to terminal speed. However, to consider only terminal to terminal costs is to err. Goods do not move from terminal to terminal. They move from origin to destination, which often means additional costs. In integrated logistics, time is measured in how quickly the goods move, not how quickly the vehicle moves. A train may go ninety miles an hour over good track with no grade crossings, but if the goods spend a week in the rail yard waiting for final delivery, it does not matter. Pricing based on costs takes into account the total cost of the service, which includes both time and money.

Transit time Transit time is the time from the shipment of the order at the origin to the receipt of the order at the destination.

Transit time may be a significant part of the order cycle, which describes the time from order placement to order receipt. Transit time should be measured from shipper door to customer door not from terminal to terminal. Usually shippers prefer shorter transit times. Shorter times improve customer service and reduce in transit inventory. A firm may prefer slower transportation and longer transit times. The longer times allow a firm to use the transportation vehicle as a moving warehouse.

Security of the goods Terminals and other stops in the system risk goods in any logistics system.

When goods are in transit - in a moving vehicle - many hazards disappear. Theft is less likely, damage usually does not occur while the vehicle is in motion. Motion itself may cause damage in some instances, but more damage occurs as a result of poor handling or poor packaging. As a general rule, truck load trucking maintains the security of the goods better than other modes of transportation. The safety of the transportation personnel and the general public may also affect how goods are secured and what mode they take.

Safety Safety concerns in modal selection range from protecting the general public from explosions to protecting carrier employees as they load and unload the goods.

Some goods might economically move in bulk, but safety concerns require that they be packaged some chemicals in drums rather than as liquid bulk goods. Such issues will affect mode choice. Packaging interacts with safety concerns, which in turn affect modal choice.

Carrier Characteristics and Selection

Carrier selection logically follows mode selection. Having chosen a mode of transportation, the integrated logistics manager must decide which carriers or carriers to use. The choice will depend on which carrier best manifests the characteristics of the mode. Carriers are chosen on the basis of price, accessibility, responsiveness, claims record and reliability.

Price Price will often influence carrier selection, Many integrated logistics system demand the basic service offered by a mode of transportation. Managers assume, often correctly, that most carriers provide that basic, core service, so the major distinction between carriers is price. Often variable influence the price for transportation services, including volume, handling requirements, liability, market factors, density, stow ability and distance. Volume affects a carriers economies of scale. Economies of scale occur when long run average costs decline as output increases. Since average costs decline as volume increases, prices usually decline accordingly. The more goods are handled, the greater the cost to the carrier. Handling requirements may include repalletizing or repackaging goods, ordinary cross docking of less than vehicle shipments, specially trained labor, and special handling equipment. The more susceptible a shipment is to loss, damage or theft, the greater the carriers liability cost for the freight. Fragile or easily damaged freight results in more liability claims from shippers. Stow ability refers to how the product being shipped will affect the space utilization in the vehicle. Certain products ship well and waste little space (e.g. a television set in a square box), while other products stow poorly and force a carrier to haul air. Products resulting in a wasted space are typically charged a higher price per unit. Distance has a major impact on transportation pricing. As distance increases, the total cost (variable and fixed cost) of the shipment increases at a decreasing rate.

Accessibility Accessibility is the cornerstone of service for a shipper.

The transportation capacity must be available when and where the integrated logistics system needs it. Rail and motor carriers often spot equipment at customer sites to ease loading and unloading of railcars and trailers. The carrier that places equipment in this manner usually creates a competitive advantage over those that do not. Large carriers may enjoy an advantage in coverage serving many states with much equipment over small carriers. Small carriers may make equipment available to shippers when large carriers will not or can not.

Responsiveness For carrier selection, this means how readily the carrier responds to changing customer needs.

Some carriers provide service under detailed contracts but provide only those services described in the contract. That sometimes leaves the customer seeking unspecified services, often from another carrier. This opens opportunities for small, flexible carriers to fill the seams in the contract, or even to grow at the expense of the large contracting carriers.

Claims record Some carriers damage goods more often than others. Because of this, the low priced carrier may not be the low cost carrier.

What happens when goods arrive damaged. The customer can not use the goods so they must be discarded or returned at someones expense. The receiver experiences poor service, the shipper has a dissatisfied customer and the carrier pays a claim.

Reliability Carriers that consistently deliver goods on time add more value than those that do not. They are worth more.

The importance of reliable delivery and pick up rises as firms move toward JIT, quick response and ECR programs. The higher the reliability requirements, the more likely goods will move by faster modes and faster carriers.

Private Fleet or For Hire Carriage

Some firms operate their own fleet, while others hire outside carriers. Still others use both their own fleet and outside carriers. A private fleet provides control but also subjects the firm to all the management problems encountered in operating a carrier. Back hauls, lane imbalances, driver turnover, pallet return, container utilization, railcar repositioning, or a host of other problems may accompany the private fleet. Using for hire carriage sacrifices control but leaves the worry of vehicle utilization to the carriers management. The mixed fleet, using both private and for hire carriage, may realize the advantage of both, but also brings with it the disadvantages of both. The private fleet choice often hinges on accessibility to specialized equipment and the need for tight control over delivery. Highly specialized vehicles lead to private fleets, while general use vehicles encourage for hire carriage. Tight control requires a private fleet, while lesser need for control suggests for hire carriage.

Chapter: Facilities (Plant) Location & Layout

Plant location decisions concerns both manufacturing and assembly units (i.e. fertilizer plants, steel plants, cement factories, textile miles, sugar mills, breweries, refineries, thermal and hydro-electric plants, automobiles, rubber factories, etc) as well as service organizations (banks, hospitals, recreation centers, repair shops, godowns, warehouse, etc.) Plant location decisions being strategic, long term and non-repetitive require detailed analysis of long term consequences because: 1. Poor location of the plant can be constant source of higher cost, difficult marketing and transportation, dissatisfaction among the employees and customers, frequent disturbances in production, substandard quality, competitive disadvantage, etc. 2. Once the plant is set up at a particular location, it is comparatively immobile and can be shifted late only at a considerable cost and interruption of production. 3. The investment in land and building is quite large in case of bigger firms and economics of one location against another need to be evaluated carefully to ensure fair return on such investment. Locational decisions generally arise when: 1. A new manufacturing unit is to be set up. 2. Existing plant operations are difficult to expand due to poor selection of the site earlier. 3. The growth of the business makes it advisable to establish additional facilities in new territories. 4. There is emergence of new social. Political or economic conditions which suggest a change in the location of the existing plant. 5. The product developments have out weighted advantages of the existing plant. 6. The changes in the industrial policy of the government, favoring decentralization and dispersal of industries to achieve overall development of the country, do not permit expansion of the existing plant. The location for the facility (factory) have bearing of the following points:

Factors for Selection of Location

Land The location of a factory or group of factories is the actual physical location or block of land. There are some basic locational constraints for the site such as a plentiful supply of flat land. If hilly land is taken at cheap rate ultimately it becomes costly after the building is constructed. The land is the basic need for the plant. The land should be ample. It should not only be sufficient for the proposed need but also for the future expected expansion plans.

Manufacturing Facility The required machinery, tools accessories are required to run the plant smoothly.

The suppliers of these should be well in proximity of the plant location. The suppliers of the goods should be responsive to the needs of the accessories. It should be avoided by the plant to keep the stocks of the accessories. These are costly. What is required does not exist and what is not required is lying in the stores. Such being the particularly of the machinery accessory, it is recommended not to stock them. So they must be available at hand at any time required.

Taxation and Regional Concessions There are number of regions where many concessions are offered by the ruling governments in taxations and other regulations. By this lot of money is saved by the companies.

The states Gujarat and Andhra Pradesh are good examples, who invited new investments with good proposals in their states. The states offered lot of incentives which are attractive to start ups. The industrial culture grew there.

Access to Transport The supply of the raw material and dispatches of finished goods are the basic needs. These have to be quick and easy.

This needs good access to transport arrangements. From the point of view of the heavy goods, it is highly desirable to have nearness of the railway track. Many large scale manufacturing companies have the railway track. That helps the incoming raw material to be received easily and also finished goods to be dispatched comfortably. Companies like Godrej, Tata motors, Tisco, etc. have such arrangements. They have specially laid down track for their use. General motors get the delivery of their components from vendors by two trains daily, directly on the assembly line so that they reduce their stores inventory to implement JIT principle. The manufacturing plant should be well connected to the highway. This helps material as well as men to reach to the place easily.

Power/ Fuel Energy Power is basic essential source for any organization.

The machine work only with power. Without power there is no point in setting up machinery.

There are some regions where the power is not assured consistent and many other factors are favorable, the organizations are seen setting their captive electricity generation plants. These generations plants are by the side of the factory. It is found that the electricity generated in these plants is generally costly. That cuts the profit margins. So it has to be used as facility to avoid the stoppage of smooth production.

Water/ Climate Water is the basic need which is required on large scale.

The climate for certain products is important need for manufacturing process. The use of water is essential for every operation of the production as well as for people working in the plant. It is also required to have proper disposal system for used water. Natural source of water and similarly natural disposal of used water is need for any plant.

Availability of Work Force The work force is required by the organization. The operations are performed by the people.

They should be available at low cost. At the organizations all types of people are required to run it smoothly from top to bottom. Lowly qualified as well as highly qualified persons run the company. Also the people should be needy. Skilled labor is essential along with the lower cost of labor. The skilled people will perform the required operations properly. The skilled labor is created basically for two factors. First one is requisite qualifications and training for the job. This is done by having educational and training institutes. Second one is the basic culture of the society. Just by having knowledge and qualifications perfection in the work is not possible. High cultured but costly labor at times may be preferred.

Union Activities As much as the availability of work force it is highly essential to study the activities of unions in the region.

Employees working atmosphere plays very important role for the smooth activities in the factory. The workers and employees need a union for their betterment. However aggressive and militant union culture does not motivate proper work culture, which motivates improvements and growth of the company.

Political Pressure In any country political leaders influence the decisions of the industrialists.

Since long the industries are being set up due to pressures of the political leaders or parties. They get mutual favors. Economical or strategic studies are often over ruled due to this typical factor of consideration. Professional companies do not yield to the political pressures. They stick to their studies and strategies. It may be the strategy of some companies to be friendly with prevailing political leaders.

Banks and Finance Facilities Capital and money movement is blood cells of any company.

Major Banks availability is essential in the vicinity of the company. Capital can be raised from any place, but money movement is just not possible without the banks and financial institutes. The employees working in the factory need the banking services.

Raw Material It has to be considered whether to locate an industry in the raw material or market condition.

If there is no weight loss or weight gain in production, you site your factory at either location, because the transport costs are the same each way. The transport costs are not identical for raw material and manufactured goods, a relative weighting must be calculated. The cost calculations across the studies conducted shows that from raw material point of view the site for factory is difficult to decide. Industries like metal processing like iron or aluminium, where the raw material is heavy; it is preferred to locate in the proximity of the mines.

Safety and Social security The place of the business should be safe to work.

The anti social elements are not conducive for employees to work. For example, eastern part of India has many anti social elements. Due to that there is no growth of commerce and industries in that region.

Supporting Industries In the vicinity of the business place, it is required to have supporting industries.

If the company wants some components made by outside party then that type of vendors should be available in the nearby place. Otherwise the transportation cost as well as the contacts with the vendors will be difficult.

Market Site The market site plays an important role where basically service and customer oriented businesses are concerned.

These cover the theaters, hospitals, housing, recreation etc types of businesses. The factors of the religious atmosphere, cultural of the society are the factors to be considered here.

People Culture and Environment Generally the regional society is happy for any plant starting operation in their area, since employment opportunity and general commercial activity will improve.

However in certain area the people staying around the plot may not accept the plant in that region. They may reject the proposal and will raise agitation against it. The study should take this factor also into consideration. The factory operations can not continue in such environment. E.g. Dabhol power plant in Konkan area is one such case, where the surrounding people took objection for the plant and continuously raised agitation.

All the above factors are considered and the decision is taken. General finding is that some factors are having positive marks whereas some points are on minus side. It has to be usually a compromising decision. The effect and consideration of the locational factors enumerated earlier can be observed in the following typical examples. 1. Most of the steel plants are located along the Bihar, Bengal and Orissa. This is because the basic raw material inputs like coal, lime stone and iron ore lose considerable weight during process of transformation. It is therefore more economical to transport finished goods over longer distance rather than the raw materials inputs. 2. Similar considerations can be observed in the case of cement manufacturing plants. The raw materials required in the manufacture of cement lose considerable weight in the process of transformation and as such the cement plants are located near the lime and coal deposits. 3. Naptha or oil based fertilizer plants at Mangalore, Madras, Cochin and Haldia (Hindustan Fertilizers) have been located near the ports in lieu of the import of raw materials. 4. Machine tool industries are affected by factors such as proximity to market, infrastructure facilities and location of supporting industries and services etc. Since the proximity to source of raw material is not significant for machine tool industry, the manufacturers are scattered over different parts of the country such as Bombay, Bangalore, Calcutta, etc.

Introduction to Facility (Plant) Layout

Plant layout is the disposition of the various facilities and services of the plant within the area of the site selected previously. The work of plant layout begins with the location of the work centers. Plant layout thus involves determination of space requirement for the facilities and arranging them in a manner that ensures steady flow of production with minimum overall cost. Plant layout is the placing of right equipment coupled with right method in the right place to permit the processing of a product in the most effective manner through the shortest possible distance and through the shortest possible time. A good layout results in comforts, convenience, appearance, safety, efficiency and profits while a poor layout causes congestion, disruption in material flow, unnecessary material handling, more scrap and rework, higher throughput time, wasted movements and inefficiency. The layout problems occur because of one or more of the following developments. 1. Decision to build a new plant 2. Re layout of facilities to meet changes in demand 3. Introduction of new product 4. Withdrawal of obsolete facilities 5. Changes in product design 6. Adoption of new safety standards 7. Overcoming the deficiencies of the existing layout Economy in handling of materials, work in progress and finished goods. Minimization of production delays Lesser work in progress and minimum manufacturing cycle time Efficient utilization of available space Easy supervision and better production control Greater flexibility for changes in product design and for future expansion Better working conditions by eliminating causes of excessive noise, objectionable odour, smoke, etc There are certain criteria which can be used to judge whether or not the layout is good. They are:

Objectives of Good Plant Layout

Principles of Good Layout

Minimum Movement A good layout is one that permits the minimum movement between the operations.

The plant and machinery in case of product layout and departments in case of process layout should be arranged as per sequence of operations of most of the products. Straight line is the shortest distance between any two points and hence men and materials as far as possible should be made along the straight path.

A door may be made in a wall or a hole may be drilled in a ceiling if that eliminates or reduces material handling in place of stairs or distant door.

Uni-directional flow A good layout is one that makes the materials move only in the forward direction, towards stage of completion, without any backtracking.

Since the straight line is the shortest distance between any two points, materials as far as possible should be made to move on the principle of straight line flow. When straight line flow is not possible, other flows like U-shaped flow, circular flow or zig-zag flow may be adopted but the layout must ensure that materials move in the forward direction. To ensure forward flow, equipment if necessary may be duplicated.

Straight line arrangement

3 6

1 2

4 3

U Shaped arrangement

5 4 Circular arrangement

Zig zag arrangement Effective Use of Available Space A good layout is one that makes effective use of available space both horizontal and vertical.

Back tracking and duplicated movements consume more time, involve unnecessary materials handling, add to cost and lead to inefficiency.

Raw materials, work in progress and finished goods should be piled vertically one above another rather than being strewn on the floor. Area below the work tables or cupboards built into the wall is welcome since they reduce requirement of space.

Maximum Visibility A good layout is one that makes men, materials and machines readily observable at all times.

All departments should be smoothly integrated, convenient to service and easy to supervise. Every piece of positioning or screening or partitioning should be scrutinized and carefully planned.

Maximum Accessibility A good layout is one that makes all servicing and maintenance points readily accessible.

Machines should be kept sufficiently apart and with reasonable distance from the wall so that lubrication, adjustment and replacement of belts, removal of parts at the time of repair etc can be done conveniently by the maintenance staff. Area in front of electrical panels and fire extinguishers should be kept free from obstructions.

Minimum Handling A good layout is one that reduces the materials handling activity to its minimum.

Material should be stored as close to the point of use as possible. Materials being worked upon should be kept at working height and never placed on floor if it requires to be lifted. Materials should not be handled twice in the same direction.

Inherent Safety A good layout is one that makes the plant safer for the workmen.

The aisles should be clearly marked and should be kept free from obstructions. The aisles should be located in such a way that workmen do not have to walk close to chemical vats or furnaces or conveyors etc. Fire protection equipments should be provided at strategic locations. Pick up and put down points for the materials should be so located that material handling facility fork lift, overhead crane etc. do not endanger machines or workmen. Gangways should be kept well lit.

Safe and Improved Environments A good layout is one that makes the work centers and the areas around them satisfying to the workmen.

The work place should be free from disagreeable elements like heat, smoke, dust, obnoxious fumes etc. The selection of the colors for the walls of workshop, offices, inspection bays etc. should be such that they are soothing to the eyes. Height of work place should be kept high enough to avoid the need to bend while working. A stool or a chair may be provided, wherever necessary, to enable alternate standing and sitting.

Maximum Flexibility A good layout is one that can be altered later without much cost.

Future requirements should be taken into account while designing the present. Space requirements for different departments, direction of expansion, etc. should be planned in such a way that changes may be made without any disruption. Each machine must be self container i.e. it must have everything of its own like lubrication system, cooling system, supplementary lighting, air system etc. Multipurpose machines give flexibility over special purpose machines and process layout is more flexible than product layout. Standardization of machine tools, jigs and fixtures, give flexibility to production control department.

Maximum Security A good layout is one that safeguards the plant and machinery against fire, theft, etc. without employing too many doors and barriers.

Types of Layout
Layout are basically of three types: 1. Process or functional layout 2. Product or line layout 3. Project or fixed position layout

Process layout Process layout is also called layout by function, generally associated with batch production.

The factory is divided into process units (or departments), and within these process units (or departments) all similar facilities are grouped together. Presses, for example are kept at one place; milling machines are placed at another place; drilling machines are kept at third place; gear cutting machines are located at fourth place; and so on.

Process layout is suitable when - The products are non-standard or - There is a wide variation in the processing times of individual operations. A simple sketch of a process layout is shown below: PRODUCT A PRODUCT B PRODUCT C










ASSEMBLY Advantages: 1. Lower capital investment on account of comparatively less number of machines and lower cost of general purpose machines. 2. Higher utilization of available equipment. 3. Greater flexibility in regards to allocation of work to equipment and workers. 4. Breakdown of equipment, absenteeism of the workmen and/or non availability of certain materials does not dislocate the manufacturing activity on the shop floor. 5. Workers attain greater skills since they have to attend to one type of machines and operations. 6. Imbalance of work in one section does not affect the working of the other sections. 7. New jobs with varying work contents and different operations sequences can be taken up without any difficulty. 8. Variety of the jobs make the work interesting to the workmen.

Disadvantages: 1. For the volume of production, space requirements are higher 2. Materials handling can not be mechanized which adds to extra cost. 3. Work in process inventory is higher since jobs have to queue up for each operation. 4. Routing and scheduling is difficult since different jobs have different operations sequences. 5. Inspection requires to be done after each operation as material passes to the next department. This causes delays and results in higher cost of inspection. 6. Setup costs are high because of frequent changes of jobs. Product Layout Product layout is also called layout by sequence.

The layout of plant, shape and size of its buildings, location of services and storage yards, position of materials handling equipment is such that material flows uni-directionally and at the steady rate. Special purpose machinery and equipment with built in controls to measure output and input are employed. The equipment, if necessary, is duplicated to avoid backtracking and to ensure that materials flow in the forward direction towards stage of completion. A simple sketch of product layout is show below: PRODUCT B PRODUCT C



Drilling M/c

Milling M/c

Gear Shaper


Drilling M/c







Product type is suitable when: - The products are standard and require to be produced in large quantities - The products have reasonably stable demand - The processing times of individual operations is more or less equal - Uninterrupted supply of materials can be eliminated

Typical examples of product layout are: assembly line for automobiles, refrigerators, radios, television sets, transformers, motors, domestic appliances like food mixing machines etc. Continuous or process production units, characterized by the manufacturer of single product such as sugar, steel, cement, paper, refineries etc. also have product layout.

Advantages: 1. Manufacturing cycle is small which reduces work in progress. 2. Material handling is minimum and automatic because materials move within the department. 3. Space required is small as the use of conveyors and gravity for material handling reduces the need for aisles. 4. The work is simplified by breaking into elemental tasks which are mechanized wherever possible. Consequently, labor costs are lowered. 5. Quality control is easy to exercise and more effective. 6. Production control is simplified due to lesser product variety, simpler routings, easier progressing and lower work in progress. 7. Delivery commitments to customers are more reliable and easy to conform. 8. Material requirements can be scheduled easily and more accurately. Disadvantages: 1. The changes in products and work contents necessitate the changes in the layout of the machinery. 2. All machines may not be used to their full capacity. 3. Manufacturing cost is heavily dependent upon volume of production. 4. Breakdown of any one the machine in the line renders other machines idle till it is repaired. 5. Expansion of the capacity by addition of machines is not possible. 6. Specialization creates monotony and reduces labor turn over as workers can not find jobs in other industries. Project Layout Project type of industries such as manufacturers of aero planes, ships, large turbines, heavy machinery, pressure vessels and others which involve heavy materials and sub assemblies have this type of layout.

The heavy materials, components or sub assemblies under this layout remain fixed at one place. Men, machines and tools are brought to the location to complete the job. Minor components and sub assemblies are also brought to the site for assembly.

This type of layout is suitable when one or few pieces of an identical product are to be manufactured Typical examples of product layout are: building fly over, bridge in city. Bandra-Worli sea link is an example of project layout because components required to build sea link can not be brought to the manufacturing plant.

Advantages: 1. This type of layout is beneficial for public use. 2. Manufacturing cost does not depend upon volume of production. Disadvantages: 1. It is the most expensive layout type. 2. Transportation cost is higher than product and process layout. 3. Manufacturing cycle is large.

Comparison between Product and Process Layout

NOTE: Difference should be written in tabular format.

The relative characteristics of product and process layout are:

Plant Investment Product layout requires higher initial investment than process layout as special purpose machines are costly and at times require to be duplicated to balance the production line. Requirement of Space Process layout requires comparatively more space than product layout since additional space is required to - Keep the jobs which queue up before each machine - Accumulate jobs until they are moved to next work station.

This is because unlike in product layout material flow is discontinuous.

Manufacturing Time Under process layout, it takes comparatively more time in manufacturing goods. Higher manufacturing time results on account of formation of queues at different machines due to different cycle times, batch sizes and sequence of operations.

Manufacturing cycle time under product layout is small since machine capacities are balanced and intermediate activities like travel, storage and inspection are reduced. Product layout for continuous or process production may be looked upon as one large machine wherein raw materials enter at one end and emerge as finished product at other end.

Material Handling Process layout results in more handling than the product layout because: 1. Flow of materials between different stages of manufacture is highly discontinuous due to imbalance operation wise work content while flow of material in a product layout is continuous and there is little or no queuing at any stage of processing. 2. Distance between departments in the process layout is large which increases transport distance and raises the cost of materials handling. On

the contrary, in the product layout materials move through a short distance between stages. 3. Materials, components and parts in a process layout are handled either singly or are placed in trolleys or in bins and are transported as unit loads by fork lift trucks. Material handling in a product layout is highly mechanized. Conveyor system and automatic transfer machines move materials from one stage to another. Flexibility Process layout offers a very high flexibility as alterations in operation sequence can be made when they are required. Also, new jobs, each having different routing than other and varying work content can be taken up without any difficulty.

Such flexibility does not exist in a product layout. Only jobs having the same routing and equal work content can be accommodated. It is also rather difficult to adjust proportionately in accordance with the change in demand.

Adaptability in the Event of Absenteeism/ Breakdown/Shortage Process layout offers flexibility in production schedules since disturbances due to machine breakdown, absenteeism of key operators and non availability of raw materials do not seriously affect production as another machine can be used or another operator from another machine can be shifted or another job can be taken up.

Flexibility in production schedules in case of product layout is seriously affected due to interruptions due to breakdowns and absenteeism as stoppage of one machine usually disturbs the working of other machines. Shortages of materials also affect the production line.

Functions of Production Control Production control activity in a product layout is comparatively simple and limited.

Materials control function is of crucial importance and needs to be based on scientific inventory control system. Process planning function is almost absent since the plant decides the route. Tools control function is either absent or is drastically simplified. Tools control function in an engineering firm is limited to replenishment of consumable tools which can be simplified by adopting scientific inventory control. And tools control function in continuous or process industries is almost absent due to nature of the plant. Scheduling activity is very simple and is merely restricted either or sequencing of production or limited to final targets. Production control is bit complicated in case of process layout. Materials require to be indented and purchased on receipt of customers order except in case of batch production where materials requirements can be planned in advance. Tools control function needs to be more detailed and more elaborate. Loading and scheduling charts need to be prepared, one for each machine. Progress of different components need to be recorded each day.

Inspection Inspection under process layout is necessary at each stage. The work from the previous operation is routed to the inspection bay before being forwarded to the next operation. This involves material handling, production hold ups and interruptions at the succeeding operations. The rejection at certain stages requires re-routing of rework on the faulty part back to same machine or department which causes unnecessary materials handling.

Under product layout, inspection is performed at some critical point in the product line.

Skill of labor The skill of labor force in a process layout is usually higher than in the product layout since the workmen are expected to operate number of general purpose machines capable of performing wide variety of jobs. In fact labor force in project or jobbing production is expected to be highly skilled. Highly qualified trade apprentices are employed who are expected to work from minimum instructions.

Instructions regarding what to make are issued in form of specifications while instructions as to how to manufacture are usually oral. The workmen being highly skilled are expected to work independently and display a great deal of initiative and judgment Labor in product layout consists of semi skilled workmen and skilled technicians.

Supervision The supervision in process layout is the reservoir of job knowledge. In a project and jobbing production, the supervisor besides being able administrator is expected to improvise and determine best work methods, determine tool requirements, select best process and provide management with reliable estimates of labor and materials for specific orders. The span of control - the number of workmen to be supervised by a supervisor is kept low because of technical nature of the job.

In a batch production unit employing process layout, supervisor is supposed to have considerable knowledge of a specific process. Supervisor in the grinding section for example may not know about turning and drilling but is expected to possess fund of knowledge of different types of grinding operations.

Combination Layout (Mixed Layout

A mixed layout is the combination of process and product layout. Mixed layouts are generally used when the companys 1. Product contains lot many components and parts. 2. Product requires to be produced in different types and sizes. In this type of layout, the parts are produced on facilities arranged in a process layout and they are assembled using product layout. Another concept of mixed layout is called cellular layout in which the facilities are clubbed together into cells to utilize the concepts, principles and approaches of group technology.

The layout makes it possible to adopt high degree of automation even if the product variety is large and product demands are not stable. In this layout, the facilities are grouped into cells which are able to perform similar types of operations for a group of products. A typical cellular layout is shown below: Lathe Milling Painting





Inspection PRODUCT C Press Boring





Chapter: Inventory Management

Inventory may be defined as usable but idle resource. If the resource is some physical and tangible object such as materials, then it is termed as stock. Thus stock or inventory is synchronous term through inventory has wider implications. The inventory can be in the following terms: 1. Raw materials 2. Work in progress in the form of a component or sub-assembly 3. Finished products 4. Spares and other indirect materials Inventory control is one of the important functions of the materials management department. Annual demand Inventory turnover ratio = Average inventory

Need of Inventory
No business can operate without inventories. It needs inventory as a protection against uncertainty, for efficient processing of material, and to permit transit and handling. Companies carry inventory for the following reasons:

Uncertainty of Demand Uncertainties of demand and lead time necessitate building of safety stock. These are called as buffer stocks.

Larger the uncertainty of demand and supply; the larger will have to be the amount of buffer stock to be carried for a prescribed service level. Since the materials cycle is long and complex, the materials manager must anticipate his needs at each stage. Inventories protect him against unforeseen failures in supply or increases in demand. Inventories protect production against unanticipated delays.

Uncertainty in Lead-Time The supplier is usually not in position to supply the goods as decided or as he promises.

In the context of the vendors, it is observed that there is rather rare supplier who supplies as per promises and of the quality essential. This situation leads to overstock the quality.

Time Lag in Deliveries Time lag in deliveries also necessitates building of inventories. If the replenishment lead times are positive then stocks are needed for system operation.

Stock Build up for Scale of Economy Cycle stocks may be maintained to get the economies of scale so that total system cost due to ordering, carrying inventory and backlogging are minimized.

Technological requirements of batch processing also build up cycle stocks. Unit costs are normally lowest when material is purchased, handled and processed in large quantities, which in turn generates larger inventories. Production at various stages of a manufacturing cycle can never be synchronized perfectly; inventories take up the slack when one stage operates at a rate different from that of the preceding or succeeding stage.

Pipeline Inventory Stocks may build up as pipeline inventory or work in progress right from purchased goods from supplier till they are sold to the customer.

This includes materials actually being worked on or moving between work centers to being in transit to distribution centers and customers. It may be lying in any form at the several stages, depending on the complexity of the process.

Seasonal Demand When the demand is seasonal, it may become economical to build inventory during periods of low demand to ease the strain of peak period demand. Quantity Discounts Inventory may also be built up for other reasons such as: quantity discounts being offered by suppliers, discount sales, anticipated increase in material price, possibility of future non availability etc. Transport Materials may be transported thousands of miles before they are incorporated into an end product.

All the time it is in transit, which may be period of several months.

Ease of Production System Sometimes the material manager expects prices of material to rise in near future. So he purchases and stocks up at lower prices.

These are the situation due to global shortages or tax purpose. The company will have policy to study the market situation and over stock those items which are required regularly.

Slow Movement of the Items Slow moving materials are those, which are not regularly demanded and their movement off the shelf is very occasional, say once in six months or so.

Inventory models valid for fast moving models are not applicable for slow moving items due to lack of regular demand pattern.

Generally slow moving items are quite expensive and therefore one has to first decide whether to keep them all in stock and if to keep them in stock then in what quantity. Further difficulty of slow moving parts is that initial over buying decision could take years to remedy the situation due to rarely occurring demands. These materials are often purchased for new product development. As the development process extends, stocks keep waiting. It may take only a few minutes to process, but the material can lie on a factory floor for two days waiting to be scheduled on a machine that will perform this operation.

Customer decision regarding a stock out Customer

Stock outs ` Option ``` Wait Substitute Product Substitute Product Option Option


Normal Replenishment








Product Selection



Same Product

Different Product

Objectives of Inventory Management

The production shops are busy with making finished products for customer as per schedule. Also they maintain regular supply of material to the manufacturing departments so that labor and equipment do not remain idle.

Generally the manufacturing and marketing objectives can be achieved as long as the company invests a good amount in purchased materials and in process and finished goods inventories. As against this materials manager, is very much concerned with investment in the inventory. Every company can improve the profit considerably if it controls the inventory to minimum possible.

Production control This is mainly mixed with some technology to keep these investments as low as possible, with minimum adverse effects on manufacturing and marketing.

When companies have too less inventory, they run out of stock, manufacturing efficiency and customer relation get spoiled. Stock outs of essential materials mean some interruption of production, which is loss in the business. They will delay delivery of finished products to a customer. The customer will start looking for a supplier who will give him better service cost. The situation is almost as bad for the company that carries too much inventory. It may have material available when it is needed but it costs will be so high that it will not make any profit on the business it gets by having material available. The inventories are bad since 1. Inventories tie up a companys capital 2. They generate storage costs 3. They deteriorate or become obsolete in storage For e.g. Inventories may cost as much as 20 to 25 percent per annum to carry. To carry material of Rs. 1,000,000 inventory, it can cost a company as much as Rs. 2, 50,000 or more per year. A company with a Rs. 1,000,000 inventory may have sales of not more than Rs.10, 000,000 and profits of only Rs. 1,000,000. This can give idea as to how efficient inventory management can make a tremendous contribution to company profit objectives. It is easy to guess what will happen to company profits if costs are raised 5 or 10 per cent because of frequent delays in manufacturing due to lack of inventory, or what happens to both sales and profits if customers find they can get prompter service from a competitor who is able to have material on hand when it is needed.

Business Cycle Ups and Downs Inventories can not be stable and most difficult to control.

In the typical business cycle, inventory accumulation helps push business activities to a new high. Company business then tapers off, but inventories continue to rise. Stocks become excessive.

Companies not only stop buying in excess of needs, but they buy substantially less than current consumption. This reduction in purchasing causes production to drop even more and so helps accelerate the downturn. Sales temporarily exceed production and inventories drop further. When production catches up with and eventually exceeds sales, inventories start increasing, and the cycle begins all over again. It is essential to have very good coordination between production, sales and inventory control function.

Balancing All businesses have difficulty in managing their inventories.

The major reason is inability to forecast accurately. When a material manager adds to inventory, he is anticipating a need for the material.

Types of inventories
The inventories of different kinds available in any manufacturing set up are as follows: 1. Raw material inventory 2. Work in progress at different manufacturing stage 3. Finished goods inventory after saleable product is made and before it is received at buyers side and before the payment is received. 4. Spares and other indirect material Yearly use of raw material Raw Material Inventory Turn Over Ratio = Avg. raw material inventory Cost of manufacture Work in progress inventory turn over ratio = Avg. work in progress Cost of product sold yearly Finished goods inventory turn over ratio = Avg. inventory of produce at cost Raw material inventory The valuation of raw material inventory depends on the cost of acquiring raw materials and pricing of raw material issued for production.

E.g. If a company has bought 200 tones of raw material for Rs. 14,00,000 and has issued 100 times of raw material for production at price of Rs.5,000 a ton, the value put on the balance inventory of raw material would be Rs.14,00,000 minus Rs.5,00,000 (100 * Rs.5,000) = Rs.9,00,000 This gives the raw material inventory turn over ration as 14/9

Work in progress The valuation of work in progress inventory depends on the method used for pricing materials, or the manner in which fixed manufacturing overhead costs are treated. Overhead costs are treated in two systems of costing; direct costing and absorption costing.

In the consumer product company, the stocks are drawn on the shop floor for assembly of the product.

The procedure and production layouts are drawn in such a way that the product is quickly made. This cycle of manufacturing to convert raw material into finished goods is kept fast. As against this in companies, which undertake engineering projects, the raw material of different types and shapes keeps on remaining at different places on shop floor for many days or months depending on the complexity of the project. Such companies have low work in process inventory turn over ratio as against those consumer product companies as mentioned above. In such companies the management efficiency depends on the making the material available as and when required.

Finished goods inventory This is the inventory of the saleable product made and duly packed which is not sold to user. For the period of one year average stocks available at all the stores of the company are considered in form of money.

These stocks should be minimum for the good health of the company. That will give the maximum value of the turn over index.

Types of Inventory Cost

Two types of costs are associated with inventory. 1. Carrying cost 2. Ordering cost Carrying costs are associated with physically storing a product, while ordering costs are the costs of placing an order. These two inventory costs have an inverse relationship. A firm can carry more inventory and order less often, or order more often and carry less inventory. While carrying costs increase, ordering costs fall and vice versa.

Inventory Carrying cost

Ordering cost


Carrying cost Carrying costs are associated with physically storing goods.

This cost is divided into following four categories. 1. Capital costs - Inventory investment 2. Storage space costs - Plant warehouse - Public warehouse - Rented warehouse - Company warehouse 3. Inventory service cost - Insurance - Risk 4. Inventory risk cost - Obsolescence - Damage - Shrinkage - Relocation cost These costs total much more than ordering costs. Carrying costs are calculated under two important conditions. First, all the costs in the calculation are pretax. Second, only those costs that vary with the level of inventory are considered inventory carrying costs. Capital cost compares inventory investment to what the firm could earn from other capital investment. In most firms, capital costs are the largest carrying cost category. Storage space cost covers the cost of moving goods into and out of inventory. This includes only the variable costs of rent, utilities and space. If a company leases or rents warehouse space on a per unit basis for seasonal inventory, then the cost is a storage space cost. Inventory service cost includes insurance and taxes. Firms should insure the goods they store. However, some insurance policies are written with variable and fixed components in the premiums. The variable component should be included as an inventory service cost. Inventory risk cost includes the cost of obsolescence, damage, relocation or theft. Obsolescence means the goods can no longer be sold for the original price or for the original cost because product may be outdated .Obsolescence applies to products like banana, milk, etc. Milk that is past the sell by date is obsolete. It can not be sold. So the dairy manager or dairy delivery representative who stocks too much milk at the store creates obsolescence costs. Goods may also be damaged in storage or handling. Theft may cause the physical inventory to shrink. Relocation costs come about when goods have to be moved from one warehouse to another to meet market demand.

Carrying costs are usually quoted as a percentage of the products value. To calculate carrying cost, the firm must identify the inventorys value, measure each carrying cost category as a percentage of that value, and then multiply the overall carrying cost percentage times the value of the inventory.

Ordering cost Ordering costs consist of order cost, setup costs or both.

Ordering costs could include preparing and processing the order request, selecting a supplier, checking stock, preparing the payment and reviewing inventory levels. Setup costs refer to modifying the manufacturing process to make different goods. They include personnel costs as well as capital equipment costs.

Inventory Management Models

Inventory management models can be classified as either push or pull models. Push model Push models schedule orders for production or order goods in advance of customer demand.

Manufacturers push the finished product through the distribution channel to intermediaries and the final consumer. Economic order quantity (EOQ), material requirements planning (MRPI), manufacturing resource planning (MRPII) and distribution requirements planning (DRP) are all push models.

Pull model Pull inventory models are based on making goods once customer demand is known.

The product is pulled through the channel of distribution by the order. Recent trends suggest a movement to use pull inventory models to reduce inventory throughout the channel. Just in Time (JIT) is the most widely used pull inventory model.

Economic Order Quantity Model

Carrying cost

Inventory EOQ Ordering cost


In todays world, forecasting demand would be easy and straightforward. Simply look at past demand patterns to predict future consumption. Under these conditions, the EOQ model can be used to calculate when to order the item and how much to order. The EOQ model is a type of push inventory model. The basic EQO equation is as follows: EOQ = 2PD CV

Where P = cost of placing one order in Rs. D = annual demand for the product C = annual inventory carrying cost expressed as a percentage of the Product V = average cost or value of one unit of inventory (Price of one unit)

For example: In M/S Ideal corporation one component has annual requirement of 30,000. The ordering cost is Rs.3, 000 per order. The purchase price of the unit is Rs.10. The inventory carrying cost is 20 percent of inventory value. So EOQ is calculated as follows: 2 * 3000 * 30000 EOQ = 0.20 * 10 EOQ = EOQ = 3000 90000000

How much to order From the above example, any time an order is placed; it should be for 3000 units. When to order Determining when to order is based on lead time - the elapsed time between placing the order and receiving the order.

The amount of inventory used during lead time is the reorder point. When inventory reaches this level, an order should be placed. If it takes one day to place the order, three days to process and prepare the order and four days to deliver it, then the total lead time is eight days. If daily demand is 80 units (30, 000 divided by 360 days), multiply 80 by 8 = 640. The reorder point is 640 units. In this example, when the inventory reaches 640 units, a new order for 3000 units should be placed. NOTE: 30,000 units (demand) considered context to above example.

EOQ assumptions (Problems with EOQ formula)

The EOQ model relies on following assumptions: 1. 2. 3. 4. 5. 6. 7. 8. There is a continuous, constant and known demand rate. The lead time/ replenishment cycle is known and constant. The constant purchase price is independent of the amount ordered. Transportation costs are constant no matter the amount moved or the distance traveled. No stock outs are permitted. There is not inventory in transit. All inventory parts are independent of each other. There is not limit on the amount of capital available.

Erratic Usages The formula of EOQ assumes that usage of material is both predictable and evenly distributed. When this is not the case, the formulas are useless.

Different, far more complex formulas can be developed for wide swings in usage, so long as those swings can be predicted.

Accuracy in basic information EOQ calculations are as accurate as the order cost and carrying cost.

This information may not be accurate. It is difficult job to calculate order or setup cost. In practice, order cost varies from material to material. Inventory carrying cost will vary with the companys opportunity cost for capital. Both carrying cost and order cost calculations include elements of fixed and non variable costs that would be incurred over the short term regardless of the procurement actions taken.

Costly calculations of costs It is not easy to estimate cost of purchase order and inventory carrying cost accurately.

Actual calculation of EOQ can be time consuming even when the simple formulas for steady usage are used. In many cases, the cost of estimating cost of possession and acquisition and calculating EOQ exceeds the saving made by buying that quantity. Also, savings often are reduced because the company cannot every time buy the exact economic order quantity.

Formula to calculate Total Inventory Cost

D Total Inventory Cost = Q Q

P+ 2

*V *C

P = cost of placing one order in Rs. D = annual demand for the product C = annual inventory carrying cost expressed as a percentage V = average cost or value of one unit of inventory (Price of one unit) Q = Economic Order Quantity

Buffer Stock (Safety Stock)

Safety stock is a term used by inventory specialists to describe a level of extra stock that is maintained below the cycle stock. Safety stock is the amount of inventory kept little more than inventory at reorder level. New order should be placed when inventory level reaches to reorder point. For e.g. Reorder level is 600 units. Instead of placing new order at this stage, organization keeps some extra inventory, say 400 units. So when inventory level is 1000 units, next order should be placed to keep some buffer stock. Additional 400 units (1000 units 600 units) are called as safety stock.

Quantity Reorder point (600 units)

Safety stock (400 units) Days When a replenishment shipment arrives, the available quantity is usually somewhere in the shaded area of the graph. Notice that the safety stock quantity is in the middle of the shaded area. Half the time you will use some or all of the safety stock before the replenishment shipment arrives. The other 50% of stock receipts will arrive before you use any of the safety stock. On average, the full safety stock quantity is always on the shelf when the replenishment shipment arrives.

Why it is needed? Safety stock is inventory held because of uncertainty in demand or delays in lead time. Safety stock is carried to offset product stock outs.

By having an adequate amount of safety stock on hand, a company can meet a sales demand which exceeds the demand they forecasted without altering their production plan. It serves as an insurance against stock outs. Safety stock and stock out costs should be analyzed to determine when to keep extra stock. With material requirements planning (MRP) worksheet a company can judge how much they will need to produce to meet their forecasted sales demand without relying on safety stock.

However, a common strategy is to try and reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. Safety is required because of following reasons: 1. Supplier may deliver product late or do not deliver 2. The warehouse may be on strike 3. A number of items at the warehouse may be of poor quality and replacements are still on order 4. A competitor may be sold out on a product, which is increasing the demand for your products 5. Machinery Breakdown 6. Unexpected increase in demand Various methods exist to reduce safety stock, these include better use of technology, increased collaboration with suppliers, and more accurate forecasting. An Enterprise Resource Planning System (ERP system) can also help an organization reduce its level of safety stock. By creating more accurate and dynamic forecasts, a company reduces their chance of producing insufficient inventory for a given period and, thus, should be able to reduce the amount of safety stock which they require.

Calculating safety stock A commonly used approach is that Safety Stock should be decided based on the following factors: 1. Demand; the amount of items consumed by customers, on average, per unit time. 2. Lead Time; the delay between the time the reorder point (inventory level which initiates an order is reached and renewed availability. 3. Service level; the desired probability that a chosen level of safety stock will not lead to stock-out. Naturally, when the desired service level is increased, the required safety stock increases as well. 4. Forecast error: an estimate of how far actual demand may be from forecasted demand. Expressed as the standard deviation of demand.

Analyzing Inventory
There are number of materials in any organization. It is rather difficult to control so many items. Different strategies have to be used to manage them. They can be handled in different groups. Each item may not be handled in same sense of importance. For e.g. The TV manufacturing company has TV tube as well as several screws of normal standard size. The tube is costing Rs. 1500, while the screws are costing Rs. 2 each are rather readily available in market. For the material manager its specially item TV tube is more important to plan as compared with the screws. Safety stock of the screws will cost the company few hundred rupees, while a safety stock of 30 TV tube would cost thousand. Obviously the

investment in safety stock for the screws is much better value than investment for the tubes, since it provides the same protection at a fraction of the cost. Safety stocks always are better value for low cost items than they are for expensive ones. Modern inventory systems take this into account by classifying items by different attributes like value of usage, price, etc. Following are the methods to analyze the inventory of material. 1. ABC Analysis 2. VED Analysis 3. FSN Analysis 4. XYZ Analysis 5. CVA Analysis

ABC analysis ABC analysis categorizes products based on importance.

It classifies items based on the annual usage value (AUV). Importance may come from cash flows, lead time, stock outs, stock out costs, sales volume, or profitability. Once the ranking factor is chosen, break points are chosen for classes A, B, C and so on. ABC analysis applies Paretos law which separates the trivial many from the vital few. A classic example that the majority of sales originate from a small portion of sales representatives. The 80-20 rule is a version of Paretos law; that is 80 percent of the orders come from 20 percent of the customers. Once a ranking factor is chosen, products are placed in descending order of importance. In every company, a big percentage of the investment in inventory is concentrated on relatively few high value items. The first step in the ABC approach is to estimate average demand for each item in inventory and multiply this figure by unit cost to determine value of usage. In following example, ranking factor is sales revenue. The actual and cumulative total sales revenue percentage for each product are calculated. %of annual sales 50.0% 25.0 16.7 8.3 100.0% Cumulative Sales 50.0% 75.0 91.7 100.0 %Items 10 % 20 50 100 Category A B C C

Item P1 P2 P3 P4

EXAMPLE: 1 Annual Sales 6, 00,000 3, 00,000 2, 00,000 1, 00,000 12, 00,000

Above table shows that Item P1 ranks first, contributing 50% of the annual sales, but only 10% of total inventory.

Item P2 contributes 25% of total sales and 20% of the total inventory. Eighty percent of the firms inventory creates only 25% of the total sales (items P3 and P4). On the basis of these calculations, only item P1 is an A product; P2 is B and P3 and P4 are C items. This example suggests seeking very low stock out rate on P1 because of its importance in generating sales. Item P2 could have a higher stock out level while the other two could afford even higher stock outs rates. EXAMPLE: 2. An item that costs Rs. 5 and has an annual consumption of 800 units would have a usage of Rs. 4,000, while an item that costs Rs. 200 with a usage of only 100 units per year would have a usage of Rs. 20, 000. Values of usage for each item are then listed in order of importance, with the maximum value volume item at the top of the list. The items are separated into three groups. 1. The 10 percent that are most costly are A category items 2. The next 20 percent are B items 3. The balances are C category items. In every case the A items will account for a heavy percentage of total expenditure and the C group will account for small percentage. The following relationship is typical; Category A B C Percent of items 10 20 70 Percent of value 70 20 10

Seven times as much as money is spent on items of A category items as on C items. The fact is that the A category items are almost one seventh as many as number of C category items. Thus the average expenditure of an A category item is many times greater than the average expenditure for a C category item. Investment in safety stock for the A item must be many times greater than for a C item in order to afford the same protection against stock outs. The ABC analysis permits selective inventory control. Safety stocks are kept low for the high value items. The low value items get less attention from materials personnel. With ABC control, it is possible to risk fewer stock outs and reduce investment in inventories. Inventories are divided into three classes: 1. A category items account for 10 percent items for 70 percent of the value. 2. B items for 20 percent of the total and about 20 percent of the value. 3. C items for 70 percent of the total and about 10 percent of the value. Suppose, for example, a company stocks 1,000 items in inventory and that its average investment is six weeks usage, or Rs 1 million of which Rs.2, 00,000 is safety stock. Average order quantity is eight weeks usage and there is two

weeks safety stock. With this order quantity and safety stock, assume that the company experiences ten stock outs every year.

Now suppose that the company classifies its inventory by the ABC system. It breaks down as follows: Category No. of items Avg. inventory investment Investment in safety stock Item A B C Total 104 213 810 1127 Rs. 142000 40100 20300 202400 Rs. 28400 8020 4060 40480

The ten stock outs expected each year are distributed among all the 1,000 items. Thus, the chances of a stock out on an A item are the same as those for B or C item. Since C item comprise 70 percent of the total number of items in inventories, it is reasonable to expect that 70 percent of the potential stock outs will occur on these items, with just 20 percent on B items and 10 percent on A category items. E; Essential items D; Desirable items

VED Analysis V; Vital items

This classification is applicable only for spare parts. There is no point in just controlling inventory of the items from the point of view of money blockage. Some of the items are in C category. But they are critical. They need better attention in view of production hold up. VED analysis attempts to classify items into three categories depending upon the consequences of material stock out when demanded. Accordingly the items are classified into V(Vital), E(Essential), D(Desirable) categories. Vital items are the most critical having extremely high opportunity cost of shortage and must be available in stock when demanded. Essential items are quite critical with substantial cost associated with shortage and should be available in stock by and large. Desirable group of items do not have very serious consequences if not available when demanded but can be stocked items. The percentage risk of shortage with the vital group of items has to be quite small. These are calling for a high level of service. With Essential category, relatively higher risk can be taken of shortage and for Desirable category even higher.

The classification of items should be done in 9 groups. Such as A+V, A+E, A+D, B+V, B+E, B+D, C+V, C+E and C+D. That will aim to provide proper service to avoid stock outs. S; Slow moving items N; Non-moving items.

FSN Analysis F; Fast moving items

All items do not get consumed in the same rate. Checkout rotations and identifies obsolescence of items. This analysis is suitable to stores. They are not required with the same frequency. Some materials are quite regularly required. Some others are required very occasionally and some materials may have become obsolete and might not have been demanded for years. FSN analysis group them into three categories as follows: 1. Fast moving 2. Slow moving 3. Non-moving Inventory policies and models for these three categories have to be different. All the products under fast moving category have regular consumption. The products under slow moving category do not have regular consumption. These have to be managed on a different basis. The products under non-moving category do not have any kind of consumption and they occupy lot of space. Non-moving products create dead stock in the stores. Appropriate guidelines are required to deal with the slow moving and dead stock items.

XYZ analysis In many company it is difficult to forecast the quantity for each item accurately. This forecast ability is identified by XYZ analysis.

X category items are those which can be accurately forecasted. These are about 20% of the total items. Fairly accurate controls can be achieved on these items. Y category items are those which are less accurately forecasted. These are considered to be 50% of the total items. Less control can be achieved on the inventory of these items. For example: the seasonal consumption items. Z category items are those which can be lease accurately forecasted. These are considered to be about 30% of the total of the items. So least possible control can be achieved on the inventory of these items. For example: the items required for repairs and maintenance purpose. In any company the studies are conducted to push more and more number of items to X category items to gain better controls on the inventories.

CVA analysis Critical value analysis pays more attention to C items.

Although it ranks products similarly to ABC, CVA analyzes products based on stock out rates. Normally using three to five categories, CVA could evaluate products as follows: 1. Top priority; critical item and no stock outs are permitted. 2. High priority; essential item, but limited stock outs are allowed. 3. Medium priority; necessary item, but occasional stock outs permitted. 4. Low priority; desirable item but stock outs are allowed. 5. Lowest priority; needed item but stock outs are permitted on a wide basis. Stocks out rates are assigned subjectively to each category. Top priority items might have zero stock outs, high priority items 3 percent stock out rate, medium priority items 6 percent, low priority 10 percent and lowest priority 15 percent.

Just In Time (JIT)

This is a technique from TQM activity. Basically this is waste control method. It is not the inventory control technique. It is organized approach to introduce in manufacturing cycle 1. Timeliness 2. Quality 3. Productivity 4. Flexibility 5. Work simplification and waste reduction In any manufacturing organization, the material undergoes processing right from the stage it is at suppliers place to buyers place. All the stages in between are called as pipeline. In the pipeline, there are several stages. It moves and waits at each place.. It starts from place such as receiving stores, receiving inspection, rejected to go back to supplier or accepted item to go to warehouse, binning in the warehouse, issuing to manufacturing shop, on shop floor, on the several processing machines, inspection on each processing machine, remains in the component store, again issuing to the assembly shop, remains in the assembly shop, gets assembled on the assembly stage, inspection at every stage of assembly stage, then getting the product packed in the packaging cases, going back to the finished goods stores. Then material waits there till it gets customers order. After that the material gets shifted to the customers site. This pipeline is very long indicating the stages at which the material waits. Longer the pipeline, longer the time the material waits. The expenses go increasing.

The value is added on the material only at stage where it is being processed. At all other stages no value is added on the material. These all the stages are called non value added activities and so they are all called as waste. The customer is not willing to pay for those activities. All the activities and the documents in the organization related to that non-value added activities should be eliminated. That is exactly done in the process of JIT. At every stage the material waits, there are two or more documents to receive and allow material to go further, needing authorized signing person for these documents. In the view of the customer buying the product these internal documents have no importance. Storage (Inventory) of material at any stage, inspection of any kind, packing, rejection, rework, lead times etc are the operations to be eliminated. These activities add to the cost of product and not to the value of the product. In the pipeline there are two types of periods involved 1. A; period in which the material is under the process on machine, which is value added activity. 2. B; All other period when material is kept in any form/ place in the organization, non-value added activity.

The ratio of B to A should be tending to one. In the conventional factories, the workmen on shop floor have number of quality problems. This company and others like that, which were cash rich companies in the days of monopolistic structures seen closed later. Some companies are on the path of improvement because they have been accepting the TQM and JIT movement. The companies are slowly realizing the importance of avoiding wasteful activities. The waste reduction exposes the problems in the organization. They are hidden under the waste. The problems are like: 1. Improper methods. 2. Waiting/ Delays. 3. Machine/system breakdowns. 4. Rejection/rework. 5. Low demand for product in market. 6. Poor supervision 7. Layout (distance) 8. Long setup time 9. Poor maintenance 10. Lack of work place organization These wastes are reduced by JIT techniques. Objectives of JIT are: 1. Produce only the products the customer wants. 2. Produce products only at the rate the customer wants. 3. Produce with perfect quality 4. Produce with minimum lead time 5. Produce products with only those features the customer wants

6. Produce with no waste of labor, material or equipment every movement must have a purpose so that there is zero idle inventory. 7. Produce with the methods that allow for the development of workmen Material Management in JIT: The vendor plays important role in JIT. Following are the points indicating requirement.
Total vendor Involvement

Purchase of an item should be done from single source. Vendor should be taken in full confidence and he should feel the part of the company and his shop is an extension to our shop. There should be long term relationship and transparency in price fixing. In general healthy relations have to be maintained. The selection of vendor must be done properly. The quality control method must be maintained. In all aspects help of design know how, training should be provided. Quality improvement program should be done. Material must be received as and when required and no inventory should be encouraged. That should be done economical transportation system and good, standard and reusable packing in such a way that damages are avoided.

Total vendor quality control

Smooth material flow

Chapter: Purchase Organization

The purchase is a main activity in the area of material management. It is the most important function in any organization. This is the place from where money is spent out of the organization. It decides the profitability of the company. It is studied that one percent saved in the purchase function improves the profit of the company as much as 2 to 3 percent. Purchasing aims at anticipating requirements, sourcing and obtaining supplies, moving suppliers into the organization and monitoring the status of supplies as a current asset. Purchasing derives its importance to an organization from two sources 1. cost efficiency 2. operational effectiveness Managers with good negotiating skills and strong relationships with suppliers save their organization large sums relative to the competition. Identifying the right production equipment and buying it at a good price can create a competitive cost advantage that lasts for many years. Good purchasing practices avoid operational problems. Without effective purchasing practices, operations in a firm may be disrupted, customer service levels may fall and long term customer relationships may be damaged. Before any product can be manufactured, supplies must be available - and the availability must meet certain conditions. Meeting these conditions may be considered the goal of purchasing. Principles of purchasing are: (seven Rs) 1. Buying the material at right p5lace 2. Buying materials of right quality 3. Buying materials in the right quantity 4. Buying materials at the right time 5. Buying materials from the right source 6. Buying materials at the right place 7. With the right mode of transportation

Objectives / Goals of Purchasing

Provide and uninterrupted flow of materials, supplies and services required to operate the firm. Raw materials and component parts must arrive when required.

Minimize inventory investment and loss. The cost of carrying inventory reaches as much as 50 percent of the value of the product. Inventory carrying cost typically range between 20 and 30 percent of the value of product. Maintain adequate quality standards. The quality of a firms products may be limited by the quality of its purchased materials. It is easy to lose sight of quality when attempting to control purchasing cost. Therefore, it is of utmost importance that quality standards not be compromised for lower prices. Find or develop competent suppliers. Good suppliers help solve many purchasing problems. It is a primary goal of the purchasing manager to locate and attract quality suppliers. Standardize, wherever and whenever possible, the items bought whenever possible. Standardizing materials can reduce inventory carrying cost, and may allow for purchasing at quantity discounted prices. Purchase required items and services at the lowest ultimate price This does not mean that lowest cost is automatically accepted. Price may be defined as the time, effort and money needed to obtain an item. The non monetary costs may depend on services, material quality, quantity needs and delivery requirements. Improve the organizations competitive position. Purchasing can assist the firms competitive position by ensuring that the right materials are brought at the lowest ultimate price. This controls costs and guarantees that the materials will be available when required. Also, purchasing can develop relationships with suppliers that ensure a continued flow of materials in spite of conditions that negatively affect the supplies of competitors. Work harmoniously with other departments in the organization. Purchasing does not stand alone. It affects nearly every facet of the firms operation. Therefore, it is very important that purchasing and the other departments communicate effectively with one another and that they cooperate to solve common problems. Wherever possible avoid duplication of purchases resulting in wastes and obsolescence. Accomplish the purchasing objectives at the lowest possible level of administrative cost. Like any other activity or department, purchasing incurs costs in its operation, such as supplies, telephones, travel, computers, etc. These operating costs should be controlled efficiently and effectively.

Functions of Purchase Department

The purchase department has got to do many functions in an organization to achieve organizational objectives. They are narrated as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. Activities for placement of order Purchase records Purchase reports Maintenance of vendor relations Forecasting and planning Selection of good vendors Fixing price, checking invoice Inspection Other functions

Activities for placement of order Analyzing quotations received from different vendors and prices offered.

Planning and scheduling purchase and deliveries of the item to avoid excess inventory as well as avoid production hold ups due to non availability of the material. Accordingly determining time to buy and quantity to buy. Issuing proper purchase orders to the vendor. Selecting capital equipments. Negotiate prices with the vendor before order is placed. To get the item at right place. Checking and approving invoices.

Purchase records For efficient purchasing it is highly essential to keep good record keeping. It has to be done properly to get back any information quickly.

Purchase department has to maintain the records as follows: Vendor registration files; Telephone numbers, addresses, list of equipments, owners information, delivery and quality records. Closed purchase orders; The name of supplier, cost of item, record of all purchase orders issued. It contains purchase order number, suppliers name, description of purchase, value of the order etc. Open purchase order; with status of all outstanding orders. It is attached with purchase requisition, purchase order, follow up data, etc. Material record; All major material or service that is purchased repetitively. It shows the list of suppliers, annual use of items, price, orders placed, etc. Material codes from different angles like company material code book, IS code, etc. Different law codes of purchase, sales tax, octroi law, import duty, excise duty, etc.

Purchase reports The purchase department handles a major part of companys money. So they have to release different types of reports at regular interval such as monthly, quarterly, half yearly or annually.

The management has to take important decisions on the basis of these reports. 1. The budget to be made before the year starts for expenditure under different heads. 2. Total expenditure done for different types of purchase. 3. Purchase value for major items. 4. Purchases made for each planning department. 5. Revisions of budget proposals for running year. 6. Vendor performance report.

7. Inventory and consumption pattern of materials. 8. Pattern of market prices. 9. Development of new components for new products. Maintenance of vendor relations An important part of purchasing is the maintenance of good relations with the vendors with whom the company deals.

Good relations are based on mutual trust and confidence. These grow out of dealings between buyer and seller over a period of time. The worth of purchase department can be measured by the amount of goodwill it has with suppliers. Such goodwill helps the purchasing department to achieve objectives of buying the right goods in terms of quality, quantity, time and place. The ultimate objective in vendor quality assurance is the production of materials, which so adequately conform to the buyers requirements that there is no need for extensive acceptance or corrective procedures by the buyer. The activities needed to achieve this objective include following: 1. Communication of essential and helpful information, design, specifications, standards, practices, etc. 2. Communication of engineering changes and changes in specifications, etc. 3. Developing methods for detecting deviations from standards promptly. 4. Helping the vendor in resolving quality problems. In case of vendors needing help like technical problems then, rendering necessary technical assistance as well. 5. Developing methods for identifying the qualified vendors and for eliminating those who are unable to meet the quality requirements. 6. Reviewing the performance of the vendor through vendor rating or other plans and following up on the chronically poor vendors. 7. The guiding principle in vendor relations is the spirit of what is best for the partnership. The supplier must be made to realize that it is not sufficient to accept the returns willingly or to negotiate the disposition of materials not delivered to the specifications.

Forecasting and planning Well run purchase department will anticipate needs of user department. That is so for number of items of at least regular use.

Anticipating advance needs is one of the important factors, which helps the work to do it better and achieve good results. In such case the buyer gets sufficient time to reduce the likely of rush orders. In case of sudden increase in the rate of consumption of the item, it is possible to develop alternative sources of supply. Though he may not buy alternative materials on his own initiative, he should call such possibilities to the attention of the user departments and make the purchase arrangements.

Once the need has been recognized, it must be accurately defined that all parties will know exactly what is wanted. An improperly or poorly defined need can be costly.

Selection of good vendors The important function of purchase department is the selection of the vendors for the regular required items.

For branded or patented items there may be single source. For most of the other items there is need of number of alternative suppliers. The manner in which the purchasing department selects source depends to a considerable extent on whether the item is bought regularly. A separate group of the engineers, depending upon the size of the organization are assigned this task. They undertake the activity as follows: 1. Investigate the parties. 2. Interview the salesmen. 3. Visit plant by senior persons. 4. Manufacturing financial capability 5. Put up the vendor for the new orders in small way. These activities lead to the choice of one or more additional vendors to whom the order is awarded.

Fixing price, checking invoice The activity of fixing price is important.

In some companies, the accounts departments do invoice checking. Even in that case it is better that concerned buyer checks the invoices before the account department releases payment. This is because it is buyers responsibilities to see that his orders are accurately filled and billed. In the case of errors, it is buyers duty to contact the supplier in order to secure a correction or an adjustment. If the accounts department makes the invoice check, there is some delay in referring errors to the purchase department. Purchase department is familiar with its terms and conditions, discussion and intentions in placing an order.

Inspection Inspection of incoming material is closely related to the receiving activity.

Receiving department checks the material receipt for quantity. The inspection department checks for the quality. This may be done by production department or by the purchase department. The production department should inspect goods before they are taken for production. The purchase department may tend to accept the inferior lot.

Other functions Conducting market studies and cost analysis and keep it updated with developments outside the company.

Dealing with sales tax and custom duty commitment of the company. Dealing for insurance matters. Conduct vendor rating and development of the vendors financially and technologically. Participating in the engineering function to decide Make or buy or import. Control and audit, maintenance and development of procedures, forms, records and reports.

The Purchasing Process

There is a general, underlying purchasing process. The process may be describe as: 1. Recognizing a need 2. Identifying a supplier 3. Qualifying and placing an order 4. Monitoring and managing the delivery process 5. Evaluating the purchase and the supplier PROCEDURE

Requirement from user department Send ENQUIRY to the vendors Get QUOTATION from vendors Study and compare the quotations
with estimated cost

Negotiate the quotation to fix the price Place the order to the right vendor Follow up with the vendor Get the material Inspect the material Store the material

Recognizing a need In organizations, needs are recognized in many ways.

A department may contact purchasing to buy new production equipment or new computers. Purchasing may be notified of an order for component parts by the materials requirements planning system. Orders may also be placed through an EDI system and simply reviewed by purchasing. Each of these methods starts the purchasing process at some level. Once the need has been identified, other steps in the process may follow.

Identifying a supplier There are many suppliers in the market.

A procedure has to be applied to search for a good supplier. The vendor must know name, designation and telephone number of suppliers to whom he has to deal with. Supplier who provides quality material in reasonable rate should be approached. Once the potential suppliers have been identified, one or more will be chosen to provide the goods.

Qualifying and placing an order Once a supplier has been identified, the order must be initiated, contracts signed or some step taken to get the goods delivered or services provided.

Purchasing is usually then responsible for determining if orders are filled correctly, if contract terms are met, if goods meet standards and if suppliers perform satisfactory. Buyer should not request a quotation from a supplier with whom he has not intention of doing business. Quotations are expensive to prepare, and it is unethical to ask suppliers to prepare them when they will not get an order regardless of what price they quote.

Monitoring and managing the delivery process Primarily, purchasing makes sure that correct goods were delivered in the correct quantity and right quality at the right place.

If not, purchasing takes some action to fill the gaps.

Evaluating the purchase and the supplier This is a two stage process.

Most purchasing organizations summarize the accumulated experience with a supplier through many transactions and many purchases. When one transaction goes away, purchasing may contact the supplier to avoid future problems. When many transactions fail to meet standards, purchasing then seeks new suppliers. Follow up P. Request PO Acceptance Supplier

Purchase Cycle
Other user depts.

Enquiry PO

Quotation Goods PO

Inspection Report

Stores dept Inventory control

Accounts Dept. Inspection Report Payment

PO; Purchase Order

P. Request; Purchase Request

Purchase Requisition This is the document, which initiates the activity of purchasing any matter in the organization.

Any person needing some material in the company fills up this form. The initiator gets the component drawing and finds the annual requirements for the item. He calculates the rate for the item if it is not available. The document has to be authorized before it is released to the purchase department, because it generates inventory in the organization.

Request for quotation After the purchase department receives the purchase request, it gets trigger for further chain of activities. The buyer releases the enquiry to the vendors.

In the enquiry form, it is essential to fill up quality requirements of the item and annual requirements for vendor to understand the business content in the enquiry. The vendor also must know clearly, the name and designation and telephone number of the person to whom he has to deal with. Buyer should not request a quotation from a supplier with whom he has no intention of doing business. Quotations are expensive to prepare, and it is unethical to ask suppliers to prepare them when they will not get an order regardless of what price they quote.

The buyer can do nothing with the suppliers quotation until engineering approves or rejects the proposed change. If the change is approved, he usually will get new quotations from other bidders. Tabulation is made to analyze and study the quotation 1. The unit price quoted. 2. Tool cost required along with tool drawing 3. Payment terms indicating the credit, that will be offered 4. The location of the vendor

Purchase order The buyer gets the quotation from different vendors. He has his cost estimations ready. He then tabulates the quotations and find the lowest quoting vendor.

Credentials of vendors are evaluated. Then purchase manager invites top one or two vendors, who are eligible for getting orders for discussion. He negotiates the price and places order.

Planning and follow up Follow up is the important function. Also it is highly undervalued and seen as unpleasant.

Very rare vendor is found, who supplies material as he promises and as what is discussed and agreed amongst two parties. So the buyer has to have good skills of follow up. This activity demand following: 1. Telephoning at regular intervals. 2. Visit to the vendors factory and seeing progress regularly. 3. Calling vendor at regular interval for discussion on plans.

Supplier (Vendor) Selection

Purchasing manager finds it more effective and efficient to deal with fewer suppliers rather than more. Purchasing managers want to be important to a supplier, which means giving a larger percentage of business to each supplier and dealing with fewer suppliers. Reasons for this reduction abound. 1. Finding and developing suppliers is expensive and time consuming. 2. Close relationships with those suppliers are time consuming and can be maintained only with a few. 3. Having only a few suppliers means that each one gets more business from one buyer, making that buyer more important. 4. Administering the search for quality materials is easier with fewer suppliers. Often, buyers and suppliers will work closely to develop new products for the buyer, or new components from the seller. Quality finished goods rarely result from inferior inputs. This means that purchasing managers and their internal clients spend a great deal of time and effort screening suppliers and their products to ensure quality.

One widely used method for screening suppliers is ISO 9000 series certification. This certification program was developed by the International Standards Organization. ISO 9000 requires that firms establish processes and document activities. They are widely accepted as a sign of quality. 1. ISO 9000; Quality management and quality assurance standards. 2. ISO 9001; Quality systems model for quality assurance in design and development, production and installation. 3. ISO 9002; Quality systems model for quality assurance in production and installation 4. ISO 9003; Quality systems model for quality assurance in final inspection and testing. Purchasing falls under ISO 9001. While being certified does not ensure quality, it ensures consistency in what is being produced.

Supplier (Vendor) Evaluation

After reviewing the sources, the purchasing manager must reduce the initial supplier list to a more manageable length. From this list, the best one is chosen. The purchasing manager should investigate the suppliers banking and credit references, financial stability, supply capabilities, extent of technical expertise, quality assurance programs, plant facilities, management cycle, customer service levels and just in time capabilities. The purchasing manager should discuss the suppliers performance with current and former clients. A firm must consider whether to use multiple suppliers or a single source for materials. Many firms single source for many reasons, such as 1. Priority supply 2. Price and/or volume discounts 3. Lower costs 4. Better quality control 5. Lower freight costs 6. Lower inventory costs Single sourcing presents several risks, including 1. Exposure in time of shortage, fire or strike 2. Supplier price increases 3. Supplier complacency about quality and customer service Whether the firm has one or a hundred suppliers, it must evaluate each of them. Suppliers are normally evaluated on price, quality, customer service and delivery. These variables can be divided into following key aspects. 1. Price Variable: - Price of the materials - Financing terms

2. Quality Variable: - Overall supplier reputation - Product reliability - Technical specifications 3. Service Variable: - Ease of operation or use - Ease of maintenance - Reliability of service - Sales service - Supplier flexibility - Training offered - Technical service offered - Ordering convenience 4. Delivery Variable: - Reliability of delivery - Total transit time



Area of Supplier Acceptance



The relative importance is given to each of the factor. As per the evaluators need, the weightages are given to different factors. For example, in case of the company A quality is important. Accordingly the factors are given as per the table below: Company A Sr. No 1. 2. 3. 4. Factor Quality Price Delivery Service Total Weightage 40 25 20 10 100

In the case of company B the price is important as per following table:

Company B Sr. No 1. 2. 3. 4. Factor Quality Price Delivery Service Total Weightage 30 40 20 10 100

The results are added to get summation to get the vendors final rating. To obtain a valid comparison of two or more vendors performances under contracts for the same or similar materials, the weighted factors must be constant for all the suppliers of that particular material. The supplier providing best performance will have the highest composite score. Supplier evaluation can be done in following two ways: 1. Evaluating the performance before the vendor has delivered material. 2. Evaluating the performance after deliveries have been made. First case is called as vendor evaluation and second case is called as vendor monitoring. In the first case the buyer has no direct evidence on the results achieved by the vendor and must get his information in other ways: 1. General reputation of vendor 2. Historical information from the buyers 3. Vendor surveys The details of this performance evaluation scheme are as follows: Quality Rating: Q = Total quantity supplied Q1 = Quantity accepted Q2 = Quantity accepted with concession Q3 = Quantity with rectification Q4 = Quantity rejected Q = Q1 + Q2 + Q3 + Q4 Quality Rating = (Q1 + Q2 + Q3) / Q * 100

Price Rating: Price Rating = (Lowest price quoted / Price agreed by vendor) * 100 Delivery Rating: Delivery Rating = (Promised delivery time / Actual delivery time) * 100 Quantity Rating: Quantity Rating = (Qty. supplied within stipulated time / Qty. promised) * 100 For Example: In an organization weighted points indicated for vendor rating are as follows:

Quality 40 points, Price 35 points, Service 25 points. The following data is given for 4 suppliers. Rank the 4 suppliers on the basis of rating. Quantity Supplier Received P Q R S 500 600 80 200 Accepted 480 560 78 192 10 9.6 9.2 8.9 0.94 0.9 1.0 0.98 Unit Price Service

Calculation of the individual rating Supplier P Q R S Quality 480 / 500 = 0.96 560 / 600 = 0.93 78 / 80 = 0.975 192 / 200 = 0.96 Price 8.9 / 10 = 0.89 8.9 / 9.6 = 0.93 8.9 / 9.2 = 0.97 8.9 / 8.9 = 1 Service 0.94 0.9 1.0 0.98

Calculating the vendor performance rating of all the three types for 4 vendors by multiplying the factor of importance. Supplier P Q R S Quality (40 * 0.96) + (35 * 0.89) + (25 * 0.94) = 91.24 (40 * 0.93) + (35 * 0.93) + (25 * 0.90) = 92.25 (40 * 0.98) + (35 * 0.97) + (25 * 1.0) = 98.1 (40 * 0.96) + (35 * 1) + (25 * 0.98) = 97.9

Above calculations show that the supplier R is beneficial since he gets maximum rating.

Supplier Measurement
Common performance measures include following: 1. Price effectiveness 2. Cost savings 3. Workload 4. Administration control 5. Efficiency 6. Vendor quality 7. Delivery 8. Material flow control 9. Compliance with regulation 10. Environmental measures 11. Procurement planning 12. Research 13. Competition 14. Inventory 15. Transportation

Price effectiveness measurements determine actual price performance against the plan, against the market and actual price performance among buying groups and locations. Cost savings refer to reducing the per unit cost. Also, it evaluates cost avoidance, meaning that the new unit price is lower than the average quoted price. Workload relates to measuring new work, the backlog of work and work accomplished. In administration and control, measurement normally compares actual cost to the purchasing budget. Efficiency measures purchasing outputs relative to purchasing inputs. Common measures could include purchase order per buyer, contracts written per buyer, etc. Vendor quality and delivery includes the percentage of items accepted or rejected, the frequency and severity of defects and the total cost of purchasing a single unit of product from a supplier. Material flow control measures the flow of materials from suppliers to the buying firms. Regulatory, societal and environmental measures show if purchasing is meeting the various legal, societal and environmental standards. These issues could include pollution control standards. Procurement planning and research deals with price forecast accuracy, lead time forecasting and number of plans proposed annually. In terms of competition, firms evaluate items like the number of purchases from a single. Inventory measurement revolves around analyzing the inventory turn over ratio, inventory levels and consignments. Measuring transportation refers to how much material moves by premium transportation, that is using more costly transportation.

Just In Time (JIT) Purchasing

JIT purchasing is the method of made to order. Products are not produced in advance and delivered to the customers as and when required by them. JIT system provides quality products. Several characteristics related quality, transportation, suppliers and quantities define successful JIT purchasing programs. JIT manufacturing fails without JIT purchasing. JIT purchasing ensures that, while minimizing inventory levels, materials are available for production.

JIT purchasing characteristics are as follows.

Quality The purchaser imposes minimal product specifications.

The materials supplier is assisted by the purchaser to meet quality requirements. The quality assurances departments of the seller and buyer work closely together.

Transportation The purchasing manager schedules and controls as much of the transportation activity as possible. Supplier A few suppliers located as close as possible are used.

Attempts are made to cluster remote suppliers. Repeat business with suppliers is preferred. There is consistent monitoring/evaluation of suppliers. Bidding of materials is minimized. Suppliers are encouraged to create JIT purchasing with their suppliers.

Quantity Frequent, steady delivery of small lots in exact quantities that demands reduced supplier production lot sizes.

Long term purchasing contracts are common place. Shortages and overages are discouraged.

Benefits of JIT purchasing

JIT purchaser Benefits JIT purchasing works best when buyers have consistent, reasonable production schedules, give larger orders to fewer suppliers, use long term contracts and select responsive suppliers that can meet the buyers requirements.

Potential productivity benefits include reduced material costs. Less rework, fewer delays and less supervision. Administrative efficiency is derived from fewer contracts, lower expediting expenditures, fewer suppliers, better and more accurate communication and more accurate accounting. Lower inventory costs, lower transportation costs, less scrap and fewer defects lead to lower delivered material costs. Higher quality means faster detection and correction of errors, less inspection and better quality finished goods.

JIT supplier benefits Suppliers also benefit from JIT purchasing.

Better training and more predictable schedules may lead to reduced labor turnover. Also, capacity requirements and production schedules become more consistent, also reducing turnover. Administrative efficiency improvements come from better communication and steadier, more predictable outbound movements of finished goods. Material costs may fall because of reduced finished goods inventory, more controlled work in progress inventory, and lower purchased inventories because their suppliers are involved in JIT. Quality benefits arise from smaller production runs and better quality assurance control.

Purchasing Partnership
Partner shipping is a relationship that attempts to build interdependence, to enhance coordination, to improve market position focus, or to achieve other shared goals. It also involves sharing benefits and burdens over some agreed upon time horizon. Characteristics of successful partnership Successful partnerships exhibit some or all of the following characteristics; 1. Joint planning 2. Sharing benefits and burdens 3. Extendedness 4. Systematic operational information exchange 5. Operating controls 6. Corporate cultural bridge building

Joint planning Successful partners share goals and coordinate plans.

Any partnership will fail without proper planning.

Sharing benefits and burdens This factor implies reciprocity during the difficulties of business.

Suppliers may accept reduced volume in the short term if they know volume will increase in the future. A purchasing manager must sometimes accept higher material prices in the beginning, knowing that the supplier will reduce them later.

Extendedness Extendedness means that both parties expect the relationship to continue. This takes place over time and requires mutual trust.

The partnership needs to create loyalty, which takes time to develop. This factor is critical if the partnership is to survive.

A purchasing manager can encourage extendedness by assisting in process design, supporting research and development, and providing company expertise, training advice, or even investment in equipment.

Systematic operational information exchange Successful partnerships share information. One party may need to help in the development of information sharing technology.

Information exchange is made easier through electronic data interchange (EDI). Purchasing, ordering, tracing, expediting, and scheduling shipments often flow electronically between suppliers and buyers.

Operating controls Operating controls mean monitoring the partnership.

Monitoring determines if the parties are performing as agreed. The control measure should relate closely to the partnership goals, which should be developed in planning.

Corporate culture bridge building As relationships develop, personnel in partner organizations may begin to thinks some what alike and develop similar goals.

Having similar cultures allow managers to understand more easily the partners viewpoint. The cultures need not be identical, just compatible, for a partnership to work.

Types of Purchases
As per the company and needs of the occasion the purchase method has to be adopted. For different purposes it will be better to follow different methods as per the need. They are: 1. Tender system 2. Subcontracting 3. Capital equipment purchase 4. Petty cash system (Cash purchase) 5. Rate contract method 6. Open end order method 7. Stockless purchasing 8. Order on telephone 9. Ordering method electronically 10. Imports

Tender system This method is usually followed in government organization, municipal corporations or public sector organizations, for buying number of items or services.

The method motivates buying process impersonal. It also gives opportunities to the variety of known and unknown suppliers.

Generally the value of order is high in this case. More larger value projects and higher technical requirements global tenders are invited. The methodology takes more time and the pipe line of activities is long. The authorization system is highly defined. Hierarchy levels are very important to be maintained. Methodology followed is as under: 1. Define the requirement clearly. 2. The advertisement to be given in minimum three national levels. 3. Generally offers are to be placed with earnest money and before a stipulated date, after which it will not be accepted. They are to be filled up on a prescribed tender form. 4. Tender document is available at cost. It contains the terms and conditions. Sufficient time is given to fill the tenders. 5. The tenders are opened publicly on the decided date and the work is awarded to the lowest bidder. 6. If the lowest bid is more than the estimated cost, the negotiations are done with that party and then they are awarded the work.

Subcontracting This method is used basically for the purpose of getting the assembly or the sub assembly of the products done from the vendors.

The vendors in this case, have generally the small factory. He may be having the small assembly tables at house. The investment in the equipment is low and more of labor force available. The people recruited there may be with low skills and they often need guidance and training from the buyers factory. All the technical help, processes, tools, gauges, inspection / check sheets are provided and overseen by the factory supervisors till the assemblies are approved by quality control department. This methodology took popularity in the countries like Japan where the small vendors were groomed to develop cottage industry. This concept is taking roots in India. Reasons for going for subcontracting are as follows: 1. The labor cost is at increase. 2. Assembly technology is not complex and does not need costly equipments. So the assembly function is easy to be given out. 3. The small vendor can manage the labor properly and can demand high rate of production from operators and paying them lesser salaries. 4. The efficiency and productivity of the operators in the big industries is poor and at decline day by day. 5. The purchase department has no major job expecting the job of the rate fixing. 6. There is good need to develop small vendors. The technocrats are required.

There are problems as follows: 1. The union has to be cooperative. 2. The secrecy of the technical matters of the products, processes, tools etc is difficult to maintain. The vendor has to maintain confidentiality. 3. Lot of material has to be sent to the vendor with high frequency. In the big and developed company there are number of tedious procedures, paper work and legal commitments. 4. It is argued that the quality of the assemblies produced at vendors place is inferior as compared with those made in the factory.

Capital equipment purchase The purchase of the capital goods is usually is planned, in the days of prosperity and when the production and sales rise is projected.

The manufacturing and related departments are generally aware as to what they want for progress and to enhance the capabilities. User department, which is manufacturing department, does mainly the study of the equipment or it may be under the area of general management. The indent is to obtain general information about the equipment. The purchase department has to gather general sales proceeds and operating literature together with approximate price and information. The particularity of the schedule date is that often delivery schedule is immediate if not urgent. That means till the time the equipment is not there the work was going on. The purchase department has chain of activity. The activities go hand in hand with production and accounts department. Methodology 1. Get the management sanction for the indent. 2. Contact the different parties who make the equipment. 3. Make comparative study of the specifications and quotation. The specifications may be fitting with a proprietary equipment of some manufacturer. 4. Make the indent for purchase department. 5. Negotiate the price and other details with the vendor such as trials, training, approval, testing of the samples made in trial, etc. 6. Place the order to the supplier. 7. In case of imported equipment, the import license is to be opened. 8. When the equipment is ready, conduct the exercise of the trials. 9. After satisfaction get the equipment at the factory. 10. Make the payment and inform the accounts department about closing the sanctioned budget. 11. Important consideration is the reliability of a vendor in standing.

Petty cash system (Cash purchase) Many firms use a petty cash fund for making small one time purchases often less expensive for an individual user or a purchasing delivery to buy minor items personally and pay for them from a petty cash to avoid buying them through the conventional purchasing system.

This is system that virtually eliminates paper work. A sum of money set aside to meet minor expenses of a business. This procedure is most effective for purchasing small orders from any source, whether registered or unregistered. It is not essential to get the authorized indent for these purchases. Generally these are the items, which do not go to stores, and are not required, in the regular production of the product. Some companies find it economical to make small one time purchase basis. Material can be ordered by telephone and paid for on arrival. Purchase can be made with petty cash or with a departmental cheque written from amount sanctioned for such use. Each department in the company is set aside with the amount as planned for cash purchase purpose. This becomes very convenient for departments and also for purchase department, which avoids complexity of documentation and authorization for small purchases.

Rate contract method This is the different version of Blanket order.

An order is placed for stipulated time period. Most companies usually buy a few selected materials under long time contractual agreements. Four primary benefits of this purchase method are as follows: 1. Under a long term contract, a supplier typically agrees to have material on hand for immediate shipment whenever the buyer requires the material. This makes purchaser to carry a smaller inventory. The buyer thus shifts some of his inventory costs to the supplier. 2. When a supplier is assured a sizable business and knows in advance the customers approximate needs, he can reduce production costs. 3. Through negotiation or competitive bidding, the buyer is able to buy at much lower prices than if small orders are placed with various suppliers in a random manner throughout the year. Contracts can be negotiated at a fixed unit price for the period. Thus, a third possible benefit the buyer may receive is protection of material price increases during the year. At the same time able to get reductions when the price declines. Supplier reduces the time that a buyer must spend in negotiations, selecting a supplier for recurring material requirements. 4. Contract purchasing resembles blanket order method in operations.

Blanket order or open end order method This method solves the problem of small order for items that are used regularly. Most common method of purchasing these items is by means of a Blanket order. That is also called an open-end order.

Blanket order is the most popular alternative to the single item, ordered at fixed price. It is an agreement to provide a required quantity of specified items for a period of time at an agreed period. If the price is not specified, a method of determining is made a clear in the contract.

Deliveries are to be made as and when specified by the buyer. Other type of blanket order is an agreement to provide buyers needs for particular items for a designated period of time. In this type of blanket order the quantity is not fixed until the time period has been over. In this case the quantity and the rate both may be kept open. Or the price may be fixed while placing the order and quantity may be kept flexible as per the need of the planner. The purpose of a blanket order is to purchase a variety of items for which there are frequent deliveries from one source. The blanket order is best for items with low unit value, with regular usage and whose rate of consumption can not be accurately planned. Advantages 1. Flexibility is available to planner. 2. Avoid placement of new order again and again. 3. To stagger expiration dates. 4. Avoid negotiating new orders. 5. Cover hardware type items, which are commonly, used items in different products. 6. It is advantageous to the supplier to plan the work at his place. 7. It is good for supplier since it is assurance of business. 8. It releases the buyer from routine work, giving him more time for attending his major responsibilities. 9. It requires fewer purchase orders, which reduce the clerical activities in purchasing, accounting and receiving. 10. It often achieves lower prices through quantity discounts by clubbing requirements. 11. Under a blanket order the supplier is encouraged, and in some instances required, to maintain adequate inventory to meet the commitment the buyer has made. 12. Assurance of higher volume of sales enables the supplier to plan his auction and inventory more accurately. Since most blanket order attracts specify monthly invoicing, it follows that the suppliers paper work can be significantly reduced. 13. It requires fewer purchase orders and reduces clerical and stores receiving work of purchase officer. 14. Relieve buyers from routine work, giving them more time to concentrate on problems. 15. It permits volume pricing by consolidating and grouping requirements. 16. It sometimes ensures protection against price rises during the period. 17. It centralizes purchasing control of similar commodities. 18. It can improve the flow of feedback information, because of the grouping.

Stockless purchasing The recent materials management demands to reduce or avoid inventory. That is aimed at by stockless purchasing. For getting success in that purpose, it is necessary for the buyer and the supplier to work together very closely.

There is no financial commitment from purchasing company. This responsibility is lying on the supplier. The goods may be located either at the suppliers or the buyers location. The inventories are to be maintained at the suppliers location. Generally supplier who is nearby is preferred. The cost at the suppliers end may be lower, because he may be able to perform these functions more economically than the buyer, since he is a specialist in the products. Also the cost saving is generated due to the fact that the supplier may be serving a number of similar buyer and thus be in a position to consolidate and lower the total maintenance of inventory for the purpose of back up. They may need smaller safety stocks. Often the items may be off the shelf type. Both sides gain in this methodology. Buyer gains due to no inventory conditions and for reducing purchase routine.

Order on telephone For small orders this method is used to reduce the paper work. In this method the purchase department does not prepare a formal purchase order when the internal material requisition is received.

The order is placed by telephone. The requisition is used in the receiving procedure. The requisition form is used for the purpose of internal control. The request includes all data normally included on a purchase order. The copies are distributed to different departments such as accounts, receiving, etc. When the material arrives, all receiving data are noted on their copies. One of these copies is sent to accounts department who makes the payment. The price is discussed and finalized on telephone. This works well with the captive type of vendors.

Ordering method electronically The new ERP or MRP system gives rise to the method of generating requirements through MM module.

The orders are placed through the computerized medium. Most of a companys major suppliers have necessary electronic equipment. Such electronic systems are relatively new and are currently experiencing rapidly expanding use among industry. In situations where buyers find their use feasible, such a method to expedite the purchasing process, reduce paper work and makes accounting and control simple. It is particularly applicable to the purchase of regularly used items. One important use of computers in purchasing is electronic data interchange (EDI).

JIT Relationship Support for Bar Coding

Electronic Funds Transfer Paperless Purchasing

EDI Benefits Increase Data Accuracy Internal Systems Impact

Purchasing Professionalism

Increasing productivity Inventory and Lead time Reduction Building enhanced Communications with Suppliers

Imports This is a method to purchase the goods from the area or the country outside the Indian Territory.

The reasons may be: 1. Collaborator recommends using the material of their origin. 2. The quality reasons compel to import for the specific need of product. 3. New technology equipments need to be used in the production. 4. For long term goal of self sufficiency today we need to buy some goods. 5. Since we cannot produce enough of the goods of our need, we need to import. For example, we import petrol since we cannot produce as much as we need. Imports are not easy. They are made difficult by rules and regulations by government. Central government releases Import policy every year on the basis of needs prevailing at that time and foreign exchange reserves available, raw material position, technical development goals, etc. This is known as red book. The companies exporting goods can import the spare parts, metals easily. Auto industry has been exporting a lot. Methodology: 1. While importing there is need of taking license. Different types of goods need different types of license. These licenses have stipulated time period. Every application for license has fee on the basis of value of the order. 2. The applications are on prescribed form. They are filled properly and are authorized be signing authority. Import export control authority analyses the application to keep control on imports. They see that only essential goods are imported of limited quantity. 3. Whether similar material is available in India? If no Indian company is in position to manufacture the goods then the license is given to import.

4. After receiving the license, the Letter of Credit (LC) is opened in the bank which gives credit to pay foreign currency. The bank name is indicated at the top of LC. When the foreign exporter receives the LC he checks the document whether the bank is acceptable to him. Normally the payment terms are advance payment before delivery. 5. When the goods are received they have to be cleared by custom by the payment of the customs duty applicable for that material. The goods are previously tested. So there is less problem of rejection.

Buying and Purchasing

Buying is a simple and common term refers to transfer of goods with the payment of money. Whereas purchase order is placed first to get goods for sales later as whole sale or retail sale. In buying payment can be made later stage but in purchasing immediate payment is required. In buying products are purchased on temporary basis like shares. Whereas in purchasing becoming owner is required.

Chapter: Material Management

Material is the central item and the activity of any organization. Materials are the key resources in an industry enterprise, since no production can be possible without use of materials. They form a major constituent of cost of end product and therefore proper control over their procurement, storage, movement and consumption is necessary. Materials, in this context include all things from raw purchase of ingredients to semi finished and finished goods. Every manufacturing unit has 25 -75% sales turnover investment in materials. This makes it a critical part. Expenses made on materials are spent in inventories, transportation, storage etc. Material management is the term used to connote controlling the kind, amount, location, movement of various materials used in production by the enterprise. Material management is the branch of logistics that deals with tangible components. It covers the acquisition of spare parts and replacement, quality control of purchasing and ordering such parts, standards involved in ordering, shipping and warehousing of parts. Material management covers all those activities which concern procurement, receiving, storage and issues of materials. It ensures steady flow of materials, achieving economy in cost of materials, ensuring consistency of quality, reducing inventory investment, reducing operation cost, etc. The main purpose of any organization is to make profit. This profit or loss gets generated due to material. In India, Indian Institute of Materials Management (IIMM) is working to promote excellence in Material Management. This is engaged in various facets of Material Management, responsible for planning, sourcing, and Logistics and Supply chain management. Its major activities include: 1. Material planning. 2. Purchasing. 3. Receiving and store keeping. 4. Inventory control. 5. Material handling. 6. Transportation. 7. Disposal of surplus and obsolescent material. 8. Material economics and waste management. Following chart shows the expenditure of Tata Motors and its sales in Rs.

Details Purchase of products, raw materials and Components Employee expenses Manufacturing, administration and selling Total

Amount Rs. 57,000 7,204 15,326 79,530

% of Total 71.67 09.06 19.27 100.00

Tata motors, manufactures of vehicles, spend 71% on material. They spend on labor about 9%. The studies indicate that on an average any organization has about 60% of its expenses on material content. The efficient material management decides direction of the organization. The material department is generally having following subsections: 1. Office and administration activities. 2. Purchase. 3. Receiving the incoming material. 4. Stores and warehousing. 5. Transport and internal material movement. 6. Dispatching the semi finished and finished material. The place of materials department is any industry is quite equally placed to the important departments like design department, manufacturing department, etc. Every department has dealing and concern with the material department. Materials management activities are performed primarily along with other activities. Following figure shows place of material department in the organization.

Marketing Department

Engineering Department

Production Planning

Manufacturing Shops

Materials Department

Product Design

Industrial Engineering


Plan Management

Main components of material management 1. MRP 2. Material procurement 3. Inventory management 4. Invoice verification 5. Material evaluation 6. External service management.

Objectives of Material Management

In any organization the materials department plays an important role in dealing with material. The objectives of material management are to buy materials and services of the right quality, in the right quantity, at the right price from the right source and at the right time. The companys profit will grow by keeping the objectives mentioned below: 1. Purchase material at low rates. 2. Keep the department expenses low. 3. Development of good suppliers. 4. Development of good relations with suppliers. 5. Development of personnel. 6. Development of good records. 7. Favorable reciprocal relations. 8. Participating in development of new materials and products. 9. Economic make or buy. 10. Standardization. 11. Product improvement. 12. Interdepartmental relations. 13. Forecasts. 14. Expansion of business by acquisition. 15. Regulating inventory. 16. Cutting operating costs.

Purchase material at low rates The profitability of the company depends on the fact how efficiently the materials are purchased.

It is the prime objective of material department. It is known fact that if the purchased rate is less by 1% then the profitability goes up to 4 to 5%. Holding down prices is most important objective. The rate of material ha to be controlled.

Keep the department expenses low Keep the employee cost lower. The profits go up by doing this.

This has to be done by improving employee efficiency. Different measures have to be taken from time to time to control the expenses. Apart from administrative expenses the material department has number of other expenses like Telephone, Fax, Travel, Tours, etc. These expenses have to be controlled by some rules.

Development of good suppliers Development of the suppliers is an important objective of the materials department.

The good, reliable and professional supplier is strength of any company. Regular efforts have to be taken to develop the new suppliers. Good professional company has a vendor development department or a section of engineers assigned this duty.

Development of good relations with suppliers As much as new vendor development, it is important to maintain good and professional relations with the supplier. Often their suggestions will give good tips to the company. This may lead to cost saving and product / process improvement, giving rise to the profits.

Manufacturing companies rely on outside suppliers to a far greater degree than is generally recognized. This makes favorable relations with suppliers. A companys standing in the business community is to a considerable degree determined by the manner in which it deals with its suppliers. A company with a good reputation in supplier relations is more likely to attract customers than one with a bad name. Suppliers make a direct contribution to a companys success. If a company has good relations with its suppliers, it will be far more successful in its efforts to stimulate superior performance from supplier personnel. Good companies manage the suppliers conventions per year or on regular interval. Some training programs are also managed for vendors for TQM or SAP awareness.

Development of personnel The persons on the job are the decision makers. The fortunes of the company depend on the decision they take. Recruiting talented staff and training them properly from time to time can do the skill development. Development of good records Information helps to take decisions. More the information, better it is.

Latest information is more important. The people need different types of information. The information has to be kept appropriately. Record keeping is important. Good records are considered primary objective of materials management. They contribute to the role of the materials department in the companys survival and profits only indirectly.

Favorable reciprocal relations When a company buys from its own customers as much as possible, it is practicing reciprocity.

Sound reciprocity involves a balancing of the advantages and disadvantages of using ones buying power as an instrument for getting sales. In the customer goods industries, reciprocity is rarely a problem. There are number of buyers who are using the goods. Materials department in some industries coordinate its purchases with the sales department to make certain that customers get favored treatment.

Participating in development of new materials and products New product development is the prime important work of any company.

Material department has to play important role in this venture. Design and engineering engineers do need guidance and participation of the materials engineers.

Economic make or buy When the new components are released for new product or the new features of the running product, engineering department along with the materials department has to take important decision as to whether the item has to be made in house or it should be purchased.

This decision is not depending only on the economy basis but also on the basis of number of other parameters in which the materials department has to play an important role. Make or buy decisions are decided by materials personnel since they are the most intimately concerned with the selection of supply sources.

Standardization The company management for the wider perspectives of improving the material management sets up standards committee.

The persons from all important departments like product design, engineering, industrial engineering etc are the constituents of the committee. The engineering groups are primarily responsible for standards and specifications but materials personnel can make a substantial contribution. They can periodically review stock to weed out nonstandard items.

They can promote the incorporations of standard components into product designs to reduce cost and they can promote standardization with suppliers. Product improvement Product design and the engineering department work on this job regularly.

Their economic knowledge can supplement the technical skills of the engineers on programs to boost profits through product change. Materials personnel can help engineers achieve their design objectives more economically by materials or components that will do a better or equivalent job at lower cost.

Interdepartmental relations The persons in the materials department are basically doing the job of service department. Their success depends on how well they get along with the people in the other departments.

They have to get cooperation from any persons as well. Their relations of harmony are essential. Their own success depends on how successful they are in gaining the cooperation of personnel in other departments. To prevent disputes, they are careful to define departmental responsibilities clearly and also try to familiarize others with materials, objectives, policies and organization.

Forecasts Experience counts that can forecast well. To manage materials well, some conception of the future outlook for prices, costs and general business activity is necessary.

Materials personnel translate the general forecasts into specific forecasts for purchased materials. They provide data for forecast because, more than any other group in the company, they are intimately familiar with the market and general business conditions through their daily contacts with suppliers. The forecast of the future requirements is very much useful. The market awareness and future moves of the prices as well as taxes, duties can be forecasted well by the experienced buyer.

Expansion of business by acquisition In the modern world one of the important method for companys growth is to acquire other company. It is a tricky job to analyze and identify a possible candidate for acquisition and then to make the necessary plan and take action for merger.

The materials manager can often play an important role in acquisitions, since he normally has, through dealing with his many suppliers, more contacts with the outside business world than other executives in the company.

Regulating inventory Not only company should have thousands of items available for product, but also often it stocks thousands of repair parts for customer service.

If demand is erratic, there is always the danger that inventories will become unbalanced. The materials manager strives to prevent stock outs without trying up too much of the companys capital in inventory.

Cutting operating cost If purchase prices are stable and inventory fluctuations are minimal, then the most important, contribution the material manager can make is to do his job at minimum cost.

His focus should be entirely on how to maintain the same level of basic performance at lower operating cost.

Functions of Material Management

For performing the job efficiently, purchase department must have a close relationship with the design, quality control and production departments. Functions of material management are as follows: 1. Make or buy 2. Facilities procurement 3. Calculating quantities for scheduling 4. Ordering of material 5. Packing the finished goods, storing and dispatch 6. Distribution of material 7. Inventory control activity 8. Material movement 9. Participation in the product development

Make or buy Any newly released product, its subassemblies and components are taken up for decision of make or buy by the engineering department.

Decisions among the variables that influence make or buy decisions are estimated on manufacturing costs, purchase cost, technical skills, availability of material and capital resources.

Facilities procurement In case of components to be manufactured specific investment is required, to be done in the facilities and equipment. For large expansion land, building will have to be purchased.

The material manager is partially responsible for selecting the site of the new building.

Calculating quantities for scheduling The process of planning and scheduling starts with a sales forecast, based on market research studies, by the companys marketing department.

The forecast is converted into a master production schedule. The schedules take availability of labor, materials and basic capacity in house into account. long with the production persons, the materials persons calculate requirement of the components on the basis of bill of material that indicates the name, part number and usage of each component. The demands for end products keep changing. The performance of the material department depends on the proper reflexes on these schedules. If demand suddenly spurts, the flow of material must be accelerated. They have to look for the bottleneck items, tooling requirements, if required parallel suppliers.

Ordering of material When requirements have been calculated, the ordering process begins.

Requisitions and work orders are made up for each item.

Purchase requisitions for purchased items and work orders for the manufactured components are released. The purchase requisition for the raw materials must be executed before manufactured components are to be released. Section of vendors is done carefully and orders are placed to those, who have done a good job in the past.

Packing the finished goods, storing and dispatch The purchased material moves in the factory and gets processed to form the finished product of the company.

Many times good packaging is required. The transportation route may be quite tough. Due to that packaging is costly

Distribution of material Finished goods must be moved from the production line to a company warehouse and further to customer. This process is called physical distribution.

Manager may also be responsible for the physical movement of partially finished products within the plant and may receive and transport purchased materials to storage areas and to their point of use. The traffic function may also be included in the physical distribution department.

Inventory control activity Along with the receiving report and the approved inspection report, the material goes to store for binning or it may go to the user directly.

The material going to stores becomes part of the companys inventory. Controlling this inventory is one of the prime functions of materials. On the other hand, the production should not stop for lack of material.

Material movement The movement of the material in the factory and out of the factory is important function of the materials department.

It is concerned with incoming of purchased materials and is also concerned with outgoing of finished products to customers. Tracing incoming shipments of material in short supply as required by production control or purchase. This may involve negotiation with competing shippers, special studies on selecting the most advantageous plant location for new products.

Participation in the product development Cost Estimates; At design stage to get competitiveness of the product, cost estimates are required. Once a decision is made and tools are made, it becomes expensive to make changes.

Using standard components; Using standard component can be less costly.

Manufacturability of the components; It is required from the point of view of manufacture of the component. This is essential to avoid fictitious drawing, from which may not be possible to make the component. Supplier development; It is desirable to develop suppliers for the components. In such cases, the company may decide to buy from certain supplier. The supplier may put up his needs into the adaptation. The materials department should play a role in choosing the suppliers for engineering job on new product development. Guiding design decisions; Design engineers have difficulty in choosing from a number of acceptable designs and specifications. The engineer can determine which materials and processes will do the job. Introducing new materials; The materials persons are in contact with the outside developments and can help engineers by introducing them.

Integrated Material Management

The function of materials management is important in any organization. There are many opportunities to save direct money in the different parts of the departments. This increases the profits of the company giving rise to the competitiveness of company in the market. Every 2% reduction in the cost improves the profitability of the company to the extent of 8 to 10%. Various function saved by the materials management include material planning, purchasing, receiving, stores, inventory control, scrap and disposal, vendor development, evaluation, etc. If some of the functions were to be handled separately, normally conflict of interest takes place. If purchasing department is allowed to operate independently, they may take decisions which result in less than optimum. For example, purchase department may take decision to order large quantities for getting quantity discounts leads to problems in warehouse and carrying cost. There is need of balancing conflicting objectives of the total interest of the organization. In the integrated materials management set up, the material manager is responsible for all the functions. He is in position to exercise control all over to get the benefits for the organization. He will coordinate the functions and achieve the balance of conflicting objectives of individual functions. Integration helps in transferring the data rapidly through effective and informal communication channels. This data transfer is highly essential in view of supply chain management. So it is useful to have integrated materials management. This gives rise to better coordination of the functions improving good control over the activities. Following are the advantages of integrated materials management. 1. Better accountability

2. Better coordination 3. Better performance 4. Adaptability of EDP Better accountability Through centralization of authority and responsibility for all aspects of materials function, a clear accountability is established.

Various user departments direct their problems with regards to materials to one central point so that immediate action is taken. This leads to evaluate the performance of materials management in objective manner.

Better coordination Central materials manager is responsible for all the functions.

Sections under materials manager create a common identity. This result in better cooperation and support in accomplishment of functions.

Better performance All the functions are integrated organizationally.

Greater speed and accuracy in the work takes place. Need for material is promptly brought up by planning department. Purchase department is informed with stock levels, order status and inventory control department. This leads to overall lower cost, better inventory turn over, reduce stock outs, reduction in lead times and reduced paper work.

Adaptability of EDP Centralizing the function has made it possible to design data processing system.

All information of material function is centralized. This has facilitated to collection analysis of data, leading to better decisions. Advanced and efficient ELECTRONIC DATA PROCESSING system can be economically introduced under integrated set up.

Classification of Materials
Classification of materials is the process of grouping items on the basis of some criteria. It can be categorized on basis of: 1. Conversion process. 2. Usability of materials. 3. Nature of materials. Classification of material is necessary for the following purpose: 1. To evolve procedure of planning and control of material in a class. 2. To device accounting and evaluation procedures common to all materials in a class. 3. To decide system of storage and issue of materials in a class.

In a manufacturing organization store materials can be classified into following categories; STORE

Direct Material

Indirect Material


Work in progress MATERIAL

Work Made Parts

Purchased Parts



After being purchased and assembled


Use of Computers for Material Management

Computers have a huge role, whenever systematic approach is necessary. Much of the job in the materials department is done via computers like record keeping, calculation of receipts, dispatches, ordering etc. The characteristics of computers needed are: 1. High speed 2. Large storage 3. Quick processing 4. Quick retrieval 5. Versatility in working Matters done by computers: 1. Determine economic lot size of each item. 2. Determining safety stock level. 3. Determine order and reorder level. 4. ABC inventory analysis. 5. List of suppliers along with their rating. 6. Automatic generation of purchase requisition, purchase order. 7. Follow up with the vendors. 8. Master purchase files, considering previous purchase (item-wise, departmentwise, supplier-wise, price, quality, etc.)

Computer has facilities to print the quotation request, purchase order, follow up, inspection report etc. Often these are printed on a preprinted stationary. When the buyer receives a purchase requisition, the data are entered through the relevant software. In this process, computer checks the stock status of the item and fills up the details as required by the system. Computer selects the supplier and prints the purchase order. Upon receipt, it will update the inventory of the item. In addition to these, it prepares timely report on: 1. Items not supplied on time. 2. Items rejected or accepted. 3. Pending payments. 4. Reduction in inventory. 5. Excess suppliers done by vendor. Important area of the materials department is the warehouse. Here written data and related records are kept. There is urgent need to do all the updates. Computer is a good help for all that. In most organizations, material management department makes use of MRP (Material Requirement Planning). This software coverts the master schedules to useful activities like: 1. Requirements of raw material. 2. Components. 3. Sub-assemblies and assemblies. For meeting the master schedule requirement, MRP indicate the quantities and when they should be brought in. There is Bill of Material for each product. The components are made from raw material and the amount of each material is counted. There are different modules available in the software like ERP (Enterprise Resource Planning) and MM (Material Management). MRP processes input data and releases data in the following form: 1. Purchase request, purchase order. 2. Production order. 3. Reports for the management. The details of input are fed into the MRP software, as per the bill of material; the product is exploded into components and raw material level. Requirements are then taken from master schedule and quantities of each item are arrived at. The lead time and other details are related from inventory details and the time to release each action is arrived at. There are many advantages of using MRP software like all documents get ready as per required time, information is available real time, reporting tools, reduction in inventory, storage components, purchase cost, lead time, scrap, cost of movement etc.

MRP (Material Request Planning)

Computers can be of great help to the materials manager. With the help of specialized software, Material Requirement Planning is developed as computational technique. This software converts the master schedule to the useful activities like: 1. Requirements of raw material 2. Components. 3. Sub-assemblies and assemblies. MRP indicates the quantities and when they are required to be brought in. It is the integrated approach to the inventory management, taking into account the purchase and in house production program. The MRP software takes the input of different types. The main points are show below: Sales Forecast Customer Orders Product Design Inventory Transactions Management Policy

Master Schedule

Bill of Materials

Inventory Records

Input MRP Software


Purchase Request

Management Reports

Production Orders

Three types of information are fed to computer: 1. Master schedule; This is made up from sales forecast by marketing department and live orders received by the company. 2. From product design the bill of material is prepared. 3. Inventory details for each item are prepared and it is fed as input. MRP software processes the data and releases the output for ready use of management in the following form: 1. For purchase components it releases the purchase request, purchase order and all the further documents. These are all in the form of soft copy. 2. For in house manufactured components it releases the production order.

3. It prepares different types of reports for the consumption and use of management as required. Master schedule The master schedule is the chart indicating which product is required to be delivered by factory and when it is to be released to the customer.

It is fed to the MRP software in the following form. Week 1 2 3 4 5 6

Product Product - A Product - B Product - C Product - D Product - E Product - F

1500 2000 4000 5000 1000 2000 1000 1000 3000 3000 4000 3000



This is prepared from the sales forecast by marketing department for the orders already received from the customers.

Bill of material The bill of material is prepared from the product design documents.

Each product is the assembly of the number of components. Before reaching to the final assembled product, for convenience the engineering person has to make several subassemblies depending upon the complexity and the size of the product. The components are made from some raw material. The raw material is required to be planned if the said component is made in the factory. This information is essentially indicated in the design and assembly process sheets. This is fed to the MRP software. On the basis of the production requirements the bill of material extrapolates the requirements for the components and raw materials. Also the MRP indicates when those components and raw material are to arrive in the factory. According to the lead time requirements, the requisite release documents are prepared.

Inventory details For every time there is basic data. This has to be arrived at and fed to the software, without that further information can not be used.

The data required is as follows: 1. Item number 2. Description 3. Standard cost 4. Annual consumption 5. ABC category 6. Lead time 7. Safety stock 8. Order quantity 9. Frequency of release The inventory details keep changing. Any change needs to be fed immediately. MRP software makes the changes immediately.

Working of MRP The details of input are fed into the MRP software package.

As per the bill of material, the product is exploded into the components and raw material level. The requirements are then taken from the master schedule and the quantities of each item are arrived at. The quantities for each component are calculated for each planner to act up on. The lead time and other details are related from inventory details and the time to release each action document is arrived at. The location to provide each material is indicated on the document. The relevant planner takes action as per the signal given on the document. Any change taking place on the schedule, bill of material and inventory details is indicated to the MRP software. Accordingly the changes take place automatically in the related documents. An integrated MRP package has different modules as follows. The customer has to select those, which he finds important from his point of view: 1. Accounting 2. Inventory program 3. Address book 4. Production control and planning 5. Purchasing 6. Receiving 7. Bill receivable 8. Sales and logistics 9. Invoicing 10. Bill of material 11. Warehouse 12. Distribution or retail operations

Advantages of MRP All the documents get ready as per required time. These are like purchase or production order release signals.

All information is ready on the screen at any time, which is available duly updated. This is called as REAL TIME information. Getting latest information is absolutely important for each person in the company. The program gives many types of output documents, which are highly accurate. The master schedule is the one, which has characteristics of ever changing. Making the changes manually is rather difficult task. This is done by MRP easily and accurately. The relevant changed documents are released or signed immediately. Time to time it prepares the reports, which are good for users for taking decisions. These are related to inventory status, production outputs, latest sales figures, slow moving items, profits and loss figures etc. Any time the people can know the latest data using MRP methodology. By adopting to MRP method, the company has to keep in mind that it is getting collaboration for best managing practices. The MRP packages are well thought and derived after long considering, the best rules and regulations, which are in built in the system. There is benefit to the company by implementing the same. MRP calculates and maintains an optimum manufacturing plan based on master production schedules, sales, forecasts, inventory status, open orders and bill of material. If properly implemented, it will reduce cash flow and increase profitability. MRP provides with the ability to pro-active rather than re-active in the management of inventory levels and material flow.

Problems in the MRP Implementation Need of high level of discipline: Since total matter is dealt with computers, it operates totally as per the details fed to it. No manual intervention is allowed. Where strict discipline can not be kept, MRP software becomes barrier.

The procedures in the company have to be clear: There should not be any ambiguity. The software can be edited in the beginning as per the companys needs of the procedures. But it is found that these procedures are rarely found to be clear. Many highly sophisticated organizations find that their procedures are hardly uniform. This becomes barrier in the implementation. Cost of software is high and further implementation is costly: Dedicated team of the experienced persons have to work for implementation for elaborately long period.