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Smita Khandelwal

Excerpts of the Course

Materials The Profit Centre Organization of Material Function Cost Reduction by Codification Music -3D view of Materials Management

Financial Aspects in Materials Management

Inventory Management & EOQ P&Q Systems of Inventory Warehousing Management

Stock Valuation & Verification

Disposal of obsolete & Scrap Items Purchasing Cycle Right Modes of Transport

Vendor Rating
Negotiations International Buying
Purchasing & Materials Management

Unit No. 1
Materials The Profit Centre

Purchasing & Materials Management

Materials Management as Profit Centre

Organizational Expenses

-Sales & Marketing - HRD - Finance & Taxation - Business Overheads - Operations Every Rupee saved adds to P&L Accounts

Purchasing & Materials Management

1:- The Profit Centre Is Material Management is about Negotiation & Buying? BOM Enquiries & Quotation Comparative Analysis, Commercial Negotiations & terms agreement. Release of PO, Delivery Schedule and Follow-up Logistics and Storage Billing & Payment Forecasting of materials Vendor Management & Evaluation

Purchasing & Materials Management

Material Management - Objective

5 Rs of Materials Management 1. Right Quality

2. Right Quantity
3. Right Time 4. Right Source 5. Right Price

Purchasing & Materials Management



Purchasing & Materials Management

balance between confidence & diffidence

Conflict Handling-assertiveness

Practical-Speculative, Objective-Speculative

Build working relationships

Purchasing & Materials Management

know the rules of the game

Do homework on the culture

Be truthful & check for truth in your opponent

Introduce more variables, communicate creativity

Purchasing & Materials Management

Its all about information

Rephrase your objective


Raise the level of abstraction to suit you.

Slow down things to give you breathing space

Purchasing & Materials Management

Unit No. 2 Organization of Materials Function

Purchasing & Materials Management

2 :- Organization of Materials Function

-To have uninterrupted & Effective Flow of materials with lowest cost e.g. Small shopkeeper & Department Stores - Location of Purchasing depends on type of - Industry (Food Industry, Shelf Life) - Variety (Cosmetics, Merchandizing) - Volume (Mass production) - Purchase function: Stores, inventory, planning, cost reduction, Transportation, value engineering. - Purchase is not function of -Finance (Min inventory, Max Cash Flow) - Production (Max Inventory, Min Cash Flow) - Administration (Waste of Inventory & Cash Flow) - First Source of outside supplier hence public relations, corporate image.

Purchasing & Materials Management


Purchase Enquires Source identification and quote by tenders Negotiations & PO Follow-up with supplier, transport Stores, Quality inspection and documentation Receipt, Acceptance of correct material, rejection of incorrect material. Payment of supplier bills Purchasers at Corporate Situation are been seen as Corporate Image & Public relation officer for organization.

Purchasing & Materials Management

Centralized Procurement o Economy of Sales o Volume Negotiation o One Point contact with all o Resource Utilization o Delay in Procurement o Inferior Quality o Restoring emergency procurement o Team understanding technical specs o In process inventory due to compiled quantity o Improper Planning / Cancellations, rejections

Purchasing & Materials Management

De- Centralized Procurement o Better Commitment o Knowledge of needs o Short communication time o Better liaison & Performance Control o Speedy Execution & Short inventory o Lesser Economy of Scale o Resource waste o No Volume / Bulk discount o Higher Logistical Cost

DELEGATION OF POWER Material & User Department Manpower Planning

Purchasing & Materials Management

Unit No. 3 Cost Reduction by Codification

Purchasing & Materials Management

3 :- Cost Reduction by Codification

Representation item by number, alphabet, group digit, subgroup, type, dimension, stores & bin location, sometimes suppliers name. Number Alphabet Group digit Subgroup Type Dimension Stores & Bin Location Suppliers Name : Supplier country, Area Code : Item Starting alphabet : Production, Administrative, Packaging, Finance : Metal, Wood, Paper : Raw Material, Stationary, consumables, Tools, spares : Size, Capacity : Material, Administrative, Rack location, Tray / Bin : ESSAR, NAVNEET, CAMLIN, FEVICOL, BOSCH

Pin Code / Pan Card / Mobile No

Purchasing & Materials Management

While deciding codes: o logical, simple & easy rules o Unique o similar group & easy retrieval o flexibility to add new items Why codification? o Easy recognition o Small names o Logical grouping o No duplication o Less items o Bulk ordering with staggered delivery o Less lead time and More Working Capital o Simplification, Standardization & Computerization o Stock Transfer
Purchasing & Materials Management

Coding System The Brisch System:

Conceived by E G Brisch & J Gombinski. Block of numerals separated by decimals. First Block: Major Classification e.g. Raw Material, Fasteners etc Second Block: Secondary Classification by types & kinds Third Block: Dimensions or other distinguish features. XX






Material (Size , 1, L)

Developed by Eastman Kodak Co. of USA. Its a 10 digit numerical code. Three Group of digits separated by hyphens. E.g.
(XXXX Main Class XX XXXX) (XX Sub Class XXXX XXXX) (XXX Type & Kind XXXX XXX) Dimensions & Characteristics Minor Variants

The KODAK System:

Purchasing & Materials Management

PSHCSSM10020 / SPR200ASR34
PSHCSSM10020 P S H CSS M10020 SPR200ASR34 S P R 200 AS R 34 : Production Department : Steel item : Hardware : CS Screw : M100 x 20 : Stationary Department : Paper product : Long Register : 200 Pages : Administration Stores : Rack No : Shelf no.

Way AheadInternational Codification

Purchasing & Materials Management

Unit No. 4 3D View of Materials Management

Purchasing & Materials Management

Inventory Control: Selective Treatment

- Pareto Principle

CLASSIFICATION ABC Analysis HML Analysis VED Analysis SDE Analysis GOLF Analysis SOS Analysis MNG Analysis FSN Analysis XYZ Analysis

Criterion Employed Usage Value = Consumption x Price Unit Price Criticality of Item (Prodn Loss) Procurement Difficulties Nature of Suppliers Seasonability of Item Stock Turnover Rate Inventory Turnover Ratio Value of Stocks on hand

Purposes To Decide stocking policies, improve store keeping, degree of control To access storage & security requirement, Control consumption , Frequency of stock, buying & control policies, power of cash purchase. Spares Inventory Control Method of buying, responsibility of buyers Allocation of Procurement Responsibility Procurement strategies Disposal of surplus material, identification of non existing item to save space Disposal of Surplus & obsolete stock. Which items to control to bring down current inventory

Purchasing & Materials Management


Timely Communication Courtesy Business Ethics Avoidance of Legal Action Visits by Senior Staff

Buyer to Give

Seller to Give

Long Term Business. Timely Payment. Minimized unscheduled deliveries & rush orders. Acceptance of Justified price Increases. Avoidance of Unnecessary. Avoidance of Harassment. Avoidance of force price Reduction. Occasional Help

Timely deliveries w/o constant follow-up. Advance communication in case of expected failure in delivery. Shorter lead time in Emergency Competitive Pricing. Defect Free Supplies. Correctness of Paper Work. Ability to Hold Prices.


Purchasing & Materials Management

Unit No. 5 Financial Aspects of Materials Management

Purchasing & Materials Management

HOLDING Cost - Stock Out Cost: Cost of being out of stock i.e. loss due to non availability of an item in stock. SOC depends on nature of item or bought out parts SOC = Premium Price Paid for Item = Market Price Vendor Price

SOC in case of FG is profit loss on lost sales

SOC in case of spares = Downtime (Hrs) x M/c Hour Rate (INR)

SETUP Cost: Change Over Time to switch from ONE ACTICITY TO ANOTHER
Setup Cost can be reduced by Traditional Method : Time & Motion Study SMED : Single Minute Exchange of Dies
Purchasing & Materials Management

Item Cost:
Cost corresponds to price paid for the goods themselves.

Penalty Cost:
Cost paid for each demand item which cannot be served directly from inventory.

Purchasing & Materials Management

Cost incurred apart from the Cost of Raw Material viz. - Cost of Procurement - Freight & Logistics - Follow-up & Travel Charges - Operational Overheads - Meetings, Postage, Advertisement - Other capital cost & its Depreciation Settlement of Bills: Payment deliveries from Finance for the receipt of material from vendor. Clearing the Bills, Raising payment advice, Payment follow-up and communication with Vendor. Late payments would result in non appreciated relations & increase source prices as the interest would be additional multiple due to late payment.

Purchasing & Materials Management

Receipt & Quality approved entry of Material & being a major cost incurred aspects refers to - Pricing Issues - Evaluation & Verification of Stocks - Credit Reversal of Taxes, Duties, Excise & other components For A/c various terminologies are used for better evaluation viz. -FIFO (First In First Out) - LIFO (Last In First Out) - Weighted Average Two year end Stock value is to be include in Balance Sheet.

Purchasing & Materials Management

AUDITS: To verify and check whether the integrity & effectiveness of transactions are consistent with organizational Objectives, Procedures, Strategies, Policies & manual. -Management Audit - Internal Audit - External Audit - Cost Audit - Social Audit - Proprietary Audit - Accountant General Audit

Purchasing & Materials Management


Trade Discount
Quantity Discount Off Season Discount Cash Discount Standard Package Discount OEM Discounts Turnover Discounts

Purchasing & Materials Management

Shipping Terms :-

Ex Works
FOB (Station of Dispatch) FOR (Freight on Road) Buyers Works At Site Works Contracts

@ @ @ @ @

Sellers Premises
Sellers Station Buyers Station Door Delivery Delivery at Site / Stores Ready for Use

Purchasing & Materials Management

Unit No. 6 Inventory Management & EOQ

Purchasing & Materials Management

Inventory Control:-Finished Goods inventory Reduction : - Pull Production - Heijunka Learning Production - WIP Inventory Management : - Small Batch Size - Setup Reduction - Cellular Layout / Flow Management - Buffer Stock Management: - Lesser Defects - Absenteeism - Breakdowns - Fundamental Problems: - Small Lot Purchase - Supplier Proximity - Vendor Managed Inventory - Kanban - JIT
Purchasing & Materials Management

Motivation for holding Inventories:-Economy of Scale -Uncertainty of Demand - Smoothing Demand Over Time - Flexibility in Planning Motivation for not holding Inventories:-Capital -Depreciation - Flow Time


Annual Total Cost

Annual Inventory Carrying Cost

Annual Procurement Cost

AICC = Annual inventory x ICC in fraction APC = No of Order per year x Procurement Cost Per order Annual Total Cost = AICC + APC

EOQ q =
Assumptions for EOQ and valid on:-Price / unit is independent of Order Quantity - Item can be procured within zero time lag - Items are consumed at known constant rate - Items can be procured free from any restrictions - Item has fairly long shelf life, no obsolescence - ICC & APC are common to all items and they are known.

2xSxCp Cu x i

S: Consumption Cp: Cost of Procurement Cu: Cost Per Unit i: ICC

But referred above EOQ may require modification due to business constraints viz. -Follow-up Difficulties - Supplier Minimum quantity condition - Lead Time - Seasonal availability - Shelf Life - Packing Size - Space Restrictions SOLUTION: - STAGGERED DELIVERIES Purchasing & Materials Management

Consumption / Month = 75 Nos. Cost per unit = 25/Cost of Procurement = 36/Inventory Carrying Cost per month = 1.5% Soln:Annual Consumption = 75 x 12 = 900 units Annual ICC = 1.5% x 12 = 0.18


2 x S x Cp Cu X i

2 x 900 x 36 25 x 0.18

120 Nos.

Purchasing & Materials Management

Unit No. 7 P & Q Systems of Inventory

Purchasing & Materials Management

Decisions for When to order & How much to Order ?????

Inventory Controls :- When inventory level hits a predefined value, an order of fixed size is then launched. These are Fixed Quantity ( Q system of Procurement) Periodic Review (P System of Procurement) Order Quantity (Q) Fixed Review Time Continuous Periodic X X X Variable

Purchasing & Materials Management


The figure shows the predictable, timely re-ordered stock movements.

Safety Stock:
We may run out of stock because of a re-supply delay or higher than anticipated usage. If we can predict demand then we merely place EOQ orders on time. Thus we need to assure a minimum level of inventory, quantity of which replicates wrt Lead Time, Consumption pattern and buffer Stock.

Purchasing & Materials Management

Service Levels:
We risk a stock-out with unpredictable demand, usage and re-supply so introducing a safety or buffer stock reduces the risks of variable demand/lead time. However, the level of material consumption would vary due to constraints / bottlenecks of other resources viz. non availability of manpower, power outrage which affects the Planning.

Purchasing & Materials Management

Selection of Replenishment System

Replenishment System

When to Order

How Much to Order

As per Stock

As per Time

Fixed Quantity

Variable Quantity

Review System Optional Replenishment

Reorder Level System / Two Bin System

Purchasing & Materials Management

Review System / Compulsory Replenishment

Unit No. 8 Warehousing Management

Purchasing & Materials Management

Unit No. 9 Stock Valuation & Verification

Purchasing & Materials Management

Need for Valuation:

For converting physical quantities into monetary figures for judging the performance of organization as inventory forms the single largest assets in industrial process. Stores Manager has physical custody for raw materials, capital goods, consumables, spares, furniture etc and is responsible for safe upkeep. Since process of valuation enables organization to measure its performance, a picture can be portrait on methods of valuation adopted e.g. gross profit is obtained by deducting the cost of material consumed from net sales and in bad year, a higher gross profit can be indicated by adopting a lower value for cost of materials consumed.

Purchasing & Materials Management

Methods of Evaluation:
FIFO: FIRST IN FIRST OUT (material issued in chronological order)
Date Qty 5th Jan 6th Jan 10th Jan 12th Jan 14th Jan 16th Jan 200 300 Receipt Rate 1.00 1.20 Value 200 360 Qty 100 100 150 Issue Rate 1.00 1.00 1.20 Value 100 100 180 Qty 200 300 100 300 150 Stock Rate 1.00 1.20 1.00 1.20 1.20 Value 200 360 100 360 180

LIFO: LAST IN FIRST OUT (material receipt last are issued first)
Date Qty 5th Jan 6th Jan 10th Jan 12th Jan 14th Jan 16th Jan 200 300 Receipt Rate 1.00 1.20 Value 200 360 Qty 100 200 150 Issue Rate 1.20 1.20 1.00 Value 120 240 150 Qty 200 300 100 200 50 Stock Rate 1.00 1.20 1.20 1.00 1.00 Value 200 360 120 200 50

Purchasing & Materials Management

Average Price: The issues are valued on simple average price. Method is very accurate due to approximation. As prices are not weighted by quantities purchased, the Average prices obtained do not give a proper presentation facts. Since the valuation is

not at cost, the closing stock value will differ from actual value, giving rise to profit/loss
due to system adoption. Weighted Average: Issues of production are split into equal batches from each

shipment at stock. Being realistic methods the price levels and stabilizing cost figures.
The total unit cost is arrived with weighted average is computed to production and a new price is computed on purchases of extra material purchased.

Standard Cost: Forecasted unit price for specific period of one year or more is used to
evaluate the issue. Actual price being different from standard cost helps in evaluating the performance of purchasing.
Purchasing & Materials Management

Replacement Cost: Relevant in inflation in built economy, the purchases are valued on price paid, issue price is based on replacement price i.e. price on replacing them on date of issue. Value of stock on hand would be difference between the sum of

purchase price and sum of replacement prices.

Stock Verification: Reconciliation of stock, review of stock and book stock which differs in almost all organizations. Magnitude of this will increase with more transactions as

mistakes may be committed in more no. of transactions. Issues with indents, improper
receipts, pilferage, obsolescence, deterioration & damage due to different causes of improper storage, evaporation, spillage etc.

Process of Verification: Inventory Count, Physical counts, weighing, against book of

accounts. These are usually done on Quarterly, half yearly or yearly basis to have balance between physical count of material wrt book of accounts.
Purchasing & Materials Management

Unit No. 10 Disposal of Obsolete & Scrap Items

Purchasing & Materials Management

Management of SOS: Holding SOS results in non moving stock & cost. These includes ICC (30%), maintaining records, security cost, preservation, capital loss & opportunity cost, Manpower, space. Category of SOS: Obsolete stock are not damaged but not required & have economic value. Items like spare parts, foods & drugs, change in product designs, technological innovation, cannibalization, inaccurate forecasts, wrong purchases, wrong

codification, poor maintenance, stores handling. All SOS being non moving cannot be
obsolete being coverage from insurance. These items either have no immediate use nor are reasons of above mentioned errors. Dormant/slow moving stocks are those categories whose usage is infrequent. Reason for Obsolescence: Sudden Development of High Tech New tech

Purchasing & Materials Management

Rationalization Design Change Product Change


In few cases standard design & non standard varieties elimination .

Control of SOS: Stock records & item movement is one of the effective method for SOS.
FSN type of Inventory Classification is adhered to identify & control of SOS. Scrap is residue from Manufacturing process, which cant be used in organization. Usually scrap is categorized in Ferrous Scrap, Metal Scrap, Waste. Disposal: Disposal of SOS is effective vide Inviting Offers Annual Scrap Contract

Public Auction
Purchasing & Materials Management

Unit No. 11 Purchasing Cycle

Purchasing & Materials Management

Indent Status: Material request with technical details, quantity, codes, time. PO should contain:

Order No
Date Serial No Full Name & Address of Supplier

Consignees Name & Address

Terms & Conditions of purchase (Price, Payment mode, Delivery date / schedule) Goods Description in all aspects Quantity, Code

Supplier Quote reference

Packaging & Transport instructions Inspection Procedures, Warranty, Insurance & Cancellation Provisions Authorized Signatures, Acknowledgement,

Purchasing & Materials Management

Raising of PO Chasing & Follow-up Transportation

Incoming Inspection
Bill Settlement Documentation

Purchasing & Materials Management

Unit No. 12 Right Mode of Transport

Purchasing & Materials Management

Transport Cost: Accounting to 15-20% of the cost of material purchased. At time cost of transportation is more then the cost of raw material due to Vendor located in remote place

Critical item requiring special transportation

Cheaper items to be imported with higher duties & taxes.

As buyer we need to seek constant improvements in transportation to cut down transportation cost achieving greater speed and better quality of service in the light of

technological advances in transportation, handling, purchasing, and logistical

management. It is possible to reduce the cost of transportation by appropriate choice of mode of transport, route selection, rate verification, auditing, application of linear programming

techniques for optimum transportation costs.

Choice of Mode of Transport: Depends upon type of material, rate charges, distance, volume, safety, loading & handling charges, taxes etc.

Purchasing & Materials Management

Railways: More economical for longer distance and heavy volumes. Road Transport: Carry assignments of smaller weights at a lesser cost. Since other mode

cant reach everywhere, RT is only mode to be relied upon for linkages of source.
Water Transport: WT is generally resorted in case of imports & is cheaper mode of transport but takes longer time. Air Transport: AT is one of the most costliest transport mode but the fastest. Perishable or smaller shelf life items are been shipped. Buyer needs to make setoff to the cost of transport wrt the opportunity cost. Containerization: Depot-Depot. Door-Door with cheaper handling charges. Reduce rates compare to AT, Lesser CIF-Taxes-Duties.

Purchasing & Materials Management

Few Dos & Dont in Transportation: Shouldnt permit vendor to ship the material Inspect Freight bills carefully

Double check supplier packaging

Shouldnt allow vendor to use premium transportation when not necessary Clear identification for freight rate purposes Dont offer damaged consignments.

Purchasing & Materials Management

Unit No. 13 Vendor Rating

Purchasing & Materials Management

Vendors are best intangible assests to any organization and thus both new & established vendors are coming for critical review of their plant capacities, financial capabilities, performance in todays scenario. Evaluating Potential Suppliers: Step is to evaluate each prospective supplier individually. The type of evaluation required to determine supplier capability varies with the nature, criticality, complexity, and dollar value of the purchase to be made. The evaluation also varies with the supply managers or sourcing teams knowledge of the firms being considered for the order. Complex, high-dollar-value, and perhaps critical, purchases, additional evaluation steps are necessary. For complex, high-dollar-value, and perhaps critical, purchases can include surveys, financial condition analysis, third party evaluators, evaluation conferences, plant visits, and selected capability analyses.

Purchasing & Materials Management

Supplier Surveys Financial Condition Analysis Third Party Evaluators Evaluation Conference Facility Visits Quality Capability Analysis Capacity Capability Analysis
Quality System Raw Material

Supplier Audit


Surface Protection

Special Process

Purchasing & Materials Management

Supplier assessment and orientation Supplier self evaluation Quality system survey Design validation Manufacturing validation Production part approval process Source approval testing Demonstration of total quality capability Audit of supplier quantity system Achieve ship to use status Implement quality maintenance activities Pre-certification review Certification

Purchasing & Materials Management

IBM Quality Rating System: Uses quality costs as basis for rating suppliers. VQR = Desired Cost of Inspection Actual Cost of Inspection x 100

Bell Quality Rating System: Vide Lot Quality Index assessment is done on lots received against lots rejected, by disposition & category.

Where, L is Total No. of lots received during period. X is (L1x1.00)+(L2x2.10)+(L3x2.90) L1 is lots received and accepted L2 is lots rejected by sampling but labeled L3 is lots rejected and disposition and needs rework Weights were determined at company after study of complexity & No. of operations.

Purchasing & Materials Management

Unit No. 14 Negotiations

Purchasing & Materials Management

Objective of Negotiation Process Price Factor Strategy & Tactics Qualities of Negotiator What to Negotiate Process of Negotiation Theory of Bargaining Precautions of Negotiation

Purchasing & Materials Management

Negotiations Is an art by which a buyer & seller, usually face to face, tends to resolve differences to reach at the precise terms of contract. Purpose of Negotiations - Delivery. - Packaging, Parking and transportation. - Insurance - Bonus penalty clauses, - Frequency of reporting progress. NEGOTIATIONS TECHNIQUE CAN BE BEST LEARNT FROM LABOUR UNIONS: UNION OFFICIALS:- NEVER ENTER A NEGOTIATION WITHOUT BEING FULLY PREPARED. - NEGOTIATE ONLY WITH MGMTS REPRESENTATIVE HAVING LEGAL POWER TO CONLCUDE CONTRACT. - PUT THEIR INITIAL DEMANDS VERY HIGH. - CLASSIFY THEIR DEMAND INTO HIGH IMPORTANT AND NOT IMPORTANT & MAKE MGMT CONCEDE TO THEIR VITAL DEMAND IN EXCHANGE FOR CONCESSION OF LEAST IMPORTANT. - DETERMINE WELL IN ADVANCE WHAT CONCESSIONS THEY CAN MAKE AND WHICH CONCESSIONS out of this are of vital importance to the management. - They hold back vital concessions and make only minor concessions. Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get.

Purchasing & Materials Management

Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get. Principles of Negotiations: Prior knowledge of opponents bargaining strengths helps buyer to plan his appropriate tactics. 1. Sellers Strengths i. Sellers need for the order. ii. Sellers confidence in securing the order. iii. Time available for negotiations. iv. Criticality of items involved. v. General market condition. vi. Monopolistic status. vii. Knowledge of cost elements. 2. Good initial planning can increase your chance of success. 3. Talk to the right person. 4. A buyer also has some selling to do. 5. A good offence is the best defense. 6. Time constraints in negotiations, as in other activities, are subject to 80-20 rule. 7. Diversions at the appropriate time era essential for keeping control and avoiding bad judgment. 8. Hard won concessions, regardless of its value to the buyer, provide greater satisfaction to the receiver (the seller) of the concession. 9. Tact and diplomacy is necessary to make supplier do face saving. 10. Negotiations should not end up with an unhappy supplier. 11. Commitments once made must be kept. 12. Critical review of ones own performance after the negotiations usually helps in sharpening negotiations skills.
Purchasing & Materials Management

Unit No. 15
International Buying

Purchasing & Materials Management

Why Imports
Cost, Options, Quality, Benefits from Govt for Imports, International markets. Import Policy: Import Trade Control Classification of Importers:

Actual Users (Industrial)

Actual Users (Non-Industrial) Registered Exporters Registered Importers

EXIM policies, Registration, Documentation, Duties & Taxation, Logistical Policies Letter of Credit Bill of Lading

Customs Clearance
Way Ahead in International Buying International buying for cost, better options, quality, association with 3PL/4PL, Economy of purchases with multiple options and branding.
Purchasing & Materials Management

Case Study for ABC Analysis

Purchasing & Materials Management

ABC Analysis

Identify the SKUs that we need should spent time on.

Prioritize SKUs by their value to firm Create logical grouping Adjust as needed

Purchasing & Materials Management

A Class Items with 80% Stock Value & 20% SKUs

B Class Items with 15% Stock Value & 30% SKUs

c Class Items with 5% Stock Value & 50% SKUs

Annual Value = Price x Demand

Purchasing & Materials Management

Purchasing & Materials Management

Case Study Buyer Seller Relationship

Purchasing & Materials Management

Arctic India Ltd

Mr. Mullick is a Materials Manager with Arctic India Ltd, a medium sized engineering firm engaged in manufacture of domestic appliances. Over the last few years, Mr. Mullick had developed very intimate

relations with his suppliers. On the day of marriage of his sister one of his supplier presented to him a
costly gift, a Television set. The policy regarding the gifts in the company reads, Gifts beyond Rs. 200 shouldnt be accepted. His plea with the supplier that cant accept the gist makes the supplier snub him Is Malti only your sister. She is my sister as well & I am giving the gift to my sister Mr. Mullick is confused. if he doesnt accept the gift, the supplier will create a scene & if he accepts there is of course going to be problem. Analyze the situation & suggest best course of action for Mr. Mullick to follow. Mr. Mullick if cant refuse the gift, he should accept the gift however should inform to concerned authority in the organization about the gifts.

Is the policy on gifts properly framed?

No, Policy should further be extended to acceptance of gifts provided information/approval from concerned person in organization. What course of action on part of Mr. Mullick would have prevented this? Mr. Mullick should have emphasized supplier & make him understand the relationship shared among them due to business relationship & cannot be shared at personal touch. If the gift is on conclusion of personal relation should have been referred earlier with Mr. Mullick & organization.
Purchasing & Materials Management

A manufacturer of a hand grinder requires a special roller bearing at the rate of 300 no's

per year. Each bearing cost the company Rs. 36, the procurement cost & Inventory
carrying cost have been calculated at Rs. 30 & 20% respectively. Calculate the EOQ of bearing

Total Consumption S = 300

Unit Cost Cu= 36/Cost of Procurement Cp= 30/ICC i = 20%

Purchasing & Materials Management

An Education Institute Library has 120 Operations Management books of different Authors with their

no's of readers whose details are

Operations Management Production Management Supply Chain Management Inventory Control Purchasing & Material Management Total Quality Management Enterprise Resource Management Logistics Management 20 15 14 11 16 4 5 12

Theory of Constraints
Information Technology in Operations Retail Management Operations Research

6 7 2

The librarian needs your help to identify the categories of book with respect to the readers and needs to know the location of storing the books to can have ease to issue the books to readers without much time delay. The librarian needs your helps to categories the books using Inventory Control Model and design the storage plan to avoid any time delay.
Purchasing & Materials Management

Since the issuing of books are based on readers Inventory tool which can be used is

HML Analysis (Analysis to access Storage, Frequency of Stock)

The Librarian needs to use HML Analysis to identify the frequency the stock wrt to readers and designs storage plan accordingly. The HML Analysis can be carried out based on the nos of reader for the books in descending order which would be Operations Management Purchasing & Material Management Production Management Supply Chain Management 20 16 15 14

Logistics Management
Inventory Control Theory of Constraints Retail Management Information Technology in Operations Enterprise Resource Management Total Quality Management Operations Research

11 8 7 6 5 4 2

Purchasing & Materials Management

Now applying 80-20 Pareto Rule, the requested books groups would be High Group 80%, Medium

Group 15% and Low Group 5%. Thus, calculating the books in percentage category
Operations Management Purchasing & Material Management Production Management Supply Chain Management Logistics Management Inventory Control Theory of Constraints Retail Management 20 16 15 14 12 11 8 7

Information Technology in Operations

Enterprise Resource Management Total Quality Management Operations Research

5 4 2

Purchasing & Materials Management

Purchasing & Materials Management

Operation Books Storage

Layout of Library




Purchasing & Materials Management


Purchasing & Materials Management

Inventory Control in JIT Age

Purchasing & Materials Management

Good Companies practicing JIT view inventories as road block to World Class Mfg. Inventories: Hide Problem (Production, Material Shortage) Consume Resources (Other process, Pending Work) Cause Various Waster (Rejection, Depreciation) Finished Goods in Inventory Reduction o o o Pull Production Heijunka Learning Production Small Batch Size Setup Time Reduction Cellular Layout Pull Production & Kanban System

To Reduce the inventory o

WIP Inventory Reduction o o o o

o o

Reduce Buffer by solving chronic problems of defects, Absenteeism, Breakdown Attacking fundamental problems of Small Lot Purchasing, Supplier Proximity, VMI, Kanban, Local Vendor

Purchasing & Materials Management

Small Lot Size: Lot Size refers to quantity of an item purchased / produced / shipped at a time. Purchased Produced Shipped Transported Lot Option Size: : Purchase or Order Qty : Production or Process Batch : Delivered Quantity : Transfer Batch Lot for Lot Quantity (LFL) Period Order Quantity (POQ) Economic Order Quantity (EOQ) Economic Manufacturing Quantity (EMQ) JIT recommends small lot size, an ideal lot size is one piece flow or make one & move one Advantages Low Inventory Investment Quick Problem Identification Quality Improvement Lower Manufacturing time Shorter Delivery & Waste Elimination Disadvantages Frequent Machine Setups Loss of Production Capacity Setup Losses Greater Skill of labor

Less / Zero Overtime

Less Space and Obsolescence Setup Time Improvement
Purchasing & Materials Management

Stores Management

Purchasing & Materials Management

Stores Management involves receiving movement, storage and issue of items, raw material required for production, maintenance and operation of plant and finished goods until their dispatch to customers Store is the custodian of all materials and responsibilities of Receiving Storage Preservation Issue Accounting

Stores is required for Time lag between receipt & consumption if materials / parts Economy of buying Business constraints Forward buying Prevention of loss of sales Economy in manufacturing Reduction in operations waiting time
Purchasing & Materials Management

Scientific Stores Management: Identification of stores Receipt of materials Inspection of materials Storage

Identification & Location of stock

Security of stores Stock control Issues & dispatch Stock records Stores accounting Stock verification Surplus stock management Administrative control

Co-ordination & co-operation with interfacing departments

Purchasing & Materials Management

CLOSED STORE SYSTEM Material physically stored in closed area Direct access to store personnel only Material movement in/out of store when accompanied by authorized documents Expensive item liable to pilferage Light material easy to issue Delicate, perishable items can be stores Stores personnel responsibility Perpetual records OPEN STORE SYSTEM Material stored closed to point of use Direct access of workmen No authorized document needed as materials can be picked up by operations No chance of pilferage Material are too heavy or bulky Production supervisors responsibility No perpetual records

RECEIVING STORES MAIN STORES FG STORES SPECIAL STORES SCRAP YARD Incoming material, Rejection Stocking, Inventory FG Goods Bonded, Special materials Scrap, waste, Residue

Purchasing & Materials Management

Security of stores includes specific measures against: Prevention of Theft (By Outsiders) Prevention of Pilferage (By Employees) Prevention of Malpractices (By Stores personnel) Prevention of Fire Prevention of Rodents & Termite Measures High Compound Wall Minimum No. of Window, Glass Shutters & Open Ventilators Fittings of windows & skylights with bars and wire mesh Security guards at strategic points Outsiders not to be permitted to enter store beyond serving counters Patrolling to look after store by watchman during OFF hours Expensive items to be kept locked in steel almirah Insurance against burglary Vehicle should bring only companies items should be allowed Vehicle should be weighed @ incoming & outgoing

Prevention of Theft

Purchasing & Materials Management

Prevention of Pilferage: Entry of only authorized personnel Personnel items not allowed to be carried inside store Items liable for pilferage to be mono grammed with Co.'s name or marked for identification Fresh material against return of old ones Surprise check / audits Immediate enquiry incase of malpractices Prompt disciplinary actions Adequate publicity of punishment for pilferage Daily security check of storage with personnel

Prevention of Malpractices: Through checks of outgoing vehicles Gate passes to take material out of company Indemnity bonds or bank security from store employees Rotation or change of duties Recruitment of store personnel from different communities

Purchasing & Materials Management

Prevention of Fire: Doors & Staircase of fire resistant materials No smoking in stores Adequate earthing Prevention of leakage of inflammable oil / grease / fluids Small combustible materials to be stored in covered metal bins Large quantity to be stored in small lots in more location with gaps Telephones at strategic locations with ready access to telephones Material storage inside store to be planned keeping fire hazard in mind Appropriate provision of fire fighting equipment & Fire insurance cover Smoke detectors Fire drills & Regular inspection by local fire brigade officers Segregation of Risk Materials Fire doors & emergency exits to be kept absolutely clear Fumigation of Stores Rat Traps Regular spray pesticides and fungicides
Purchasing & Materials Management

Prevention of Malpractices:


Purchasing & Materials Management


Purchasing & Materials Management

Q. Which of the following is not one of the Rs of Materials Management A. Right Source B. Right Quantity C. Right Place D. Right Price Q. Which of the below is not a Purchasing Function A. Quotation Enquiry B. Cost Comparison C. Technical Data D. Negotiations Q. What is the disadvantage of Centralized Procurement A. One Point contact to all B. Restoring Emergency Procurement C. Volume Negotiations D. Economy of Scale. Q. Delegation of Power (Authority) is important in which type of Procurement A. Centralized B. De-Centralized C. Both of the above D. None of the above
Purchasing & Materials Management

Q. Representation of Components by their part nos is referred as A. Identification B. Codification C. Demarcation D. None of the Above Q. Which of the below are standard codification system used worldwide A. JIT B. Brisch System C. IBM System D. Toyota Process Control Q. Which of the following Statements for ABC Analysis is not true A. Used to decide stocking policies B. Used to improve Store Keeping C. Offers Degree of Control D. Evaluates on material consumption Q. Which of the following Statements for HML Analysis is not true A. Used to plan access Storage B. Helps in identifying in Security requirements C. Used based on Frequency of Stock D. Used for disposal of Surplus & Obsolete inventory
Purchasing & Materials Management

Q. Stock Out cost is A. Cost of material in stock B. Loss of opportunity cost with material not in stock C. Cost of Procurement D. None of the above Q. Setup Cost is A. Change over time from one activity to another B. Machine Downtime C. Production time Loss D. A, B and C Q. Of the following which is true in case of penalty cost A. Delay in Material Delivery B. Rejection of Material C. Early Shipment D. None of the above Q. How many years stock value is to be included in Balance Sheet A. One Year B. Six Months C. Two Years D. Not to be included
Purchasing & Materials Management

Q. Finished Goods Inventory Reduction can be done with A. Pull Production B. Push Production C. Lean Production D. A & C Only Q. Buffer Stock Management is practiced to address A. Emergency Stock B. Reduce Setup Cost C. Kanban D. Lesser Defects Q. Procurement vide EOQ is not practiced for A. Minimum Cost of Procurement B. Optimized Quantity of Procurement C. Minimum Inventory Stock Cost D. Annual Inventory Consumption Q. Which of the following assumptions are not made calculating EOQ A. Unit Price is independent of Order Quantity B. Unit Price is constant C. Supplier agrees to Minimum Order Quantity D. ICC & APC are common
Purchasing & Materials Management

Q. P & Q system of inventory is A. Productive & Quality System B. Fixed Quantity & Periodic Review System C. Fixed Review & Periodic Quantity System D. None of the above Q. Service Levels are risked with Stock Out Cost due to A. Unpredictable Demand B. Higher Safety Stock C. Lesser Safety Stock D. Managing Inventory Q. Which of the following is not a Replenishment model A. Fixed Quantity as per time B. Fixed Quantity as per Stock C. Variable Quantity as per time D. Variable Quantity as per Stock Q. Two Bin System is used for A. Fixed Quantity as per time B. Fixed Quantity as per Stock C. Variable Quantity as per time D. Variable Quantity as per Stock
Purchasing & Materials Management

Q. One of the Principles relevant while designing the warehouse is A. Design Criteria B. Inventory Stock C. Safety Stock D. None of the above Q. Material Handling in a warehouse is analyzed based on A. Procurement Scale of Economies B. Production Scale of Economies C. Movement Scale of Economies D. None of the above Q. Stock Valuation doesnt helps in A. Performance of Organization B. Gross Profit Analysis C. Increasing the Profit Margin D. Inventory Management Q. Which of the mentioned method uses forecasted pricing for stock valuation A. Weighted Average B. Standard Cost C. Average Price D. Replacement Cost
Purchasing & Materials Management

Q. Holding of Surplus and Obsolete Stock doesnt results in A. Non Moving Stock B. Inventory Carrying Cost C. Capital loss D. Production Cost Q. Which among the below is not a reason for Obsolescence A. New Technology B. Bulk Purchase C. Rationalization D. Diversification Q. Scrap generated from manufacturing process is not categorized in A. Metal Scrap B. Waste C. Recycle Scrap D. Ferrous Scrap Q. A Purchase Order is not valid unless it doesnt have A. Warranty Clause B. Cancellation Provision C. Authorized Signatures D. Serial No
Purchasing & Materials Management

Q. Transportation Cost cannot be reduce by A. Selecting Right mode of Transportation B. Reducing the Cost of Procurement C. Better Route Selection D. Rate Verification Q. Road as a mode of transportation is generally used for A. Smaller Volumes B. For Heavy Volumes C. Imports D. For Longer Distance Q. As a Purchaser we should A. Allow Premium Transport Mode B. Inspect Freight Bills C. Permit vendor to Ship material D. Negotiate for Transportation Q. The mode of transportation isnt selected based on A. Material Type B. Vendor Type C. Criticality of Material D. Cost of Transportation
Purchasing & Materials Management

Q. Methodology not used for Supplier Survey A. Supplier Surveys B. Third party Evaluators C. Profile Evaluation D. Facility Visits Q. Among the following tools which is used for Vendor rating A. IBM Quality System B. BRISCH System C. Toyota Quality System D. GE Supplier Chain System Q. Which of the following are crucial elements in Negotiations A. Information B. Time C. Power D. All of the Above Q. Classification of Importers is not done based on A. Actual Users B. Customs Users C. Registered Exporters D. Registered Importers
Purchasing & Materials Management

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Purchasing & Materials Management