1. Strategic Supply Management (SMM = Strategic Materials Management)

Supply Chain Management

Logistic Management

IMM ( Integrated Materials Management )

Purchase Stores Inventory

Management Management Management

2. RTP - Model : Materials as a resource base.

3. Purchase/Procurement/Sourcing Management :

(Selection of Right Source),

Developing it and building

On the relationship from 1 to 3

Relationship Management

Trust 2 3 Alliance

Relationship

Transactional Contractual Type of

Relationship Relationship Relationship

B C ADD = Ancillary

Development Department

New A D

Typical

Purchase

Source Dept.

Old Old New Products

The Attributes of sourcing for Domain A is quite different from those

For B, C and D

1

Separate deptt., ADD, should handle B,C,D and develop the

sources as mature and then pass on to the Purchase Deptt. To Domain

A.

4. ADD should report to SMM

MF = Material Flow

IF = Information Flow

CF = Cash Flow

5. Price Management/Cost Strategy :

Cost C4(effective cost

Built-on the end-products)

Cost C3 (cost at the point of consumption)

Cost C2 (landed cost at your door)

Cost C1

(Price paid to the supplier_

2

Suppliers

Process ofConversion

The Purchase Manager's pricing decision should based on C1, C2, C3, C4?

Take an example of Sandvik Asia. Tool bit, its C3 or C1 may be high, but your tooling

cost per end-product will go down. Therefore, pricing decision should be based on

C4 i.e. TCO, Tool Cost of Ownership.

6. Purchasing Cycle

7. Buying Methods : 13 Types : Negotiation

Power Time Information.

8. Purchasing under uncertainty/Different situations.

9. Vendor Rating : Parametrs

Quality

Delivery

Post-Sales Service

Responsiveness to change/New product development

Management Strength

Financial Capacity

10. Purchasing as a Outsourcing Strategy's starting point :

Operating it as a 'Profit centre'

11. Price Sustenance and gradual decline :

@7% inflation

C4 - CIF

Price -@7%learning curve

Cost reduction

BPR

to Time

3

PURCHASING MANAGEMENT

(A) Scientific Purchase Management :

Purchasing is the task of buying goods of right quality, in the right

quantities, at the right time and at the right price. These essentials of

scientific purchasing are through complimentary, yet the achievement

of one does not guarantee the other. The buyer may have the

capability to supply goods of right quality and in the right quantities, but

he may not supply the right price, or at the right time. But if the buyer

has the right kind of sources, then he can get the goods of right quality,

in the right quantities, at the right time and at the right price.

Scientific purchasing in essence signifies locating selecting, developing

and retaining right kind of supplies.

(B) Growing Importance of Purchasing Management :

Traditionally, purchasing was regarded as one of the activities of the

production management. Many a progressive management have

already realized the changing business coordination, growing

competition, contimral escalation in the cost of inputs, that the

Purchasing must be given the status equal to that of other major

functions, viz., production, sales/marketing and finance. Following are

some of the reasons.

i) Higher cost of goods and Services : Material cost represents

about 50% of the total cost. In some industry like paint

industry, material cost represent more than 60% of the total

cost.

ii) Escalating cost of stock outs : Lack of continuity in the

availability of material seriously affects all major companies.

Financial losses due to stock outs of material sin mass

production process and capital intensive units can be very

high.

iii) High cost of Capital

iv) Purchase is not a mere art of bringing Purchasing in today's

concept includes a wide range of related activities such as

4

market research, vendor rating, standardization and variety

reduction, codification, indent control, pre-purchase value

analysis, price-negotiation, inventory control, surplus

disposal, purchase budget, import substitution, purchase

systems, design etc.

v) Changing nature of purchases : Purchasing today is no

longer just a commercial activity, but a techno-commercial

activity. More and more technical persons are being

inducted into the purchase department and the management

experts a better treatment of the purchase function.

vi) Professionalisation of the materials function : Like other

functions of the company, purchase too has experienced

development of many management concepts like ABC, VED,

GOLF etc. analysis, EOQ, learning curve, critical path

analysis, like balancing, variety reduction, codification, value

analysis, vendor rating etc. The knowledge of these

techniques is considered essential for the middle and senior

management personnel in the purchase department. This

additional knowledge has given rise to a group of

professional or specialists in the Purchase field who expect

status at least equal to the counterparts in the other

functional areas.

vii) Changing concepts of buyer-seller-relations : Efficient buying

continuity in availability of materials with the lowest

inventory-investment-demands a buyer to be good at

business relations. He must buy goods of right quality, at the

right time, and at the right price for which he must have right

source. Retention of good suppliers, with increasing

competition, is becoming difficult and hence the buying

function is becoming challenging day by day.

5

(C) Classification of Purchase functions :

Primary Duties Secondary duties Optional

duties

a)Receipt, scrutiny of

purchasing, indents and

determination of methods

of buying

a)Make-or-buy decisions a) Traffic

b)Search for suppliers b)Capital equipment and

construction purchases

b)Stores

c)Acquisition & analysis

of suppliers proposals

c)Inventory control

d)Selection of suppliers d)Purchase Research

e)Follow-up with

suppliers for timely

receipts of materials

e)Management reports

f)Performance evaluation

and feed lock

g)Disposal of surplus,

absolute and scrap

materials

(D) Purchase As a Profit Centre : Purchasing Department in most companies is

its biggest spending department and literally the "custodian" of the company's

purpose. About 50 to 60% of the company's income is spent on materials.

The very fact that purchase department is responsible for such a high

percentage of company's money highlights its role in profit-making potential of

the company. To earn a rupee, sales volume equal to ten rupees, or more is

required which implies that a rupee saved is equal to a ten rupee sale. Also, a

sale is an one time sale. A saving, on the other hand, in a repetitive saving.

Every rupee saved goes to profit directly. Therefore, effective purchasing can

make a tremendous effect on the profitability y of the company purchase

department contributes to profits in the following manners :

i) Purchasing and competitive price : Skillful negotiation can easily cut

down procurement cost upto 5% from the total cost of goods

purchased.

6

ii) Purchasing and Capital reliase :

ROI = Profit Margin x Capital Turnover

Good Purchase Management helps to increase both P.M. and C.T.

iii) Purchasing and Procurement Cost reduction : In the conventional

approach, Purchasing department spends bulk of its time on law value

item which increases paper work and follow-up costs. Drastic reduction

in these costs is possible through 'blanket order", "group purchasing"

and "system contracting"

iv) Purchasing and Life-cycle costs : Conventional purchasing of capital

equipment aims at low initial price of the equipment. Scientific

purchasing, on the other hand, advocates life-cycle approach wherein

the costs covering the entire life of the equipment are considered. Such

an approach considers besides price, maintenance logistics,

maintainability, reliability etc. and this reduces the sum of procurement

and operational cost of the equipment.

v) Purchasing and Transportation Cost : Handling and transportation

costs constitute an important element of the material cost.

Transportation cost in some industries like mining, fertilizers, heavy

machinery etc. may be as high as 20-30% of the total production cost.

vi) Purchasing and Waste control :

vii) Purchasing and economical disposal of supplies materials : This helps

in controlling the material cost within acceptable limits.

PURCHASING CYCLE

Purchasing is not merely "buying to satisfy the indenter's requirements" but

"buying goods of right quality, in the right quantities, at the right time and at the right

price" Purchasing cycle consists of the following 8 major activities :

1. Establishing and communicating the need for procurement

2. Scruting of the purchase indents

3. Market study and selection of sources of supply.

4. Order preparation

5. Follow up

6. Receiving and inspection

7

7. Store and Record keeping

8. Invoicing and payment

Approved sources *

Elements of Procurement Cycle :

1. Establishing and communicating the need for procurement : The need for

Purchase Originates in the company's operating department, or The

stores/planning departments. The demand may be for raw materials, such

as structural; or it may be for semi-finished goods such as castings,

forgings, semi-machined parts; or it may be for bought-out parts; or for

cutting tools such as drills, reamers, cutters etc; or it may be for supplies,

or for spares. The need is communicated to the Purchase department

through a formal document called the "Purchase Indent" or a "Bill of

Materials"

a) Purchase Indent : Purchase indent, also called purchase requisition, is

a formal request made to the purchase department to purchase

materials, or services specified therein. The document serves as an

authority to purchase department to go ahead with purchase activity

and it also provides written information regarding quantity,

specification, time when required etc.

XYZ LIMITED PURCHASE INDENT No.: Date:

8

Order Preparation

Purchase Market Research

Follow up with supplier

Establishing the need for

procurement

Scrutiny of the Purchase indent

Receiving and Inspection

Invoicing and payment

Storage & record keeping

Please Purchase the following materials for ………..

Sr.

No.

Description Code Qty.

Required

When

Required

Stock

On hand

Average

Cons.

Previous

Rate &

PO No.

Route

Indented By Stores : Purchase :

Bill of Materials : Bill-of-materials, also called parts list, building list, is yet another

document which forms the basis the purchase department to take purchase action.

Bill of material is prepared by the engineering department. The final assembly is

broken into major assemblies; major assemblies are divided in to sub-assemblies,

and the sub-assemblies are divided into parts. The individual parts comprising each

assembly are arranged, as far as practical, in the manner in which each part is

assembled. A bill-of-materials indicates whether the part. Is to be made or IS to be

made, or purchased and it also gives the quantity of each part. The bill of material

alongwith the production schedule can be routed through stores to purchasing as

notification of the need for materials. The stores checks the availability of material

according to the bill-of-materials, it deletes from the list the items available to stock

and forwards the bill of materials to be purchase department. Thus, the copy of the

bill-of-material serves as the purchase indent.

XYZ Ltd. BILL OF MATERIAL

Description:

Main Assly ;

Part NO.

Sr.No. Drawing

No.

Descrip-

tion

Qty,/

Set

Source

Code

Material Required

For

Qty.

Reqd.

(Set)

Stock

On

Hand

Stock

shortage

Chkd. By : Date Appr. By : Date :

2. Scrutinizing Purchase Indents : The security of the indents is a routine

activity of the purchase department. The indent is scrutinized to see whether :

a) it is signed by the authorized signatories in order to avoid irresponsible

purchases.

b) It is routed through stores department to certify non-availability of the

item in stores.

c) The description of the required item is correctly and clearly given.

d) Whether, or, not qualified and developed sources are available.

9

e) Last supply of the stated item is completed, or, pending

f) Quantity shown against the item is correctly and clearly written.

Each Purchase indent after scrutiny is logged in the purchase indent register

and their given to concerned buyer.

3. Market Research and Selection of stores of supply :

The following steps are being followed.

i) for the items purchased to commercial standards, telephonic

quotations are obtained from vendors and verbal order is given to a

supplier where terms are found to be better than others. To regularize

the transportation, a formal purchase order is sent later. An alternative

to this is the concept of blanket order system.

ii) For the items of regular use and required to buyer's designer, delivery

schedules are released to the suppliers.

XYZ LIMITED DELIVERY SCHEDULE Ref. :

Date :

Vendor

Code

Vendor's Name

& Address

Mode of

delivery

Kindly register our schedule for the following items and supply the materials in

the lots indicated as below.

Sr.

No.

Item/

Code

Purchase

Order

No. of

Lots

Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec

Important : Make separate delivery challan for each item.

Make deliveries only for confirmed quantities

Advise immediately for inability/delay expected to meet confirmed

delivery schedule.

Quote correct code description, ref. P.O. and vendor code.

b) purchased and it also gives

i) For commodities and items whose price fluctuate widely from time

to time, an enquiry is sent to probable sources and quotations are

received. A comparative statement is prepared from the quotations

received from the suppliers which is followed by provisional

selection of one, or, two sources. Vendors are called for

negotiations and price terms and contract are finalized with one/two

such vendors.

XYZ LIMITED PURCHASE ENQUIRY

To : Enquiry No. :

10

Date :

Due on :

Please submit your lowest quotation indicating the earliest delivery time for the

following items.

Sr. No. Code No. Particulars Unit Price Quantity Remarks

1.Quotation should be sent in SEALED ENVELOPES.

2.Rate quotes should be free delivery at our Works.

3.Excise duty, if applicable, should be quotes as Rs./Unit

4.Sales Tax rate should be specifically mentioned.

5.Please return the drawings along with your quotation.

For XYZ Ltd.

XYZ Ltd. COMPARATIVE

STATEMENT

Item Desc. :

Code :

Last P.O.:

Price :

Supplier's Name M/s. M/s. M/s.

1 Quoted Price

2 Packing & forwarding

charges

3 Excise duty

4 Sales tax

5 Freight

6 Octroi

7 Carriage Inwards

8 Landed cost

9 Payment Terms

10 Delivery

Recommendations: Ordered Placed on M/s.__________________

ii) For non-stock items, the sources are selected as per (i), (ii), or (iii)

depending upon the nature of the item (i.e., whether the item is

required to commercial standards, or to buyer's design)

11

iii) For replacement and instance spares (other than standard ones),

enquiry is sent to the manufacturer, or, its dealer. On receipt of

quotation from its dealer/manufacturer, a Purchase Order is raised,

after negotiation, to authorize him to supply.

iv) For permanent of capital equipment, enquiries are either mailed to

the machine tool manufacturers, or the enquiries are advertised.

Based on the quotations received in response to the tender,

potential sources are selected. Detailed negotiations are held and

finally a qualified source is selected.

v) When the amount involved is less and the item is easily available,

the buyer may opt for petty cash purchase.

vi) For new items (i.e., t hose which have not been purchased before),

the buying department may have to dig out information on likely

sources and undertake the activity of selection.

4- Order preparation :

Having selected supplier to supply material, which is done by placing the

Purchase Order. A Purchase order is a formal document prepared by the

buying department on behalf of the company to authorize the supply of

goods and services in the quantities, at the time and at the price specified

therein the document.

A purchase order, in fact, is a legal document and serves as an

evidence of the contract between the buyer and the seller.

XYZ LIMITED PURCHASE ORDER

M/s. Our Order No. : Date :

Your reference No. Date:

Please supply the under-mentioned goods to our works subject to confirmations

overleaf.

Sr. No. Description Quantity Per Rate Value

Flow Chart of Guidelines to Select a Supplier

12

Purchase Indent

No

Yes

No

No

Yes

Yes

No

5-Follow-up with Suppliers : Follow-up is the function of seeing that the suppliers

effect deliveries on time. The follow-up function now-a-days has become the

foremost function of the buyers. Basic rules of follow-up are :

i) Follow-up should be done on srctive basis based on market.

Coordinator and buyer's experience with the vendors delivery

performance.

ii) Buyer should keep a constant track of outstanding orders and keep

himself up-to-date with latest progress on earlier order.

iii) Post-dated folder should be used to remind the buyer of the action

to be taken.

iv) Mode of follow-up should be based on judgment of the buyer,

13

Market a short list of possible sources

Obtain Quotations

Prepare comparative statement

SelectSupplier

Finalize terms of contract Place

Order

EvaluatePerformance

Is this a

regular items

Is it time to check the

market yet?

Was last supplier

satisfactory?

Is there an annual costmet

for it ?

importance of the item, reliability, or otherwise of the supplier,

number of suppliers, location and so on.

Purchase follow-up is required in two stage pre-delivery follow-up and

shortage chasing.

2. Receiving and Inspection : The supplier or receipt of Purchase Order,

works on it and arranges for delivery of the materials according to the

buyer's delivery schedule. The department which is entrusted with the

responsibility of recurring materials and getting them inspected is known

as "Receipt", or "Receiving" Department. In small companies, the function

of receiving materials is generally looked after by the Stores Department.

The activities involved are as under :

a) Receipt, or collection of materials : Materials in receiving department

are received against a specific document. Materials from local

suppliers are received along with supplier's "Delivery Challan" in

duplicate, or, triplicate Materials received from outstation suppliers may

follow any of the following procedure :

i) Post Parcel : Post parcel is the convenient method of receipt of

materials from outstation suppliers. Only light weight materials

such as samples, spares, cutting tools etc. are sent by the post

parcel.

ii) Road Transport : When the materials are sent through road

transport, the receipt of the transporter, called "Lorry Receipt" is

sent by the seller to the buyer. The Lorry Receipt numbered and

contains description of the items packed in the boxes the

number of boxes, freight paid or, to be paid and the type of

delivery (door delivery, or delivery upto nearest transporter's

godown)

iii) By rail transport : This is similar to road transport except the

following differences :

- The railway receipt is received by the buyer in duplicate

- The railways does not inform the consignee of the arrival

of the material

- The materials are required to be collected by the

consignee

b) Recording of Receipt of materials : When materials are received

with supplier's delivery challan, the person from the receiving

14

department takes out the copy of the relevant purchase order and

verifies to ensure :

i) that goods actually ordered have been received.

ii) the supplies are according to the delivery schedule (i.e., excess

supply is not received).

iii) Purchase Order No., Part Name, Part No. are mentioned clearly

and correctly.

After having satisfied the above points, the receipt clerk marks the

entry of the receipt materials into a register called "Goods Receipt

Register"

c) Preparation of Goods-receipt-reports : Goods receipt register which

gives the record of the materials received in the company cannot be

made available to different departments, be it accounts, indenter,

purchase, or, others who are concerned with the information. They are,

therefore, required to be informed for which the information called

"Good Receipt Report" (GRR), or Goods Receipt Note (GRN), or, good

Inward Note(GIN), or, Receipt-Cum-Inspection Advice(RCIA), or,

Materials Inward Note(MIN).

XYZ LIMITED GOODS RECEIVED CUM INSPECTION NOTE

M/s. G.R.R. No. and Date :

D.C. No. and Date

P.O. No. and Date :

The following materials have been received and inspected as per details below :

Sr.

No.

Part

Description

& Part No.

Receipt Inspection Results

As per Actually Accepted Remarks Recd.

W/o opn.

U/d Rej.

Vendor : Accounts : Stores : Planning/Sub Contract

Receipt : Purchase :

d) Intimation of Receipt of material :

e) Physical Count of the received material : The verification method of

quantities may be one, or, more of the following types.

i) Counting by number

iii) Weighing

iv) Measurement of length.

15

f) Inspection of Goods: Inward inspection does the following inspection

for

j) Conformance to dimensions.

iii) Conformance to materials specifications

iv) Conformance to performance.

Removal of the accepted and rejected materials : The GRR is

handed over to the inspection department. The inspector checks the

received materials and affixes stamp ("Accepted", or, "Rejected") on the

receipt tag.

Then the duly signed and selected TAG is returned to the receipt

stores. The GRR Officer sorted out and accepted. The GRRs are sent to

the materials stores, alongwith the materials. The rejected materials are

sent to the rejection stores where they lie until they are collected by the

supplier, or, sent back to the supplier.

3. Storage and Record keeping : The fully accepted quantity forwarded to

the main stores are physically verified and entered into the Kardex/Stores

ledger, or, bin cards, and only thereafter the issue is allowed.

4. Invoicing and Payment : Receipt of Supplier's invoice : Normally, when

the supplier sends goods, he immediately prepares invoices. Sometimes,

the buyer and seller have discussion and the supplier agrees to raise

invoice after receipt of GRR.

Scrutiny of the invoices : Supplier's invoices on receipt are sent to the

accounts department which are filed to be linked up with incoming GRRs

linked up invoices are taken up for verification - the Price, Sales Tax,

carriage inwards, discount etc. It is then passed for payment if the

payment is due.

METHODS OF BUYING

A number of factors influence the selection of a buying method. They are:

i) Nature of the item

ii) Regularity of its demand

iii) Quantities required

iv) Susceptibility to price variations

Different buying methods are as follows :

16

1) Hand to mouth buying

2) Schedule buying,

3) Market purchasing,

4) Speculative Buying

5) Contract buying,

6) Blanket orders

7) Tender buying

8) Seasonal buying

9) Group purchasing

10) Sub-contracting,

11) Control purchase organization

12) Directorate General of Suppliers and Disposal

13) Reverse Auction (wells - based)

1) Hand to mouth buying : Hand to mouth buying also called "buying

according to the requirements" refers to the frequent purchases of an

item in small quantities. Important characteristics of hand to mouth

buying are :

a) Purchases are made only when demand arises

b) Purchases are made to cover immediate requirements

c) Quantity purchased is generally small through at times large

quantity may be purchased.

d) The terms of contract are negotiated. Competitive bids are

generally not obtained as there is no sufficient time.

Advantages of the method :

i) Lower inventory investment

ii) Low carrying charges

iii) Reduced deterioration and obsolescence of materials.

iv) Lesser losses due to price declines.

Disadvantages of the method :

i) Comparatively higher price is paid due to urgencies and loss of

quantity discounts

ii) Possible interruptions in production due to market shortage of

materials at the time of need.

iii) Higher ordering costs due to frequent purchases.

iv) Acceptance of sub-standard quality in emergencies.

17

Responsibility of buying Department :

The effectiveness of the buying department depends on their

connections with vendors. The selected vendors must be known for

quality, reliability and integrity so that they fill buyer's order without

taking advantage of the situation. A list of approved vendors is

necessary to be prepared for this.

Suitability of the method : This method is applicable to :

i) items required for prototypes and for products under

development

ii) items which are used infrequently and would not be required to

stock so that they are purchased when they are needed for

consumption. Machine tools, building materials, office furniture

are some of the examples of this group.

iii) Cover immediate requirements of a stock item covered either

due to delay in delivery from regular suppliers, or, due to

increase in consumption.

iv) Cover immediate requirements of items where prices are

expected to fall in the near future.

v) Procurement of replacement spares

vi) Items which have a limited shelf life

vii) Items which are bulky ( e.g., packing materials like wooden

boxes and thermocole packing etc. ) which need a lot of space

for storage.

2) Scheduled Buying : Scheduled buying is the process of procuring an

item in staggered deliveries according to the delivery schedule given to

the supplier by the buyer. The salient features of scheduled buying are:

i) A Purchase Order covering annual requirements (alternatively, a

P.O. without specifying the order quantity called open order) is

placed with the supplier.

ii) The supplier is given the estimate of the prominent needs

covering a mutually agreed period of time. It is a common

practice to give 2-3 months confirmed schedule and 2-3 months

tentative schedule.

iii) Fresh delivery schedules are given to the supplier prior to

completion of the previous schedule. Fresh schedule

supersedes the previous schedule. Fresh schedule usually

18

covers the confirmed schedule of the over-lapping period and

confirmed and/or tentative schedules of the next few periods.

iv) Monthly deliveries are normally specified except for periodical

materials, bulky items and others required in large quantities, or,

where the supplier has set up production facilities specially for

the buyer.

In such cases monthly schedules may be split up further into

weekly schedules.

Advantages of scheduled buying :

i) Both buyer and seller enjoy the savings resulting from regularity

of production and smaller inventories.

ii) Buyer is assured of supply of goods while the supplier is

assured of business.

iii) Supplier can effectively plan his factors of production which

buyer can plan his requirements of finance.

Sustainability of the systems :

i) Items of regular use such as cutting tools castings, forgings,

lubricants etc.

ii) Items produced to buyer's design and requiring long lead time to

manufacture.

iii) Proprietary items form suppliers who insist on long term

schedules.

3) Market Purchasing : Market purchasing, also called forward buying,

refers to the procurement of sufficient quantity of an item in advance of

its need at a time when prices are low (and expected to rise). Important

features of forward buying are :

i) Purchases are made to cover production requirement for a

considerable period.

ii) Quantity purchased in generally large.

iii) The atmosphere is normally favourable for negotiation.

iv) Purchases are made when the prices are low. The buyer gets

discounts on large purchases.

Advantages :

i) Low purchase price

ii) Greater profit margin on finished goods.

19

iii) Savings in procurement expenses as purchasing are normally

consolidated.

iv) Security against shortages.

Dis-advantages :

i) Inventory holding charges are considerably higher.

ii) Large scale obsolesce may result, if design charges occur.

iii) Price advantages if not realized, may result in loss to the

company.

Responsibility of the Buying Department : The buying department must

keep alert of the market conditions. It must constantly study the

statistics and factors that influence the availability of an item, or, its

price balance, and be able to forecast the changing trends. And high

inventory carrying charges and deterioration and should be constantly

balanced against price advantage.

Suitability :

i) non-perishable items

ii) items which have steady and regular consumption.

iii) Basic materials such as coal, steel, coke etc., cutting tools,

bought out parts which are less susceptible to radial changes in

specifications.

iv) Seasonal items since prices are low during season.

v) Priority items to make purchases in advantage of suppliers'

agreement period.

vi) Pre-budget purchases.

4) Speculative Buying : Speculative buying refers to the buying large

requirements of an item when its price is low with the intention to sell

bulk of it at a higher price for speculative profits. Important features of

speculative buying are :

i) Purchases are no way related to the company's production

programme. An item which is not every required for production

may be purchased.

ii) Speculative buying does not base decisions on quantity. Its

single aim is to make speculative profits. The quantity

purchased in thus generally high and is as much as the

company finance can permit to buy.

20

Suitability : Speculative buying is not really a function of the buying

department. It should be ordinarily discouraged.

5) Contract Buying : Contract buying is the purchasing mode under

contract, normally formal, of needed materials, the delivery of which is

frequently spread over a period of time. Important features of contract

buying are:

i) Contracts are given to suppliers for large amount of future

requirements, or, for a certain period (say, a year)

ii) Quantity received per occasion is generally small.

iii) The buying department usually finds sufficient time to secure

competitive bids and negotiable terms of contract.

Advantages :

i) It saves the company from the trouble of inviting quotations,

preparing comparative statements, placing of orders etc. which

otherwise will be necessary on every occasion the items are

required. This reduces the procurement expenses.

ii) The buyer's company is assured of regularity in supply despite

market fluctuations.

iii) The buyer needs to keep very little working stock and safety

stock. This reduces capital lock up and the cost of carrying

inventory to the lowest minimum.

iv) Prices and other terms of contract are generally favourable to

the parties involved.

v) The buyer can plan his requirement of finance as he has an

advance idea as to when and what amount he has to pay to his

vendor.

Type : Contract buying is of three types :

- Rate contract, where the rate is fixed and not the

quantity. Some indications of the probable requirements,

however are given.

- Running contract, where the rate and the quantity both

are fixed for the contract period. As soon as the specified

21

quantity is supplied by the vendor, the contract

automatically comes to and end.

- Service contract, where the various services are obtained

periodically.

Suitability : Contract buying is suited to the procurement of materials

and production items of regular use. Service contract may be entered

to obtain annual servicing of P.Cs, A.Cs, etc.

6) Blanket Order Buying : Blanket orders refers to the purchase of

variety of items from single source, usually a middle man. Important

features of blanket orders are :

i) A blanket order specifies the categories of items covered by the

order.

ii) The items covered by the order generally have low unit value.

iii) More than one middleman may be selected to avoid hold ups in

case of non-availability of an item with one.

iv) The supplier is given requirements on phone who supplies and

bills at the "prevailing prices less agreed discount". The records

of the supplier are open to inspection on demand.

Responsibility of buying department :

i) The middleman selected should be large stockiest who are

known for their honesty and reliability. The stockiest in the

vicinity of the factory should be given preference over others.

ii) The buying department must continuously watch the items in the

group and periodically check up whether the demand for any

item has risen considerably to justify its removal from the group

and purchase as an individual item.

Suitability of the method :

i) The method is best suited for general hardware, electrical

supplies, stationery, small cutting tools etc.

7) Tender Buying : Government departments and public sector

undertakings in India follow this method of buying private sector

organizations too adopt tender buying, if the volume of the purchase

exceeds the prescribed limit, as desired by the management. Salient

features of the system are :

i) The buying department corallites a biddler's list and invites them

to submit bids.

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ii) Bids on receipt are evaluated by comparison and the right

supplier is selected. Lowest price is the retention used except

when supplier quoting the lowest price has questionable delivery

time, quality, reliability, or, financial stability.

Advantages :

i) Tender buying is the purchaser's most important single tool to

select qualified supplier on the basis of competitive prices.

ii) It eliminates possibility of favoritism, patronage and personal

preferences.

Disadvantages : Tender buying is costly and time-consumes and

therefore, used by the private sector undertakings only when the value

of purchases is high.

Responsibility of Buying Department :

i) For each new product, material, or, service, a buyer must obtain

quotation from at least three potential suppliers.

ii) Past performance in case of old supplier must be taken into

account while deciding on the contract of a new item. Buyers

must guard against suppliers who submit extremely low

quotations initially and increase prices later.

iii) Quotations should be evaluated considering the capabilities of

the competing firm. The bid should be high enough to yield a

reasonable margin of profit to the potential vendor.

Types of tender : Tenders are of four types :

i) Single tender : refers to the system of tendering wherein the

details of the requirements are communicated only to one

company. Competition in this system is altogether eliminated

and price is fixed by mutual agreement. Single tender system is

used when there is only one supplier of the item. Quotation from

the sole selling agents of the manufacturers belong to this

group.

ii) Limited, or, closed tender refers to the system of tendering

wherein enquiry is sent to a limited number of suppliers who are

on the approved list of suppliers and tenders/quotation are

received in response.

iii) Open tender system is the system of tendering where the

enquiry is advertised in the news papers and tenders are

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received in response. Open tender system is used for items

which are required in large value and/or are difficult to procure.

iv) Global tender wherein the enquiry is advertised inside and

outside the country, and tenders are received in response. This

system is followed for purchases involving huge investments

such as procurement of turnkey projects etc.

8) Seasonal buying : Seasonal buying refers to "buying of the annual

requirements of an item during its season" and t his method is used for

items available in a particular season only. Such items may be

required by food processing and similar seasonal industries. Important

features of seasonal buying are :

i) The items involved are available in particular season only, and

have to be purchased and stocked in sufficient quantities till the

next season ( e.g., oranges, sugarcane, apples etc.).

ii) Market prices are the lowest during season, when the items can

be purchased at the cheapest rates.

iii) Manufacturers/farmers are contacted and direct purchases are

made.

9) Group Purchasing :

Group purchasing refers to buying items of isivial value in a single P.O.

important features of group purchasing are :

i) items required are classified into few basic groups, like drills and

taps are placed in one group, plug gauges in another group,

screws and bolts in another group etc.

ii) Maximum and minimum levels are fixed for each group.

iii) Stock levels are reviewed periodically, say once in a month, or,

in two months once and order is placed to one single/two

sources for all items in the group at a level equal to the

difference between the 'maximum level' and 'stock on hand'.

10) Sub-contracting :

Sub-contracting is the work placed with outside suppliers for part - or,

full-machining/job work operations according to buyer's design

specifications. Sub-contracting is the hiring of another firm to perform

some of the manufacturing operations, or, to furnish certain parts and

sub-assemblies to be incorporated into the buyer's end products.

11) Central Purchase Organization :

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A large company may have division wise stores. The material

requirements of these stores can be sourced by two methods :

i) Each store to make its own stores

ii) A central stores to make purchases and supply materials in turn

to division wise stores.

The advantages of central purchase organization are :

a) The central purchase organization (CPO) can obtain quantity

discounts, lower rate and better contract terms due to large

purchases made possible due to consolidation of the

requirements of individual stores.

b) The CPO can contract directly with the manufacturers and

obtained items as per specifications, which individual division

wise stores may not have been able to do.

Typical examples of CPO are : State Road Transport Corporations

(i.e. MSARTC, GSRTC etc.), Nationalised Bank, Co-operative Banks

etc.

12) Directorate General of supplies and Disposal (DGS & D) :

The DGS and D is central Purchasing Organization for the various

government departments. It enters into contract with various firms for

the supply of certain materials to the Government departments during

the year at an agreed rate. A formal document is raised for the

purpose called the "rate contract"

13) Reverse Auctioning : Web-based Purchase initiative.

PURCHASING UNDER DIFFERENT CIRCUMSTANCES

Purchasing (or, the Buying decision) can take place under the following

conditions :

i) Buying under certainty

ii) Buying under risk

iii) Buying under uncertainty.

Decision making (of buying) under such circumstances follow the route as

below:

a) identification of several decision alternatives, called strategic

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b) ranking of strategic accounting to desirability, based on the pay-

off of each strategy.

c) Selection of the optional strategy.

I) Buying Under Certainty : The salient features of the decision process

of buying are

i) There is a direct cause-cum-effect relationship between

alternative and its consequences.

ii) Each alternative has only one condition of choose from which

makes decision making simple and straight forward.

iii) Alternatives and consequences of each alternative are known

with certainty.

Typical examples of materials being purchased under this category:

a) Buying on non-stock items (against specific indents)

b) Buying of routine items (i.e. regular consumption items)

c) Purchase of capital equipment (against specific indent)

d) Project purchases

Techniques used :

i) EOQ

ii) Replenishment systems

iii) MRPI

II) Buying Under Risk : The salient features are :

i) The buying decision has more than one alternative.

ii) All possible outcomes of each decision alternative are known

iii) Each outcome can be assigned a definite probability by the

decision maker, from past historical, or, market research date.

iv) The decision criteria for selecting the best alternative is based

on EMV (=Expect ed Monetary Value)

Typical examples :

a) Determining the requirements of safety stock of an item.

b) Determining the quantity to be purchased of the item individual

one time purchase decision, e.g., Christmas Trees, Umbrella,

crackers etc.)

d) Determining the order quantity of insurance spares.

Techniques used : EMV (=Expected Monetary Value) Method -

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a) Set up a payoff matrix,

b) determine EMV

c) Selection of optimum alternative based on EMV

III) Buying Under Uncertainty : This category encompasses these buying

decision where even the probabilities of the different event cannot be

estimated. Such a situation occurs when there is no past experience,

or, historical data to enable competition of probability of the events.

The salient features are :

i) The buying decision has more than one alternative

ii) All possible outcomes of each alternative are known but

occurrences of the outcomes are uncertain

iii) There are different decision criteria for deciding which decision

alternative is the best.

Typical example : Determining optional quantity of our insurance

spare in the absence of any historical data.

Techniques : Based on different criteria defined as :

i) Maximum (gain) criteria, or, minimum (loss) criteria.

ii) Maximum (gain) criteria, or, minimum (low) criteria

iii) Hurwicz Alpha Criterion

i) Maximum gain criterion ( or, minimum loss criterion) :

Maximum gain criterion was developed by Abraham Wald and is

known the eritenion of pessimism. The critenion forces the

decision makes to be conservative and pessimistic, thinking that

the nature is an active opponent and will always work to be

disadvantage of the decision maker examines the minimum

payoff of all alternatives and select the one with maximum of the

minimum payoffs, call maraimin.

Minimore loss critenrion is the same as the maximum in

gain criterion, difference being that minimize is used when the

payoff matrix contains costs, or, losses, while maximum is

adopted when payoff represents gains, or, profits.

ii) Manimase gain critenion (or, minimum loss criterion) : Maximise

gain critenion, almost in optimism, which assumes that the

nature is on the side of the decision-maker and will work to his

advantage. This criterion selects a strategy which maximizes the

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maximum gains ( i.e. maximum) and aims at t he best of the

best.

iii) Hururic Alpha critenion : The maximin and manimax criterion are

the teo extremes on the seak of optimision, the former

representing dismissal pessimism and the later fantastic

optimision Hururic Alpha critenion propagates a midway

approach by advising or coefficient of optimism, called alpha(α)

α : 0 to 1

α : 0→ total pessimism (i.e., maximum criterion)

α : 1→total optimism (i.e., maximum critenion)

α : 1/2→ nentralism

Steps :

i) Determine the largest payoff(say, Mi) and the

smallest payoff(say; mi) for each strategy.

ii) Estimate the value of α

iii) Calculate expected value for each strategy, as

Expected value = α - Mi + ( 1 - α ) . Mi

iv) Select the strategy with the highest expected value as the

optimal strategy.

RECEVING AND STORAGE MANAGEMENT

Store function concerns receiving, movement, storage and issue of materials -

raw materials, bought out parts, tools, spares, consumables etc. - required for

production, maintenance and operation of the plant and finished goods until its

dispatch to customers.

Maynaid defines the responsibilities of stores management as "to receive

materials, to protect them while in storage from damage, or, unauthorized removal,

to issue materials in the right quantities, at the right time, to the right place and to

provide these services at the least cost."

Types of Stores :

(1) Receiving Store : performs activities necessary to exercise control

on quality and quantity of purchased material before they accepted and

taken into stock.

i) Inward Store to keep incoming materials until they are accept

and taken into stock.

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ii) Quarantine Store to temporarily stock, materials which are under

dispute and require suppliers' (or transporters') certification ( e.g.

quantity discrepancy in the consignment, transit damage to the

goods etc.)

iii) Rejection Store : to stock defective (non-confirming) goods until

they are sent back to their suppliers.

(2) Main Store to perform activities concerning storage and issue of

accepted materials and maintenance of records. Main store may be

either centralized and housed in a large godown, or decentralized and

located near their point of use. Main store may be divided as under :

i) Tool Crid Store to stock cutting tools, hard tools, gauges,

instruments etc. to be issued to the workmen in the beginning of

the shift and to be received at the end of the shift (or, job).

ii) Component Part Store to stock components and parts produced

in economic lot size.

iii) Maintenance Store to stock spares of plant and machinery.

iv) Raw material store to stock bar stocks, castings and forgings

etc. which requires a lot of space and can be stocked in areas

open to sky.

(3) Finished Product Stores, or, Warehouse : to perform activities

concerning receipt, packing and dispatch of finished goods to different

distinction, and handling of the related papers and documents.

(4) Special Store : to perform activities of receipt, storage and issue of

special materials. Typical examples of special stores are :

a) "Bonded store" to stock materials "hypothecated with banks", or,

to stock "excisable goods" etc.

b) Statutory stock to stock materials namely Kerosene, diesel and

other petroleum products requiring strict conformance to safety

precautions stipulated as per statutory regulations.

c) Temperature controlled stores : to stock perishable items such

as meat, fish, milk, vegetables, fruits etc., or, active ingredients

like antibiotics, vitamins etc.

(5) Scrap yards to perform activities of receipt, segregation and storage of

different types of scrap.

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STORE LOCATION

Store location is the process of selecting the appropriate site for the

store building in the organization and deciding how materials are to be placed

inside the store, so as to provide efficient and prompt service to the user

department.

Principles of Good Store Location :

1) Economy in cost of transportation :

The store location should be such that unnecessary material handling

is avoided. For example :

- Store building should be located within the factory premises, or,

near to the place of work where materials are required.

- While selecting the place of Store building, the material handling

facilities for transporting materials forward to the store should be

taken into account.

- Proper rail sidings and road facilities to the store should be

ensured so that materials can be brought directly upto the

receipt counters.

2) Approachability by rail/road transport : Raw material like coal, coke,

manganese and ores should be stored in the open and in such a way

that they can be easily removed by trucks, cranes and conveyors. The

location of the store should be approachable by rail, or, road transport.

3) Efficient Service : Location of the store should result in efficient service

to the user departments for activity relationship between the store and

the user departments must be given due considerations. As a general

rule :

- raw material store - forgings, castings, bar-stocks etc. should be

located near the shops where initial operations are performed.

- Finished good store should be located near the assembly bays

and in the proximity of shipping space.

- Jigs and fixtures should be stocked near the machines at which

they are used.

- tools, gauges required or a day to day basis should be stored

near the production shops.

(4) Reduced Fire risks : Materials should be stored in location which

minimizes the fire hazards. For example :

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- Inflammable materials like petrol, diesel should be stored

separately.

- Contrastable materials such as paints, greases, cotton waste,

etc. should be kept away from each other and from general

stores.

- Oxidizing agents should be kept away from combustible

materials.

(5) Security : For security reasons -

- Storeroom should be away from the maingat of factory

premises.

- Store room should not be near the factory wall.

- Main Store should be place such that suppliers representatives,

drivers and other outsiders do not have easy access.

(6) Minimization of risk of spoilage and deterioration :

- due consideration should be given to temperature, humidity

etc.

(7) Flexibility (for future expansion) : While selecting a suitable store site,

future expansion needs must be considered, if sufficient space has not

been kept for future expansion requirements, to avoid the need to shift

store to another location at a future data.

(8) Overall integration of factors : Since it is almost impossible to satisfy

each and every factor, store location should be such that it results in

overall integration of factors.

STORE LAYOUT

Store layout means physical arrangement of space of storage, materials

movement, material handling equipment, office and its records and theory provide for

the most efficient receipt, storage and issue of materials. Main criteria for store

layouts are :

i) Easy receipt, storage and issue of materials.

ii) Sufficient space for each movement of men and material handling

equipment.

iii) Optimum utilization of storage space.

iv) Clear identification of materials.

v) Quick location of items,

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vi) Ease in physical stocking,

vii) Protection against five risk to the store and rest of the establishment.

viii) Easier and better supervision of stores

ix) Adequate capacity and provision for future expansion.

Location Code Number : Location code number of an item implies material

can be found. Proper locating -

i) provides convenience in receiving and issuing of stocks.

ii) Helps to know where each and every item is kept, with thousands of

items in store, it is impossible to remember the place in the store where

the item is kept.

iii) Eliminates the possibility of working issue of the item.

iv) Improves housekeeping and vendors a neat and orderly appearance to

the stores.

v) Reduces the possibility of misplacement of items.

vi) Makes the task of physical stock taking simple and efficient.

One of the most popular locationing systems is as follows :

- All the racks from one end of the store to the other are serially

numbered as 1,2,3…

- In each rack, the shelves are alphabetically numbered from top to

bottom as A,B,C…..

- The pigeonholes in each shelve are number numerically from left to

right.

For example, the location number O3-D-02 will represent :

- Third rack in the store

- Fourth shelf from the top (denoted by D) in third rack.

- second pigeonhole from left.

Where materials are located on floor, or, open yards, the storage area is

marked off, by painting on the floor into blocks and codified.

Identification of Materials : All in the stores should be codified and each

item should have a part description and part number. Besides, for easier

identification of materials, following methods are used -

1) Tagging, or, labeling : Identification tags, made on paper board, or,

tin plate can be either kept along with items, or affixed on the item

itself.

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2) Writing, or plating : Identification details can be written on all

cartons/drums/items in ink, glass marking cartons, paint etc.

3) Engraving : Vibrating marking tools are used to engrave

identification details.

4) Stamping : Metal punches can be used to stamp code on the metal

components.

5) Etching : Code number may also etched by chemicals.

6) Colour Coding : Raw materials/valves parts in different specification

are identified by colour codes.

STORES RECEIPTS

Receiving concerns control on quantity and quality of materials from the time

they are received until they are accepted and taken into store.

Responsibilities of Receiving Stores :

i) Verification of correctness of paperwork and appropriateness of supply

before accepting the goods,

ii) Unloading of materials,

iii) In warding of the consignments,

iv) Verification of quantities,

v) Informing purchase/indentor/PPC regarding receipts of goods,

vi) Preparing necessary documents such as discrepancy notes, goods

inward notes etc.

vii) Arranging inspection of materials,

viii) Returning all rejected goods back to suppliers,

ix) Forwarding accepted materials to appropriate stores for storage,

x) Returning all chargeable empties back to suppliers.

Receiving Procedure -

Issue of Materials : Procedure :

i) Requests for the issue material should be logged in the organization

register which should be maintained date wise.

ii) Material requisitions should be scrutinized to verify whether it is signed

by the authorized signatory.

iii) Stores keeper should next check up the availability of indented material

in full, or, part.

iv) If the material is knot available, the requisition may be keep pending for

issue later on receipt of material.

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v) Before taking the material to the issue counter, the issue clerk should

up date the "issue column" of the material requisition and make an

entry in the bin card and in the stores ledger/ledger card.

vi) Where the material is to be taken out of the company (e.g., issues to

vendors/ sub-contractors/customers), a gate pass should be prepaid

giving the following details :

- Descriptions/Code no. of material.

- No. of packages.

- Issue voucher no. and date

- To whom sent.

vii) Material should be taken to the issue counter where it can be collected

by the indentor's representative after signing the issue voucher.

Where the materials are bulking/heavy, they may be delivered by the

store department on a door-delivery basis.

STOCK TAKING

Stock taking, also called stock verification, is the process of ascertaining - by

counting, weighting, or, measuring - whether the physical stock of materials tallies

with the balances shown in the stock records (i.e., kardex cards, bin cards, or, stock

ledger). If the physical stock does not tally with the book balance, the books are

subsequently adjusted to physical stock values.

Stock taking :

- is required to correct discrepancies between physical stock and

book balance and thereby ensure better material control.

- is the primary requirement for certification of the financial statements.

- provides a moral deterrent on the stores personal against fraud,

malpractices and pilferage.

- helps to audit stores procedures.

Causes of Discrepancies :

i) clerical error

ii) Incorrect location of parts

iii) Carelessness in handling of parts.

iv) Shortage due to atmospheric condition

v) Theft, pilferage and malpractices

vi) Unaccounted materials destroyed in destructive tests.

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vii) Misplacement of paper and vouchers

viii) Poor storage conditions.

ix) Material issued because of urgency, without supporting paperwork.

Methods of stocktaking :

There are three methods of stocktaking :

i) Annual stock taking

ii) Continuous, or, perpetual stock taking,

iii) Re-order point stock taking.

A) Annual stock taking : Annual stock taking is the process of making a

complete once a year count of all materials, finished parts, work-in-

process, finished goods, tools and supplies. The stock verification is

generally undertaken at, or, near the close of the financial year.

Advantages :

i) the method is simple, less costly and satisfactory.

ii) The stock figures in the balance sheet and P&L A/c. are more

correct because verification is done at the time of preparation of

final accounts.

iii) Annual stock taking does not require permanent staff.

Disadvantages :

i) Finalization of accounts at times gets delayed of stocktaking is

not completed within the stipulated period.

ii) Since all movements from and into the stores are suspended

during the period of stocktaking, there is accumulation of work

right in the beginning of the financial year.

iii) Staff called from other departments to assist stores personal in

stocktaking are not conversant with the stocktaking work and

are not accountable for discrepancies which affect s accuracy

and effectiveness of stocktaking.

iv) Discrepancies of even serious nature are not detected since

sufficient time is not given for investigation which defeats the

very purpose of stock taking.

v) As the activity is conducted only once in a year, the

discrepancies dud to pilferage, malpractices and

misappropriation by the conmiring staff can not be effectively

minimized.

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B) Perpetual, or, continuous Stocktaking : Continuous, or, perpetual

stocktaking is the process of taking physical counts of few items daily

and thus covering each item in stores atleast once a year, more

important and valuable ones are verified twice, thrice, or even twelve

times a year. The complete programme is prepared in advance and is

synchronized with stores activity during its bean period. The personnel

of the stock verification team are drawn from Accountants Department,

Purchase, Production and other departments of the organization.

Advantages :

a) Continuous stock verification can be planned and worked

into schedule activities without dislocation of either store, or,

production. The need to verify everything at the end of financial

year is avoided.

b) The work can be conducted in a more orderly and released

manner, the two conditions that are vital for accurate work, as

few items are checked every day.

c) Discrepancies are detected and corrected at an early date and

frequently.

d) The control on stock is made more effective due to surprise

checks. This lesser the risk of loss, pilferage etc.

e) Interim P & L A/c. can be compiled quickly as correct stock

figures are readily available.

f) The firm can easily tide over its financial difficulties by pledging

their inventory with banks and other financial institutions as

inventory figures are available easily and regularly.

g) It costs less because regular stores personnel are utilized for

perpetual stock verification.

( C) Re-order point Stocktaking : Re-order point stock taking is the process

of physical verification of an item when its stock falls below the re-order

level.

MATERIAL HANDLING

In some industries in the core sector manufacturing, material handling cost

represents as much as 8-10% of the total cost of the product. Therefore,

transportation and material handling should deserve a very high kind of

organizational attention and focus. Material handling may be defined as the art and

36

science of movement, handling and storage of materials during different stages of

manufacturing considered as material flow into, though and away from the plant. It is

in fact, the technique of getting the right goods safety to the right place at the right

time and at the right cost.

Material handling in a company takes place t various stages, such as;

a) unloading at goods inwards stores

b) loading on to an internal transport

c) movement to stores for the purpose of storage

d) movement from stores to place of use (first work station)

e) movement to and from work stations

f) movement to and from inspection bays.

g) movement to and from assembly benches.

h) movement to and from finished goods stores.

i) movement to and from dispatch department

j) movement during packing.

k) loading of packed materials on to an external transport.

Objectives :

A well-planned material handling system should achieve the following

objectives :

i) Speed and economy in movement of materials

ii) Prevention of damage to materials.

iii) Safety and prevention of accidents in material handling.

iv) Minimization of fatigue in case of manual handling.

v) Better house keeping and efficient storekeeping.

Material Handling : Plant layout and materials handling are closely inter-

related. Only a good layout can ensure least material handling and use costly

material handling equipments.

i) Unnecessary material movements should be avoided as they damage

the materials and causes loss of man-hours spent in shifting materials.

ii) Productive time of workers can go waste, if they have to hunt for tools

and materials throughout the whole plant. A good plant layout should

ensure that :

- all functional areas and aisles are clearly identified and named.

- Separate areas for raw materials, tools, work-in-progress,

inspection and finished goods should be clearly defined.

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A good layout, therefore, can avoid many unnecessary movements

of men and materials.

iii) Safe, smooth and speedy materials movements result, when

- bins, trolley, racks and trays are utilized to keep materials

instead of being placed on floors.

- products are properly packaged before its dispatch.

- conveyors, chntes, inclined conveyors, belt conveyors, gravity

rolling etc. are used to automatise material movements.

iv) Space costs money. Layout should be such that no space is wasted

and there is minimum movement of materials and men. In a good

layout, the width of the risks, heights of the ceiling, areas for storage

etc. are planned in a manner that duplication of movements, back

tracking of materials, obstacles to smooth material flow do not take

place while introducing economical material handling equipments, or,

expanding production activities at a later date.

Principles of Good Material Handling :

1) Planning Principles

2) Operating Principles

3) Equipment Principles

4) Costing Principles

5) General Principles

1) Planning Principles : Material hurdling should be planned and

well integrated with production activity to obtain maximum

overall operating efficiency. This require a system approach and

it should include the following :

a) Plant Layout Principle : "Good plant layout and minimum

materials handling are akin to each other." Daly good layout can

ensure minimum materials handling and as such all studies

relating to problems of material handling should be proceeded

by the study of plant layout.

b) "Delegation of responsibility" principle : "Efficiency in material

handling results when it is recognized as an important function

and is given weight age equal to that of the other cost centers"

Few important considerations are :

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- the responsibility of the entire material handling activity

should be assigned to a separate department., viz.,

Projects Deptt.

- The operators must have materials next to them to work

on; skilled manpower should not be wasted in material

handling rather cheaper unskilled contract labour should

be engaged in this job.

- Material should not be allowed to be lifted beyond the

waist height.

- Heavy materials (>20 Kgs.) should be handled

mechanically.

c) Minimization of re-handling principles : "Re-handling adds to

cost, increases spoilage and leads to wasted movements" and

must be avoided. The major consideration here are as follows :

- materials should be moved directly to the point of use.

- Materials must be kept at a height at which they are to be

worked upon.

- Materials should never be kept on the floor. Pallets,

platforms and trolleys should be employed to keep

materials.

d) "Space saving" principle : "Storage space is best measured in

terms of cent re contents." That is -

- Materials should not be made to spread on floor since it

occupies more space.

- Palletiration and stocking of materials by means of fork-lift

trucks reduces requirement of space and enables swifter

movement of materials.

- Congestion retards flow of materials and reduces

efficiency of material handling.

- Since space costs money, use of constantly circulating

overhead monorail derieces connecting difference

department is a very efficient material handling system.

2) Operating Principles :

a) "Unit load handling" principle : "Material handling cost is

inversely proportional to the size of the load (unit load)" The

considerations here are -

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- material should be handled in bulk over distances.

- It is better to wait (unless there is a compelling reason)

until labourer carry each one separately.

- Fragile, or, breakable materials should be arranged in

trays, or, in largers separated by wood, or, card-board,

the whole thing being held by strapping.

b) "Gravity" principle : "Gravity is the most economical motive

force. Materials, wherever possible, should be moved using

this nature's greatest resource" Gravity principle suggests

that :

- materials, wherever possible should be made to roll, or,

slide down the chute, roller conveyor etc. to the next work

station instead of pushing it, or, carrying it.

c) "Flow of materials" principle : "Material handling efficiency in

the greatest when it approaches a steady flow of materials,

over as straight or path as possible, with minimum of

interruptions and backtracking."

3) Equipment principles :

a) Mechanization Principles : "Mechanization of material handling

(the use of mechanized equipment instead of the manual ones)

generally increases efficiency and economy in handling."

b) "Terminal time" principle : "Reduction in terminal time of

handling equipment increases efficiency and economy of the

equipment". This principle may be applied to state that -

- waiting time of the equipment at the pick up and put down

points should be reduced to the minimum by cutting down

loading and unloading time.

- Palletisation and unit load concepts should be used to

reduce terminal time.

c) "Dead Weight" Principle : "Economy of the equipment is directly

proportional to the ratio of load handled to the dead weight of

the equipment."

To improve efficiency of the material handling equipment -

- dead weight of the equipment should be reduced to the

minimum

40

- weight of trays, trolleys and pallets should be the least

possible.

d) "Standardization" Principle : "Standardization of materials

handling equipment increases efficiency and gives economy in

operation of the equipment." It :

- permits interchangeability of equipments between

departments

- reduces investment in spares inventory as fewer parts

are required to be stocked.

- Reduces maintenance and repairs cost.

e) "Maintenance" Principle : "Systematic maintenance (preventive

and predictive type) increases efficiency and productivity of

material handling equipments." To get trouble free service -

- repairs and replacements must be anticipated.

- Planned preventive maintenance programme should be

implemented for all material handling equipments.

f) "Speed: Principle : "Economy in material handling increases with

efficiency and speed of material handling." Following

considerations should be kept in mind -

- pallets should be made square in shape so that forks of

the forklift can enter them from any side. This reduces

pickup time.

- Two-way Traffic routes may be followed to eliminate

"empty runs".

- Gange-ways should be kept clean.

- No. of boxes, pallets, or, containers available at

workplace should be sufficient to eliminate waiting of the

material handling equipments.

g) "Versatility" Principle : "Economy in material handling is obtained

by the use of equipments that are capable of variety of

applications."

- This way the company can increase their up-time of

utilization.

4) Costing Principles :

41

a) "Equipment selection" principle : Selection of the most flexibility

equipment after thorough study of the items and material to be

moved increases efficiency of material handling.

b) "Replacement" principle : "Material handling cost is the lowest if

the equipment is used only for its economic retentive period and

is replaced by an alternative based on engineering economic

principles."

Material handling equipment like production machines two have

certain economic life. Retaining an equipment beyond its

economic period increases repairs cost and causes production

hold up due to eventual breakdowns.

c) "Handling cost appraisal" principle : "Periodic analysis of

materials handling costs highlights areas of improvements"

(5) General Principles :

a) "Safety" principle : "Materials handling efficiency increases as

working conditions are made safer and safer." That is :

- Hot materials should be handled and moved

mechanically.

- Gangways should be kept lighted and undistracted to

avoid damages and injuries.

- Operators should be well trained to handle the handling

equipments.

- Aisles should be wide and uncongested.

- Workmen should be provided with protective clothing,

wherever necessary.

- Safety regulations, statutory, or, otherwise, should be

strictly adhered to.

b) "Training" Principle : "Training of workmen in good material

handling techniques and systems and educating them towards

importance of their work normally helps to develop right

attributes to material handling."

c) "Identification" principle : "Materials must be identified by

labeling on pallets and boxes." This is important failing which

unlabelled boxes may require to be opened to look for what they

contain and also when certain required materials are not

42

d) "Location" principle : All handling equipment should be placed at

the right place to avoid hunting and delays in materials

handling."

e) "Material treatment" principle : All types of materials should be

treated as important since material handling costs are not

related to the cost of the materials."

Low value bulky materials cost much more than high value

compact materials. Materials handling costs are not related to

the cost of the material but are dependent upon their bulk and

physical/chemical characteristics.

Selection of Material Handling Equipment : Selection of the material

handling equipment is a vital decision as it affects operating cost and

operating efficiency of the plant. The following factors need to be

considered to make a judicious selection of the equipment.

Factors to be considered Details

1. Material to be handled a) Size and shape of the items

b) Quantity & weight of material

c) Material characteristics (solid,

liquid, gas, toxic, inflammable,

explosives etc.)

d) Susceptibility to damages

during handling.

2. Plant building a) Temporary, or, permanent

b) Width of ansles/doors

c) Height of the ceiling

d) Levels of floors and load

43

bearing capacity of t he floors.

e) presence of column & pillars

COMPUTERS IN MATERIALS MANAGEMENT

Information is the essential ingredient of management control information flow

is of immense importance to the organization. Computers help to quickly process the

information in accordance with the needs of the various levels of the management.

The importance of computer control system lies in their ability to acquire, assimilate

large amount of information with speed, accuracy and flexibility.

Benefits of computer Systems :

It includes :

i) freeing lower and middle management from filing, non-

productive clerical functions common to manual systems.

ii) Standardizing pertinent data and terminology

iii) Providing instant availability of information from records.

iv) Improving communication within and outside the company

v) Ensuring adaptability and fast response to change in priorities,

prices of other variables.

vi) Saving in equipment and floor due to virtual elimination of filing,

eliminate also duplicate data files.

vii) Reducing inventory investment due to speed and more accurate

response time.

viii) Enabling better control over operation because of timely

availability of information for sound decision making.

Activities of MM covered by computerization :

I) Purchasing : Computerization is used for

i) preparing forecasts of materials based on their past

wages.

ii) Providing historical information on suppliers, prices,

post purchase orders.

iii) Selecting the most efficient source of supply based on

analysis of supplier's quotations

iv) Purchase order and delivery schedule preparation and

taking print-outs thereof.

44

v) Comparing actual deliveries against the delivery

schedule and sending follow-up activities for pending

delivery materials.

vi) Keeping upto date record of receipts of materials and

providing information on outstanding orders.

vii) Matching supplier's invoice with P.O. and GRR ,

auditing price, discount, freight, taxes etc. and passing

of bills

viii) Verifying payment terms, printing out cheques and

holding them until payment due date.

II) Stores Management : Computers can be programmed to :

i) Verify that quantities received from suppliers re strictly

according to the delivery schedule/P.O.

ii) Prepare GIN for the materials received from suppliers.

iii) Compute pending quantities against a P.O.

iv) Analyze no. of GRRs pending with Q.A.

v) Find the status of GRRs awaiting updating in the stores

ledger,

vi) Compute stock on hand, compare it against re-order level

and generate purchase ideates,

vii) Prepare consumption statements and month end stock

ledger (inventory reports).

III) Inventory Control & Material Planning :

i) inventory valuation

ii) carry out inventory planning and materials

Management Reports on Materials :

i) Purchase Part History,

ii) Vendor Delivery record

iii) Purchase Material price various

iv) Analysis of P.O. levels

v) Vendor wise Purchases

vi) Items below re-order levels and above max. levels.

vii) Materials consumption for the period.

viii) Accounts payable (age wise)

45

INVENTORY CONTROL TECHNIQUE AND PRINCIPLES

Classification of Materials:

An organization requires a very large number of storage, accounting -

becomes difficult if each one of them is handled separately. Hence some type

of classification of materials helps.

Classification of materials is the process of grouping of items into few

categories, according to some criteria.

Objectives of classification:

1. To crate procedures of planning and control of materials in a class,

2. To decide systems of storage and issue of materials.

3. To diverse accounting and evaluation procedures common to all materials

in a class.

Basis of classification : Materials may be classified on the basis of

i) stage of conversion process

ii) nature of materials

iii) utility of materials.

i) Classification of the basis of stage of conversion :

Stores

Direct Material Indirect Materials

Raw WIP Works made Purchased

Mtls. Parts Parts

Standard Special

Bought out parts

Finished Goods.

46

ii) Classification on the basis of nature of materials :

a) Raw materials - Direct Materials

b) Indirect Materials

c) Consumables - which cannot be used for a second time, like

coal, coke, lubricants, cotton waste, stationery items etc.

d) Chemicals,

e) Inflammable items

f) Perishable items

g) Packing items

h) Empties

i) Supplies : like miscellaneous consumable stores, welding rods,

abrasive materials like emery bolts, sand paper, brushes, glass

bottles etc. (MRO supplies)

iii) Classification on the basis of usability of materials :

a) Serviceable and usable materials.

b) Semi-finished and finished materials.

c) Dead Stock Items - Capital Equipment items

d) Obsolete Items

CODIFICATION

Codification is the systematic and concise representation of materials

in an abbreviated form employing alphabets, numbers, symbols, codes etc.

Benefits :

i) Accurate and logical identification

ii) Avoidance of long and unwrieldy description

iii) Prevention of duplication - A "Locknut" may be called "withdrawal nut",

"slotted nut", "ring nut", "check nut" etc. This can result in stocking of

an item at different places under different names. However, one single

code no. will avoid the duplication.

47

iv) Product simplification (variety reduction) : A basic reason for

codification is the simplification ( i.e. reducing unnecessary variety) and

standardization (i.e. regulating variety)

v) Efficient purchasing :

- avoids writing long descriptions of items

- codes avoids attribution - for examples different types

of "worn gear shaft" to be purchased for different end

product. Codification helps which one is to be purchased.

- Codification classifies the items into groups (i.e. forgings,

castings, bar materials, rubber parts, hardware etc.)

which in a large sized firm enables section wise

organization of purchase deptt. Based on code groups.

vi) Minimization of clerical work

vii) Efficient stock-keeping : Codification facilities locating and indexing of

materials in the main stores, tool crib, component part stores and

warehouses. The materials may be arranged in the stores according to

the codification groups and in the ascending/descending order of their

codes which reduces time in locating and issuing of the materials.

- stock verification becomes simpler

- Monthly consumption statements of stores can be

prepared category wise.

viii) Accurate and reliable recording and accounting

ix) Easier computerization.

Basic Systems of Codification :

1) Alphabetical system

2) Alpha-Numerical system

3) Numerical system

4) Colour Coding system.

1) Alphabetical systems :

Particulars Sub-Alphabet Vocabulary

(I) Acids (AC)

i) Sulfuric Acid SU AC-SU

ii) Nitric Acid NI AC-NI

iii) Carbonic Acid CB AC-CB

48

(II) Numerical Systems :

(a) Sequential Code :

Sr. No. Item Description Code

1 Housing 1001

2 Impeller 1002

3 Cover 1003

4 Bearing 1010

(b) Block Code

1001 to 2000 : For raw materials

2001 to 3000 : for electrical items

3001 to 5000 : for mechanical items

5001 to 6000 : for machinery spares

( c) Decimal Code

Main Class Sub-Class Particulars Vocabulary

Main. Sub.I/II

Tools Drill Centre drill B2.5 40.01.01

(40) 01 Centre drill B4 40.01.02

Centre drill B57 40.01.03

(III) Alpha-Numerical System : This is the combination of

alphabetical and numerical systems and is an important over the

two methods.

Item Group Items Codes

Main Sub Vocabulary

I Acids :

i)Sulphuric Acid AC 51 AC-51

ii)Nitric Acid 52 AC-52

iii)Carbonic Acide 53 AC-53

II Chemicals

i)Methylene Chloride CH 101 CH-101

ii)Ethyle A 102 CH-102

iii)Xylene 103 CH-103

Two popular Systems of codification :

(1) The Brisch System

(2) The Kodak System

49

The Brisch System : Brish systems classification as formulated by G.E.

Brisch. The system is design-oriented. A 10-dight typical class

brakedown in an engineering company is given below :

O Organization and Operations.

1. Primary materials.

2. Bought out commodities

3. Components to user's own design.

4. Sub-assemblies and assemblies to user's own design

5. Tools and portable equipment

6. Plant and machinery

7. Bldg., series and utilities

8. Scrap and waste

9. Reserved

How to use the system ? The Brisch system basically consists of

blocks separated by decimal points.

a) The first block represents major classification. The material to be

counted are grouped together based on one of the classification

systems (e.g. raw material; packing materials, fasteners,

stationery, tools, finished products, etc.) usually, 2 digits (xx) are

adequate for most organizations.

b) The second block represents the next level classification. The

items re divided and sub-divided based on their types and kinds.

Usually, two digits are enough for secondary classification.

c) The third block represents the lowest level classification

( e.g. usually dimensions, appearances, their distinguishing

features etc.) Usually, there to four digits are adequate for most

of the organizations.

The systems is explained with the help of an example :

(1/2)" Ø 1" BSW S.S., Countersink Screw

Main Class Sub Class Minor Class

2 2 1 5 4 52

Size(1/2)" Ø 1"

Material (SS)

Kind(C'Sink Screw)

50

Type (B.S.W.)

Fasteners

Bought-out

Fig. Examples of codification of Brisch System.

The Kodak System : This system was developed by Eastman Kodak

Co., U.S.A. combined all the good points of other systems. The system

employs ten digit numerical Code. The composition of Code is in three

groups of digits that are separated by hyphens. The hyphens serve the

break the code into easily handle the group of digits.

Silent characteristic of the system:

(1) Materials are divided into few broad classification, called basic

classification. The number of basic classification in primary based on

purchase category, employed to indicate the basic classification of the

item; and is restricted between 00 to 99.

Basic (Preliminary Class) : Materials based on purchase

First two digits(00-99) : categorization

00-11 Raw materials

21-35 Machines and Mechanical Equipments

36-40 Mechanical products and Loose tools

41-49 Electrical products and Electrical Equipment

50-52 Laboratory Equipments

53-68 Chemical, Chemical Equipments and Misc.

69-78 Office Equipments and other misc. items.

79-83 Furniture and Fixtures

84-87 Semi-finished and finished products

94-99 Miscellaneous

(2) Each preliminary class is further divided into sub-class

Main Class Sub-Class Description

(Code) (Kind of cutting tool)

Cutting tools(40) 0 Drills, reamers, counter bars

Broaches

1 Cutters and tools

2 Single Point tools

3 Taps and dies

51

(3) Each sub-class is then divided into kinds of items.

Main class Sub-class Kinds of Item Code Full Item Code

Tools Drills,reamer Broaches 00 40-0-00-xx-xxx

(40) Counter bores, Counter 10 40-0-10-xx-xxx

Broaches Coun.bars 20 40-0-20-xx-xxx

Drills 30 40-0-30-xx-xxx

Reamers 40 40-0-40-xx-xxx

(4) Each kind of item is further split upto "types"

Main Sub Kind of Types within Identification Code

Class Class Item a kind (Type Code)

Tools Drills,reamer Reamers Reamer, 400-6005-xxx

(40) Broaches, taper(05)

Counter bores Reamer, 400-6060-xxx

(60) shell,spiral

(60)

(5) Each type of item is next arranged according to its size and the

next two digits-eight and ninth digits - are utilized for the

purpose.

Main Sub Kind of Types within Sizes Identification Type

Class Class Item a kind within

Tools Drills,reamer Reamers Reamer,1/8" 400-6010-10x

(40) Broaches, (60) Reamer, 5/32" 400-6010-15x

(6) The last digit-tenth digit is assigned to minor variables, such as :

1) Colour Code for identification of pipeline : IS: 2379: of

1963

Colour Identification of Pipelines (IS2379:1963)

Sr. Con tents Ground First Colour Second

No. Colour Band Colour Band

1. Cooling Water. Sea green French Blue -

Chilled water

2. Drinking Water Sea green French Blue Single red

3. Treated(soft)water Sea green Light orange -

4. Hot water(60º-100ºC) Sea green Dark Violet 0

52

2) Colour Codes for raw materials : No standard system exists for

colour code for identification of raw materials. The practice

varies from company. For some company in Pune (engineering

industry), following colour code for the raw material are followed:

Specification Blue Colour Steps

1. Free cutting steel

i) En1A White -

ii)En8 White One Blue

iii)En9 White Two Blue

2. Carbon Steel

i) En18 White Two Yellow

ii) En19 White One Red

iii)En 24 White Two Red

3. Colour Code for lubricants : used by the maintenance

department

Cutting Oil drum Blue

Machine Oil Yellow

Hydraulic oil Red etc.

Standardization

Industrial standardization is the process of establishing agreement

upon acceptable levels of various characteristics (e.g., dimensions, physical

characteristics, chemical composition, performance etc.) on the basis of

specific studies, experience, recommendations of the statutory bodies, or the

Government. The established agreement, or, uniform identifiation is termed as

standard (or, specification).

Standard differs from specification. Distraction lies in the intention of

use. Specification is intended for recurrent use. Every standard m ay relate to

one, or more of the following aspects of product quality :

1) Dimensions : They are intended to ensure interchangeability and to

reduce variety e.g.

ISI 3099 : 1991 : relates to the geometrical tolerances

ISI 3902 : 1993 : relates to the dimensions of ferries components

ISI 5387 : 1969 : deals with dimensions for stillages.

2) Performance Requirements,

3) Design Requirements :

53

ISI2835:1989 : Design and construction of steel chimney

4) Safety Requirements.

Different Levels of Standards :

- Individual company standards, e.g. TELCO Stds.

- Industry Standards e.g.

(the society of Motor Manufacturers & Traders)

Director General of Mine Safety, DGS&D, Textile

Commissioner etc.

- National Standards, e.g. IS, BS, Din etc.

- International Standards, e.g., International organization

for standardization (ISO).

Various Foreign Standards in use in India :

Following important foreign standards re in use in India. :

API : American Petroleum Institute

ASTM : American Society of Testing Materials;

ASA : American Standards Associate

BSS : British Standard specification;

DIN : German Standards

GOST : USSR Standards;

ISO : International Organization for Standardization

JIS : Japanese standards;

SAE : Society for Automobile Engineers,

UNI : Indian Standard.

INVENTORY CONTROL

(I) ABC Value based

VED Criticality Based

GOLF Govt. Ordinary Local - Foreign

FSN Fast-slow-non moving

SDE Scarce-Difficult-Easy

S-OS Season-Off Seasonal

HML High-Medium-Low

XYZ Inventory Investment

(II) EOQ Ref. : MTM(MLM( Handouts

54

(III) EOQ Modified Models :

Inventory carrying cost = I

Economic Order Quantity = qo

Annual consumption in units = s

Price per unit(Rs.) = Cu

Procurement cost per unit(Rs.) = Cp

Constraints on EOQ :

i) Follow-up difficult

ii) Suppliers' Minimum order quantity

iii) Lead Time consumption

iv) Government Regulations

v) Seasonal Availability

vi) Shelf Life

vii) Space Restriction

viii) More than one constraints - Numerical

Additional Constraints :

i) Price Discount

ii) Seasonality of Prices

iii) Market condition.

Importance of Materials Management :

Organization's Goal in maximization of ROI.

P = Profit

C = Capital

S = Sales

Materials Management helps in increasing both the Profit Margin and the Capital

Turnover; thereby increasing the ROI.

Costs Involved in the Management of Materials :

55

i) Basic cost of materials

ii) Government levies and taxes

iii) Ordering costs

iv) Inventory carrying costs,

v) Packaging cost

vi) Material handling costs

vii) Freight costs,

viii) Insurance cost

ix) Wastage during receipt, storage, production etc.

Objectives of Materials Management :

There are 10 objectives of materials management which are as follows:

i) To maintain steady flow of materials to ensure uninterrupted production,

ii) To achieve economy in cost materials by adopting cost reduction

techniques like value analysis, variety reduction, JIT, MRP etc.

iii) To ensure consistency of quality by providing right materials, of the right

quality, in the right quantity and at right time.

iv) To reduce inventory investment through scientific inventory control

v) To improve corporate image by improving good buyer seller relations.

vi) To maintain good records of purchase, stores, traffic etc. to eliminate

possibility of corruption.

vii) To preserve/conserve materials in stock so that losses due to pilferage,

deterioration , obsolesces etc., are kept at minimum

viii) To reduce operating cost by minimizing/eliminating wastage and improving

productivity of materials.

ix) To improve competitive strength of the firm by providing the best quality

products using quality materials at the lowest possible cost.

x) Speedy disposed of surplus materials.

Integrated Approach to Materials Management : For best results, all activities

related to materials must be placed under one department, viz., materials

management department.

(I) Purchasing Management :

Objectives of scientific purchasing include the following :

i) to procure at a competitive price the needed materials, supplies,

tools and services of the right quality, in the right quantity and at

the right time.

56

ii) To maintain continuity of supply to ensure production schedule

at minimum inventory investment,

iii) To ensure the production of goods of better quality at the

competitive price by procuring materials which best suit the

product and the purposes for which they are intended

iv) To suggest better substitutes to materials which are currently

being used with a view to lower cost and maintain quality of the

products.

v) To render assistance in standardization, variety reduction, value

analysis and other cost reduction programmes.

vi) To advise on probable prices, deliveries, and performance of

item under consideration by the design, development and

estimating department,

vii) To create goodwill and enhance the company's reputation for

fairness and integrity through dealings with the suppliers,

viii) To enable company to maintain competitive position and earn a

fair return on its investment.

Functions of Purchase Department : Major functions of purchase

department include the following :

i) Locating, selecting and developing qualified sources of supply.

ii) Scrutinizing purchase indents and deciding method of purchase

iii) Floating enquiries, processing quotations, conducting

negotiations and releasing purchase orders

iv) Pre-delivery follow-up and shortage chasing

v) Co-ordination with inward inspection including timely return of

defective materials back to suppliers,

vi) Endorsing suppliers invoices for payment

vii) Processing supplier's request for price increase including price

negotiations.

viii) Attending to supplier's representatives and traveling salesman

ix) Arranging discussion meetings between supplier's

representative and company's officials,

x) Disposal of surplus, absolute and scrap material,

xi) Advising management as regards to new materials, new

products, forward buying etc.

57

xii) Acting as a link between company's finance department and

suppliers for timely payment/settlement of supplier's bills.

xiii) Attending periodical activities like applying for import license,

quota etc.

xiv) Maintaining company's image among suppliers.

Buying Procedure : Main steps in procurement procedure are as

follows:

i) Indenting Purchase requirements

ii) Scrutinizing Purchase indents

iii) Market study and selection of sources of supply,

iv) Order Preparation

v) Follow-up with suppliers,

vi) Receiving materials,

vii) Inspection of goods,

viii) Storage and record keeping,

ix) Invoicing and payment

x) Scrutiny of the invoices.

(II) Stores Management : Functions : The working of store need to be

organized to perform the following functions.

i) requisitioning from purchasing department an economical

quantity of material for delivery at the most appropriate time,

ii) Exercising control on quantity of materials received,

iii) Storing and protecting materials against hazardous condition,

weather, deterioration and pilferage,

iv) Issuing materials against properly authorized material

requisitions,

v) Maintaining exact records of all receipts, issues and balances to

facilitate ordering of required materials,

vi) Maintaining balances to facilitate ordering of required materials,

vii) Maintaining adequate stocks of materials to serve production

needs,

viii) Keeping inventory investment within desired limits.

Types of Stores : Functionally, stores are of five types :

1) Receiving Store

2) Main Store

3) Finished product Store(Warehouse)

58

4) Special store,

5) Scrap yard.

Receiving Procedure :

1)In warding at the security gate

2)Verification of correctness of paperwork and appropriateness of

supply -

Materials in the receiving department on receipt, before being

unloaded, are checked for correctness of paper work and

appropriateness of supply. The Purchase order, or, delivery schedule

copy helps the receipt department to ensure that :

a) goods meant for this company are only received.

b) goods are not received in advance of the period specified.

c) quantity received from supplier does not exceed the quantity

ordered.

3) In warding of the consignment in the receiving stores.

4) Verification of quantities

5) Notifying indenter and purchase regarding receipt of materials.

6) Preparation of Goods Receipt Report (GRR)

7) Inspection of materials.

8) Delivery of inspected materials to appropriate stores

9) Return of defectives materials back to suppliers.

10) Returning all chargeable empties back to suppliers.

(III) Inventory Management : Objectives to be kept in mind while designing

an inventory control system (which is an optimization exercise between

losses due to non-availability and cost of carrying stocks):

1) Service to the customers

2) Continuity of productive operations

3) Effective use of capital

4) Economy in buying

5) Reduction of risk of loss - the possibility of the risk loss on

account of obsolescence and deterioration should be

management to weed out absolute and non-moving periodically

and automatically.

6) Reduction of administrative workload - the administrative work

load on the purchasing, receiving, inspection, stores, accounts

and other related departments should be latest minimum.

59

7) Administrative simplicity - the system should be simple, easy to

operate and devoid of tedious calculations.

Selective Treatment : Selective control means verifications in

method of control from item to item based on selective method.

The criterion used for the purpose may be cost of the item,

criticality, lead time, consumption, procurement difficulties, or

something else. Various classifications are employed to render

selective treatment to different types of materials, each

classification emphasizes our a particular aspect. For example,

ABC analysis emphasizes usage value (i.e., consumption of

items in terms of money), VED analysis considers criticality,

HML employs price criterion; and SDE analysis is based on

procurement difficulties. Selective control can be divided into 8

types as per the following table :

Types of Classification

Classification Criterion Employed

1. ABC analysis Usage value (i.e., consumption per period x

price per unit)

2. HML analysis Unit price (i.e. it does not take consumption

(High-Medium-Low) into account)

3. VED analysis Criticality of the item (i.e. loss of production)

(Vital-Essential Desirable)

4. SDE analysis Procurement difficulties

(Search-Difficulty-Local

foreign)

5. GOLF analysis Source of procurement.

(Government-Ordinary-

Local-Foreign)

60

6. SOS analysis (seasonal- Seasonality

7. FSN analysis Issues from stores.

(Fast-Slow-Non-moving)

8. XYZ analysis Inventory investment.

Standard Inventory Model :

EOQ - Model :

Annual consumption of the item (units) : S

Inventory carrying cost expressed as a % of average inventory investment : i.

Unit price (Rs.) : Cu.

Order quantity(units) : q

Procurement cost/Order(Rs.) : Cp

Two costs are involved for the inventory discussions : procurement cost and

inventory carrying cost.

Fig. : Effect of Order quantity on costs.

61

Materials Economic

s

WasteManagem

-ent

MaterialPlanning Purcha

-ing

Fig: Functions of Materials Managements

Annual procurement cost = No. of orders per year x permanent cost per order

= s/q x Cp

Annual inventory carrying cost = Avg. inventory investment x

Inventory carrying cost

= q/2 x Cu x i.

Annual Total cost (ATC) = s/q x Cp + q/2 x Cu x i.

For minimization of ATC,

D(ATC) / dq = -s.Cp/q2 + Cuxi./2 = 0

S.Cp/q2 = Cu.i./2, x

% = 2.S.Cp / cu. X i.

(I) JIT (Just in Time ) : Just-in-time is to produce and deliver finished

goods just in time to be assembled into finished goods,

fabricate/purchase parts just in time to into sub-assemblies, and

procure raw materials just in time to be transformed into fabricated

parts. JIT is not just an inventory control, or inventory reduction

technique. It is a philosophy, or an approach to productivity which is

applicable to all facts of the manufacturing process including material.

Technique of JIT : Techniques used to reduce non-value-added

activities include :

1) Set-up rime reduction.

2) Autonomous, or, modular cells.

P = Total number of defective pieces

Total number of units inspected

= Sum of defective prices in all samples

62

FunctionsOf

MaterialsManagement

StoresAccountiing

Transporta-tion

StoreKeeping

Inventory control

Disposal of

supplies material

No. of samples x Sample Size

(4) C- Chart (Number of Defects) :

UCLc = c + 3 c

LCLc = c - 3 c

Material & Logistics Management

The functions of the materials management include the following

- material planning

- purchasing

- Inventory control

- Store-keeping

- Stores accounting

- Transportation - Internal ( i.e. material handing ) and

- External ( i.e., traffic, shipping etc.)

- Disposal of scrap, surplus and obsolete materials.

- Material economics

- Waste management

Procedural Steps in MRP (Materials Requirements Planning) :

Step 1: Determine the gross requirements of the finished products

The gross requirement is the aggregate quantity taken from

three sources:

i) period wise pending sales orders on hand.

ii) period wise forecasted sales

iii) management decision to alter quantities derived under (i)

and (ii) above to smoothen production.

Step 2 : Determine the net requirements of finished products. The gross

requirements obtained in Step 1 are adjusted by the available

inventory of the product to obtain net requirements. That is : Net

requirement = Gross requirements - Inventory available.

Step 3 : Develop a master product schedule. From the net requirements

for each time period as determined in Step 2, a master

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production schedule is prepared. Master production schedule is

the key to MRP.

Step 4 : Explode the bill of materials and determine gross requirements

For each assembly, a structured bill of material is available

and it contains the information to identify each item of the

assembly and the quantity required per assembly of which it is a

part. This is all done by an appropriate computer software, on a

level-by-level basis.

Step 5 : Screen out B and C category of items.

Step 6 : Determine the act requirements of items.

The gross requirements of an item obtained in Step 4 is

adjusted for the "stock on hand" and "stock on order". At times,

it may be formed that the item is overstocked and does not

require to be replenished. At times, it needs to be

ordered/manufactured.

Step 7 : Adjust requirement for scrap allowance.

Depending upon the criticality of the dimensions there may be

some rejection during manufacturing which needs to be

accounted for so that correct numbers will be available for

assembly. This is usually done by estimating the percentage of

loss and adding it to the net requirement when the item is being

ordered. In a computerized MRP system, the percentage loss is

kept in the file so that it may be automatically added when the

item is being ordered.

Step 8 : Schedule Planned orders.

Once the quantity of an I tem is determined, the next logical step

is to schedule it. While scheduling, manufacturing cycle-time is

taken into account and to that extent the item is offset for

delivery. The offset information on the item can be had on item

record for ready reference.

Step 9 : Explode the next level.

As mentioned in Step 4, the entire assembly is not explodes at

one time but it is done level by level after all previous steps have

been completed. That is each level of explosion is followed

through step 5 to 7 and the steps from 5 to 7 are repeated again

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and again until the entire assembly has been exploded through

all levels and quantities of items determined and time phased.

Step 10: Aggregate requirements and determine order quantities.

Some of the items may be common to a number of assemblies

and at various levels. It will be, therefore, wrong to place on

order each time an item appears during explorion but wait until

the demand is developed after entire assembly of each product

has been exploded and then aggregate the demand so that just

one order can be placed.

Step 11: Write and place the planned orders.

After the requirement of each item has been determined, their

purchase orders/ work orders can be printed in the form of a

computer printout.

Step 12: Maintain the schedules.

Writing the orders is no assurance that the product will be

delivered on time. Regular follow up is necessary. Expoditing

may be required in order that the product is ready to be

delivered to the customer.

Sales Order

Forecast

Inventory on Hand

Component parts &

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Determine gross requirements of finished products

Determine net requirements of finished products

Develop master production schedule

Explode Bill of materials, determine gross part requirements

Determine net profit requirements

Raw material inventory

Scrap Allowance

No

Yes

Fig. : A flow chart of the steps involved in a MRP Programme

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Adjust requirementsFor scrap allowance

Schedule/release plannedorders

Issue planned orders

Complete planned andDelivery orders

Expedite (if necessary)

Aggregate inventory Requirements

Have all levelsBeen Exploded ?