Description
It consists of topics like purchasing management, purchasing cycle, guidelines to select a supplier, methods of buying, recieving and store management, material and logistic management.
1. Strategic Supply Management (SMM = Strategic Materials Management) Supply Chain Management Logistic Management IMM ( Integrated Materials Management ) Purchase Management Stores Management Inventory 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 Relationship
Contractual Relationship
Type of Relationship
B New A Typical Purchase Source Old Dept. Old
C D
ADD = Ancillary Development Department
New Products
The Attributes of sourcing for Domain A is quite different from those For B, C and D
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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 IF CF = Material Flow = Information Flow = Cash Flow
5. Price Management/Cost Strategy :
Suppliers
Process of Conversion 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_
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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. 7. 8. 9. Purchasing Cycle Buying Methods : 13 Types : Power 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 Price - CIF -@7%learning curve Cost reduction BPR to Time Negotiation Time Information.
Purchasing under uncertainty/Different situations.
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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) iv) High cost of Capital Purchase is not a mere art of bringing Purchasing in today's concept includes a wide range of related activities such as
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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.
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(C) Classification of Purchase functions : Primary Duties a)Receipt, scrutiny Secondary duties of a)Make-or-buy decisions Optional duties a) Traffic
purchasing, indents and determination of methods of buying b)Search for suppliers b)Capital equipment and b)Stores
construction purchases c)Acquisition & analysis c)Inventory control of suppliers proposals d)Selection of suppliers d)Purchase Research e)Follow-up with e)Management reports suppliers for timely receipts of materials f)Performance evaluation and feed lock g)Disposal of absolute materials and surplus, scrap
(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. ii) Purchasing and Capital reliase : ROI = Profit Margin x Capital Turnover
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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) vii) Purchasing and Waste control : 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. Store and Record keeping 8. Invoicing and payment
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Establishing the need for procurement Approved sources * Order Preparation
Scrutiny of the Purchase indent
Purchase Market Research
Follow up with supplier
Receiving and Inspection
Invoicing and payment
Storage & record keeping
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 Please Purchase the following materials for ……….. Sr. Description Code Qty. When No. Required Required No.: Stock On hand Average Cons. Date: Previous Rate &
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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.
Description: XYZ Ltd. BILL OF MATERIAL Main Assly ; Part NO. Qty. Sr.No. Drawing No. Description Qty,/ Set Source Code Material Required For 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 a) b) c) d) e) f) it is signed by the authorized signatories in order to avoid irresponsible purchases. It is routed through stores department to certify non-availability of the item in stores. The description of the required item is correctly and clearly given. Whether, or, not qualified and developed sources are available. Last supply of the stated item is completed, or, pending Quantity shown against the item is correctly and clearly written.
activity of the purchase department. The indent is scrutinized to see whether :
Each Purchase indent after scrutiny is logged in the purchase indent register and their given to concerned buyer.
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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.
DELIVERY SCHEDULE Mode of delivery No. of Lots Ref. :
XYZ LIMITED Vendor Code Sr. No. Vendor's Name & Address Item/ Purchase Code Order
Date : Kindly register our schedule for the following items and supply the materials in the lots indicated as below. Ja Feb Mar Ap May n r Ju n July Aug Sep Oc t 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 Enquiry No. : 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 To :
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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. Item Desc. : XYZ Ltd. COMPARATIVE STATEMENT Supplier's Name 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) M/s. M/s. Code : Last P.O.: Price : M/s.
For XYZ Ltd.
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)
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,
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potential sources are selected. Detailed negotiations are held and finally a qualified source is selected. v) vi) When the amount involved is less and the item is easily available, the buyer may opt for petty cash purchase. 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 Purchase Indent No
Is this a regular items
Yes
Is there an annual costmet
for it ?
Market a short list of possible sources
No
Was last supplier satisfactory?
Obtain Quotations 12
No Yes Yes
Is it time to check the market yet?
Prepare comparative statement
No Select Supplier
Place Order Evaluate Performance
Finalize terms of contract
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, 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
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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 department takes out the copy of the relevant purchase order and verifies to ensure : i) ii) iii) that goods actually ordered have been received. the supplies are according to the delivery schedule (i.e., excess supply is not received). 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
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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. Part Receipt Inspection Results No. Description & Part No. As per Actually Accepted Remarks Recd. W/o opn. U/d Rej.
Vendor : Receipt :
Accounts :
Stores :
Planning/Sub Contract 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) iv) f) for j) Conformance to dimensions. iii) iv) Conformance to materials specifications Conformance to performance. Weighing Measurement of length.
Inspection of Goods: Inward inspection does the following inspection
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
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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. payment is due. It is then passed for payment if the
METHODS OF BUYING
A number of factors influence the selection of a buying method. They are: i) ii) iii) iv) Nature of the item Regularity of its demand Quantities required Susceptibility to price variations 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) Hand to mouth buying Schedule buying, Market purchasing, Speculative Buying Contract buying, Blanket orders Tender buying Seasonal buying Group purchasing Sub-contracting, Control purchase organization
Different buying methods are as follows :
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12) 13) 1)
Directorate General of Suppliers and Disposal Reverse Auction (wells - based)
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) b) c) d) Purchases are made only when demand arises Purchases are made to cover immediate requirements Quantity purchased is generally small through at times large quantity may be purchased. The terms of contract are negotiated. Competitive bids are generally not obtained as there is no sufficient time. Advantages of the method : i) ii) iii) iv) i) ii) iii) iv) Lower inventory investment Low carrying charges Reduced deterioration and obsolescence of materials. Lesser losses due to price declines. Comparatively higher price is paid due to urgencies and loss of quantity discounts Possible interruptions in production due to market shortage of materials at the time of need. Higher ordering costs due to frequent purchases. Acceptance of sub-standard quality in emergencies.
Disadvantages of the method :
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) ii) items required for prototypes and for products under development items which are used infrequently and would not be required to stock so that they are purchased when they are needed for
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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) v) vi) vii) Cover immediate requirements of items where prices are expected to fall in the near future. Procurement of replacement spares Items which have a limited shelf life 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. 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 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. It is a common practice to give 2-3 months confirmed schedule and 2-3 months
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ii) iii)
Buyer is assured of supply of goods while the supplier is assured of business. Supplier can effectively plan his factors of production which buyer can plan his requirements of finance.
Sustainability of the systems : i) ii) iii) 3) Items of regular use such as cutting tools castings, forgings, lubricants etc. Items produced to buyer's design and requiring long lead time to manufacture. Proprietary items form suppliers who insist on long term schedules. 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) ii) iii) iv) Purchases are made to cover production requirement for a considerable period. Quantity purchased in generally large. The atmosphere is normally favourable for negotiation. Purchases are made when the prices are low. The buyer gets discounts on large purchases. Advantages : i) ii) iii) iv) i) ii) iii) Low purchase price Greater profit margin on finished goods. Savings in procurement expenses as purchasing are normally consolidated. Security against shortages. Inventory holding charges are considerably higher. Large scale obsolesce may result, if design charges occur. 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 Dis-advantages :
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inventory carrying charges and deterioration and should be constantly balanced against price advantage. Suitability : i) ii) iii) non-perishable items items which have steady and regular consumption. Basic materials such as coal, steel, coke etc., cutting tools, bought out parts which are less susceptible to radial changes in specifications. iv) v) vi) 4) Seasonal items since prices are low during season. Priority items to make purchases in advantage of suppliers' agreement period. Pre-budget purchases. 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. 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) ii) iii) Contracts are given to suppliers for large amount of future requirements, or, for a certain period (say, a year) Quantity received per occasion is generally small. The buying department usually finds sufficient time to secure competitive bids and negotiable terms of contract. Advantages :
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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) iii)
The buyer's company is assured of regularity in supply despite market fluctuations. 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) v)
Prices and other terms of contract are generally favourable to the parties involved. 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 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) ii) A blanket order specifies the categories of items covered by the order. The items covered by the order generally have low unit value.
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iii) iv)
More than one middleman may be selected to avoid hold ups in case of non-availability of an item with one. 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) 7) The method is best suited for general hardware, electrical supplies, stationery, small cutting tools etc. 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) ii) The buying department corallites a biddler's list and invites them to submit bids. 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) ii) Tender buying is the purchaser's most important single tool to select qualified supplier on the basis of competitive prices. 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 :
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i) ii)
For each new product, material, or, service, a buyer must obtain quotation from at least three potential suppliers. 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 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. features of seasonal buying are : Such items may be required by food processing and similar seasonal industries. Important
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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) iii) 9)
Market prices are the lowest during season, when the items can be purchased at the cheapest rates. Manufacturers/farmers are contacted and direct purchases are made.
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) iii) Maximum and minimum levels are fixed for each group. 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 : A large company may have division wise stores. i) ii) Each store to make its own stores 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. The material requirements of these stores can be sourced by two methods :
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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. 13) A formal document is raised for the purpose called the "rate contract" Reverse Auctioning : Web-based Purchase initiative.
PURCHASING UNDER DIFFERENT CIRCUMSTANCES
Purchasing (or, the Buying decision) can take place under the following conditions : i) ii) iii) below: a) b) c) I) identification of several decision alternatives, called strategic ranking of strategic accounting to desirability, based on the payoff of each strategy. Selection of the optional strategy. Buying Under Certainty : The salient features of the decision process of buying are i) ii) iii) There is a direct cause-cum-effect relationship between alternative and its consequences. Each alternative has only one condition of choose from which makes decision making simple and straight forward. Alternatives and consequences of each alternative are known with certainty. Buying under certainty Buying under risk Buying under uncertainty.
Decision making (of buying) under such circumstances follow the route as
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Typical examples of materials being purchased under this category: a) b) c) d) Buying on non-stock items (against specific indents) Buying of routine items (i.e. regular consumption items) Purchase of capital equipment (against specific indent) Project purchases
Techniques used : i) ii) iii) II) i) ii) iii) iv) EOQ Replenishment systems MRPI
Buying Under Risk : The salient features are : The buying decision has more than one alternative. All possible outcomes of each decision alternative are known Each outcome can be assigned a definite probability by the decision maker, from past historical, or, market research date. The decision criteria for selecting the best alternative is based on EMV (=Expect ed Monetary Value) Typical examples : a) b) Determining the requirements of safety stock of an item. 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. a) b) c) Set up a payoff matrix, determine EMV Selection of optimum alternative based on EMV Techniques used : EMV (=Expected Monetary Value) Method -
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) ii) The buying decision has more than one alternative All possible outcomes of each alternative are known but occurrences of the outcomes are uncertain
26
iii)
There are different decision criteria for deciding which decision alternative is the best. Determining optional quantity of our insurance
Typical example :
spare in the absence of any historical data. Techniques : Based on different criteria defined as : i) ii) iii) i) Maximum (gain) criteria, or, minimum (loss) criteria. Maximum (gain) criteria, or, minimum (low) criteria Hurwicz Alpha Criterion 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 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(?) ? ? ? ? Steps : : : : : 0 to 1 0? total pessimism (i.e., maximum criterion) 1?total optimism (i.e., maximum critenion) 1/2? nentralism
27
i) ii) iii) iv)
Determine the largest payoff(say, Mi) and the smallest payoff(say; mi) for each strategy. Estimate the value of ? Calculate expected value for each strategy, as Expected value = ? - Mi + ( 1 - ? ) . Mi 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) ii) Inward Store to keep incoming materials until they are accept and taken into stock. 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) (2) Rejection Store : to stock defective (non-confirming) goods until they are sent back to their suppliers. 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).
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ii) iii) iv)
Component Part Store to stock components and parts produced in economic lot size. Maintenance Store to stock spares of plant and machinery. 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) b) "Bonded store" to stock materials "hypothecated with banks", or, to stock "excisable goods" etc. 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.
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.
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-
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 : 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 premises. Store room should not be near the factory wall. of factory
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(6)
Main Store should be place such that suppliers representatives, drivers and other outsiders do not have easy access.
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) ii) iii) iv) v) vi) vii) viii) ix) Easy receipt, storage and issue of materials. Sufficient space for each movement of men and material handling equipment. Optimum utilization of storage space. Clear identification of materials. Quick location of items, Ease in physical stocking, Protection against five risk to the store and rest of the establishment. Easier and better supervision of stores Adequate capacity and provision for future expansion.
Location Code Number : Location code number of an item implies material can be found. Proper locating i) ii) provides convenience in receiving and issuing of stocks. 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.
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iii) iv) v) vi) -
Eliminates the possibility of working issue of the item. Improves housekeeping and vendors a neat and orderly appearance to the stores. Reduces the possibility of misplacement of items. Makes the task of physical stock taking simple and efficient. 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.
One of the most popular locationing systems is as follows :
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. 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.
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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) ii) iii) iv) v) vi) vii) viii) ix) x) Verification of correctness of paperwork and appropriateness of supply before accepting the goods, Unloading of materials, In warding of the consignments, Verification of quantities, Informing purchase/indentor/PPC regarding receipts of goods, Preparing necessary documents such as discrepancy notes, goods inward notes etc. Arranging inspection of materials, Returning all rejected goods back to suppliers, Forwarding accepted materials to appropriate stores for storage, Returning all chargeable empties back to suppliers.
Receiving Procedure Issue of Materials : Procedure : i) ii) iii) iv) v) Requests for the issue material should be logged in the organization register which should be maintained date wise. Material requisitions should be scrutinized to verify whether it is signed by the authorized signatory. Stores keeper should next check up the availability of indented material in full, or, part. If the material is knot available, the requisition may be keep pending for issue later on receipt of material. 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.
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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 : i) ii) iii) iv) v) vi) vii) viii) ix) 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. clerical error Incorrect location of parts Carelessness in handling of parts. Shortage due to atmospheric condition Theft, pilferage and malpractices Unaccounted materials destroyed in destructive tests. Misplacement of paper and vouchers Poor storage conditions. Material issued because of urgency, without supporting paperwork. Causes of Discrepancies :
Methods of stocktaking : There are three methods of stocktaking : i) ii) iii) Annual stock taking Continuous, or, perpetual stock taking, Re-order point stock taking.
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A)
Annual stock taking : Annual stock taking is the process of making a complete once a year count of all materials, finished parts, work-inprocess, finished goods, tools and supplies. The stock verification is generally undertaken at, or, near the close of the financial year. Advantages : i) ii) the method is simple, less costly and satisfactory. 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) i) ii) Annual stock taking does not require permanent staff. Finalization of accounts at times gets delayed of stocktaking is not completed within the stipulated period. 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 minimized. dud to pilferage, malpractices and misappropriation by the conmiring staff can not be effectively Disadvantages :
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 :
35
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) d) e) f)
Discrepancies are detected and corrected at an early date and frequently. The control on stock is made more effective due to surprise checks. This lesser the risk of loss, pilferage etc. Interim P & L A/c. can be compiled quickly as correct stock figures are readily available. 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) ( C)
It costs less because regular stores personnel are utilized for perpetual stock verification.
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 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) b) c) d) unloading at goods inwards stores loading on to an internal transport movement to stores for the purpose of storage movement from stores to place of use (first work station)
36
e) f) g) h) i) j) k)
movement to and from work stations movement to and from inspection bays. movement to and from assembly benches. movement to and from finished goods stores. movement to and from dispatch department movement during packing. loading of packed materials on to an external transport.
Objectives : A well-planned material handling system should achieve the following objectives : i) ii) iii) iv) v) Speed and economy in movement of materials Prevention of damage to materials. Safety and prevention of accidents in material handling. Minimization of fatigue in case of manual handling. Better house keeping and efficient storekeeping.
Material Handling : Plant layout and materials handling are closely interrelated. Only a good layout can ensure least material handling and use costly material handling equipments. i) ii) Unnecessary material movements should be avoided as they damage the materials and causes loss of man-hours spent in shifting materials. 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. 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.
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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) 2) 3) 4) 5) 1) Planning Principles Operating Principles Equipment Principles Costing Principles General Principles 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 : 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.
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c)
Heavy
materials
(>20
Kgs.)
should
be
handled
mechanically. 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 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 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 monorail derieces connecting difference department is a very efficient material handling system.
39
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. c) Palletisation and unit load concepts should be used to reduce terminal time. "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 d) dead weight of the equipment should be reduced to the minimum weight of trays, trolleys and pallets should be the least possible. "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.
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e)
Reduces maintenance and repairs cost.
"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 : 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.
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c) (5)
"Handling cost appraisal" principle : "Periodic analysis of materials handling costs highlights areas of improvements"
General Principles : a) "Safety" principle : "Materials handling efficiency increases as working conditions are made safer and safer." That is : b) 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. "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 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
42
operating efficiency of the plant.
The following factors need to be
considered to make a judicious selection of the equipment.
Factors to be considered
1. Material to be handled
Details
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 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 :
43
i) ii) iii) iv) v) vi) vii) viii)
freeing lower and middle management from filing, nonproductive clerical functions common to manual systems. Standardizing pertinent data and terminology Providing instant availability of information from records. Improving communication within and outside the company Ensuring adaptability and fast response to change in priorities, prices of other variables. Saving in equipment and floor due to virtual elimination of filing, eliminate also duplicate data files. Reducing inventory investment due to speed and more accurate response time. 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) ii) iii) iv) v) preparing forecasts of materials based on their past wages. Providing historical information on suppliers, prices, post purchase orders. Selecting the most efficient source of supply based on analysis of supplier's quotations Purchase order and delivery schedule preparation and taking print-outs thereof. Comparing actual deliveries against the delivery schedule and sending follow-up activities for pending delivery materials. vi) vii) Keeping upto date record of receipts of materials and providing information on outstanding orders. Matching supplier's invoice with P.O. and GRR , auditing price, discount, freight, taxes etc. and passing of bills viii) II) Verifying payment terms, printing out cheques and holding them until payment due date. Stores Management : Computers can be programmed to : i) Verify that quantities received from suppliers re strictly according to the delivery schedule/P.O.
44
ii) iii) iv) v) vi) vii) III)
Prepare GIN for the materials received from suppliers. Compute pending quantities against a P.O. Analyze no. of GRRs pending with Q.A. Find the status of GRRs awaiting updating in the stores ledger, Compute stock on hand, compare it against re-order level and generate purchase ideates, Prepare consumption statements and month end stock ledger (inventory reports).
Inventory Control & Material Planning : i) ii) inventory valuation carry out inventory planning and materials
Management Reports on Materials : i) ii) iii) iv) v) vi) vii) viii) Purchase Part History, Vendor Delivery record Purchase Material price various Analysis of P.O. levels Vendor wise Purchases Items below re-order levels and above max. levels. Materials consumption for the period. Accounts payable (age wise)
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:
45
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) ii) iii) i) stage of conversion process nature of materials utility of materials. Classification of the basis of stage of conversion : Stores Direct Material Raw WIP Mtls. Works made Parts Purchased Parts Indirect Materials
Standard Bought out parts Finished Goods.
Special
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
46
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) ii) iii) Accurate and logical identification Avoidance of long and unwrieldy description 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. 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
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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) ix)
Accurate and reliable recording and accounting Easier computerization. 1) 2) 3) 4) 1) (I) i) ii) iii) (II) (a) 1 2 3 4 (b) Alphabetical system Alpha-Numerical system Numerical system Colour Coding system. Alphabetical systems : Particulars Acids (AC) Sulfuric Nitric Carbonic Acid Acid Acid SU NI CB AC-SU AC-NI AC-CB Sub-Alphabet Vocabulary
Basic Systems of Codification :
Numerical Systems : Sequential Code : Item Description Housing Impeller Cover Bearing Block Code 1001 to 2000 2001 to 3000 3001 to 5000 5001 to 6000 : : : : For raw materials for electrical items for mechanical items for machinery spares Code 1001 1002 1003 1010
Sr. No.
( c)
Decimal Code
48
Main Class Tools (40)
Sub-Class Drill 01
Particulars
Vocabulary Main. Sub.I/II 40.01.01 40.01.02 40.01.03
Centre drill B2.5 Centre drill B4 Centre drill B57
(III)
Alpha-Numerical two methods.
System
:
This
is
the
combination
of
alphabetical and numerical systems and is an important over the Item Group Items I Acids : i)Sulphuric Acid ii)Nitric Acid iii)Carbonic Acide II Chemicals i)Methylene Chloride ii)Ethyle A iii)Xylene Two popular Systems of codification : (1) (2) The Brisch System The Kodak System CH 101 102 103 CH-101 CH-102 CH-103 AC 51 52 53 AC-51 AC-52 AC-53 Codes Main Sub Vocabulary
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 1. 2. 3. 4. 5. 6. 7. 8. 9. Organization and Operations. Primary materials. Bought out commodities Components to user's own design. Sub-assemblies and assemblies to user's own design Tools and portable equipment Plant and machinery Bldg., series and utilities Scrap and waste Reserved
49
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 2 2 Sub Class 1 5 Minor Class 4 52 Size(1/2)" Ø 1" Material (SS) Kind(C'Sink Screw) 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:
50
(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) : 00-11 21.35 36.40 41.49 50.52 53.68 69.78 79.83 84.87 94.99 (2) Main Class Cutting tools(40) 1 2 3 (3) Tools (40) Main class Sub-class categorization Raw materials Machines and Mechanical Equipments Mechanical products and Loose tools Electrical products and Electrical Equipment Laboratory Equipments Chemical, Chemical Equipments and Misc. Office Equipments and other misc. items. Furniture and Fixtures Semi-finished and finished products Miscellaneous Each preliminary class is further divided into sub-class Sub-Class (Code) 0 Description (Kind of cutting tool) Drills, reamers, counter bars Broaches Cutters and tools Single Point tools Taps and dies Kinds of Item Code Full Item Code Broaches Counter Coun.bars Drills Reamers (4) Main Sub Class Class (40) Broaches, Kind of Item 00 10 20 30 40 40-0-00-xx-xxx 40-0-10-xx-xxx 40-0-20-xx-xxx 40-0-30-xx-xxx 40-0-40-xx-xxx
Each sub-class is then divided into kinds of items. Drills,reamer Counter bores, Broaches
Each kind of item is further split upto "types" Types within Identification Code a kind Reamer, taper(05) (Type Code) 400-6005-xxx
Tools Drills,reamer Reamers
51
Counter bores (60) (5)
Reamer, shell,spiral (60)
400-6060-xxx
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 Class Tools (40)
Sub Class Drills,reamer Broaches,
Kind of Types within Item (60) a kind Reamers
Sizes
Identification Type 400-6010-10x 400-6010-15x
within Reamer,1/8" Reamer, 5/32"
(6) 1)
The last digit-tenth digit is assigned to minor variables, such as : Colour Code for identification of pipeline : IS: 2379: of 1963 Colour Identification of Pipelines (IS2379:1963)
Sr. No.
Con tents
Ground Colour Sea green Sea green Sea green Sea green
First Colour Second Band Colour Band French Blue French Blue Single red Light orange Dark Violet 0
1. Cooling Water. Chilled water 2. Drinking Water 3. Treated(soft)water 4. Hot water(60º-100ºC) 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 1. Free cutting steel i) En1A ii)En8 iii)En9 2. Carbon Steel i) En18 ii) En19
Blue Colour White White White
Steps One Blue Two Blue
White White
Two Yellow One Red
52
iii)En 24 department Cutting Oil drum Machine Oil Hydraulic oil
White
Two Red
3. Colour Code for lubricants : used by the maintenance Blue Yellow Red 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) 3) 4) Performance Requirements, Design Requirements : ISI2835:1989 : Design and construction of steel chimney 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. : etc.
53
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 VED GOLF FSN SDE S-OS HML XYZ (II) (III) EOQ Value based Criticality Based Govt. Ordinary Local - Foreign Fast-slow-non moving Scarce-Difficult-Easy Season-Off Seasonal High-Medium-Low Inventory Investment Ref. : MTM(MLM( Handouts
EOQ Modified Models : Inventory carrying cost Economic Order Quantity Annual consumption in units Price per unit(Rs.) Procurement cost per unit(Rs.) Constraints on EOQ i) ii) iii) iv) v) Follow-up difficult Suppliers' Minimum order quantity Lead Time consumption Government Regulations Seasonal Availability : = = = = = I qo s Cu Cp
54
vi) vii) viii) i) ii) iii)
Shelf Life Space Restriction More than one constraints Price Discount Seasonality of Prices Market condition. Numerical
Additional Constraints :
Importance of Materials Management :
Organization's Goal in maximization of ROI. P C S = Profit = Capital = 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 : i) ii) iii) iv) v) vi) vii) viii) ix) Basic cost of materials Government levies and taxes Ordering costs Inventory carrying costs, Packaging cost Material handling costs Freight costs, Insurance cost Wastage during receipt, storage, production etc. There are 10 objectives of materials management which are as follows: i) To maintain steady flow of materials to ensure uninterrupted production,
Objectives of Materials Management :
55
ii) iii) iv) v) vi) vii) viii) ix) x)
To achieve economy in cost materials by adopting cost reduction techniques like value analysis, variety reduction, JIT, MRP etc. To ensure consistency of quality by providing right materials, of the right quality, in the right quantity and at right time. To reduce inventory investment through scientific inventory control To improve corporate image by improving good buyer seller relations. To maintain good records of purchase, stores, traffic etc. to eliminate possibility of corruption. To preserve/conserve materials in stock so that losses due to pilferage, deterioration , obsolesces etc., are kept at minimum To reduce operating cost by minimizing/eliminating wastage and improving productivity of materials. To improve competitive strength of the firm by providing the best quality products using quality materials at the lowest possible cost. 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. ii) iii) To maintain continuity of supply to ensure production schedule at minimum inventory investment, 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) vi) To render assistance in standardization, variety reduction, value analysis and other cost reduction programmes. To advise on probable prices, deliveries, and performance of item under consideration by the design, development and estimating department,
56
vii) viii)
To create goodwill and enhance the company's reputation for fairness and integrity through dealings with the suppliers, 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) ii) iii) iv) v) vi) vii) viii) ix) x) xi) xii) xiii) xiv) Locating, selecting and developing qualified sources of supply. Scrutinizing purchase indents and deciding method of purchase Floating enquiries, processing quotations, conducting negotiations and releasing purchase orders Pre-delivery follow-up and shortage chasing Co-ordination with inward inspection including timely return of defective materials back to suppliers, Endorsing suppliers invoices for payment Processing supplier's request for price increase including price negotiations. Attending to supplier's representatives and traveling salesman Arranging discussion meetings between supplier's representative and company's officials, Disposal of surplus, absolute and scrap material, Advising management as regards to new materials, new products, forward buying etc. Acting as a link between company's finance department and suppliers for timely payment/settlement of supplier's bills. Attending periodical activities like applying for import license, quota etc. Maintaining company's image among suppliers. Buying Procedure : Main steps in procurement procedure are as follows: i) ii) iii) iv) v) vi) vii) Indenting Purchase requirements Scrutinizing Purchase indents Market study and selection of sources of supply, Order Preparation Follow-up with suppliers, Receiving materials, Inspection of goods,
57
viii) ix) x) (II)
Storage and record keeping, Invoicing and payment Scrutiny of the invoices.
Stores Management : Functions : The working of store need to be organized to perform the following functions. i) ii) iii) iv) v) vi) vii) viii) requisitioning from purchasing department an economical quantity of material for delivery at the most appropriate time, Exercising control on quantity of materials received, Storing and protecting materials against hazardous condition, weather, deterioration and pilferage, Issuing materials against properly authorized material requisitions, Maintaining exact records of all receipts, issues and balances to facilitate ordering of required materials, Maintaining balances to facilitate ordering of required materials, Maintaining adequate stocks of materials to serve production needs, Keeping inventory investment within desired limits. 1) 2) 3) 4) 5) Receiving Store Main Store Finished product Store(Warehouse) Special store, Scrap yard.
Types of Stores : Functionally, stores are of five types :
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) b) c) goods meant for this company are only received. goods are not received in advance of the period specified. quantity received from supplier does not exceed the quantity ordered.
58
3) 4) 5) 6) 7) 8) 9) 10) (III)
In warding of the consignment in the receiving stores. Verification of quantities Notifying indenter and purchase regarding receipt of materials. Preparation of Goods Receipt Report (GRR) Inspection of materials. Delivery of inspected materials to appropriate stores Return of defectives materials back to suppliers. Returning all chargeable empties back to suppliers.
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) 2) 3) 4) 5) Service to the customers Continuity of productive operations Effective use of capital Economy in buying 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. 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 :
59
Types of Classification
Classification 1. 2. 3. 4. ABC analysis HML analysis (High-Medium-Low) VED analysis (Vital-Essential Desirable) SDE analysis (Search-Difficulty-Local foreign) 5. GOLF analysis (Government-OrdinaryLocal-Foreign) 6. 7. 8. SOS analysis (seasonalFSN analysis (Fast-Slow-Non-moving) XYZ analysis Inventory investment. Seasonality Issues from stores. Source of procurement. Procurement difficulties Criterion Employed Usage value (i.e., consumption per period x price per unit) Unit price (i.e. it does not take consumption into account) Criticality of the item (i.e. loss of production)
60
Standard Inventory Model EOQ - Model :
: S Cu. q Cp
Annual consumption of the item (units) : Unit price (Rs.) Order quantity(units) Procurement cost/Order(Rs.) inventory carrying cost. Fig. : Effect of Order quantity on costs. : : :
Inventory carrying cost expressed as a % of average inventory investment : i.
Two costs are involved for the inventory discussions : procurement cost and
Materials Economic s Disposal of supplies material
Waste Managem -ent
Material Planning
Purcha -ing
Functions Of Materials Management
Inventory control
Transport a-tion
Stores Accountiing
Store Keeping
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
61
Inventory carrying cost = Annual Total cost (ATC) For minimization of ATC, D(ATC) / dq = -s.Cp/q2 + Cuxi./2 S.Cp/q2 = Cu.i./2, x % = (I) 2.S.Cp / cu. X 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 =0 q/2 x Cu x i. = s/q x Cp + q/2 x Cu x i.
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) 2) P = Set-up rime reduction. Autonomous, or, modular cells. Total number of defective pieces Total number of units inspected = Sum of defective prices in all samples 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
62
-
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 Determine the gross requirements of the finished products The gross requirement is the aggregate quantity taken from three sources: i) ii) iii) period wise pending sales orders on hand. period wise forecasted sales management decision to alter quantities derived under (i) and (ii) above to smoothen production.
Procedural Steps in MRP (Materials Requirements Planning) : Step 1 :
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 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 : Step 6 :
Screen out B and C category of items. 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. ordered/manufactured. At times, it needs to be
63
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 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
64
may be required in order that the product is ready to be delivered to the customer.
Sales Order Forecast Inventory on Hand
Determine gross requirements of finished products
Determine net requirements of finished products Develop master production schedule Explode Bill of materials, determine gross part requirements
Component parts & Raw material inventory Scrap Allowance
Determine net profit requirements Adjust requirements For scrap allowance Schedule/release planned orders
No
Have all levels Been Exploded ? Yes Aggregate inventory Requirements
Issue planned orders
Complete planned and Delivery orders 65
Expedite (if necessary) Fig. : A flow chart of the steps involved in a MRP Programme
66
doc_195682505.doc
It consists of topics like purchasing management, purchasing cycle, guidelines to select a supplier, methods of buying, recieving and store management, material and logistic management.
1. Strategic Supply Management (SMM = Strategic Materials Management) Supply Chain Management Logistic Management IMM ( Integrated Materials Management ) Purchase Management Stores Management Inventory 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 Relationship
Contractual Relationship
Type of Relationship
B New A Typical Purchase Source Old Dept. Old
C D
ADD = Ancillary Development Department
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 IF CF = Material Flow = Information Flow = Cash Flow
5. Price Management/Cost Strategy :
Suppliers
Process of Conversion 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
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. 7. 8. 9. Purchasing Cycle Buying Methods : 13 Types : Power 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 Price - CIF -@7%learning curve Cost reduction BPR to Time Negotiation Time Information.
Purchasing under uncertainty/Different situations.
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) iv) High cost of Capital 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 a)Receipt, scrutiny Secondary duties of a)Make-or-buy decisions Optional duties a) Traffic
purchasing, indents and determination of methods of buying b)Search for suppliers b)Capital equipment and b)Stores
construction purchases c)Acquisition & analysis c)Inventory control of suppliers proposals d)Selection of suppliers d)Purchase Research e)Follow-up with e)Management reports suppliers for timely receipts of materials f)Performance evaluation and feed lock g)Disposal of absolute materials and surplus, scrap
(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. ii) Purchasing and Capital reliase : ROI = Profit Margin x Capital Turnover
6
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) vii) Purchasing and Waste control : 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. Store and Record keeping 8. Invoicing and payment
7
Establishing the need for procurement Approved sources * Order Preparation
Scrutiny of the Purchase indent
Purchase Market Research
Follow up with supplier
Receiving and Inspection
Invoicing and payment
Storage & record keeping
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 Please Purchase the following materials for ……….. Sr. Description Code Qty. When No. Required Required No.: Stock On hand Average Cons. Date: Previous Rate &
8
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.
Description: XYZ Ltd. BILL OF MATERIAL Main Assly ; Part NO. Qty. Sr.No. Drawing No. Description Qty,/ Set Source Code Material Required For 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 a) b) c) d) e) f) it is signed by the authorized signatories in order to avoid irresponsible purchases. It is routed through stores department to certify non-availability of the item in stores. The description of the required item is correctly and clearly given. Whether, or, not qualified and developed sources are available. Last supply of the stated item is completed, or, pending Quantity shown against the item is correctly and clearly written.
activity of the purchase department. The indent is scrutinized to see whether :
Each Purchase indent after scrutiny is logged in the purchase indent register and their given to concerned buyer.
9
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.
DELIVERY SCHEDULE Mode of delivery No. of Lots Ref. :
XYZ LIMITED Vendor Code Sr. No. Vendor's Name & Address Item/ Purchase Code Order
Date : Kindly register our schedule for the following items and supply the materials in the lots indicated as below. Ja Feb Mar Ap May n r Ju n July Aug Sep Oc t 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 Enquiry No. : 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 To :
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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. Item Desc. : XYZ Ltd. COMPARATIVE STATEMENT Supplier's Name 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) M/s. M/s. Code : Last P.O.: Price : M/s.
For XYZ Ltd.
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)
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,
11
potential sources are selected. Detailed negotiations are held and finally a qualified source is selected. v) vi) When the amount involved is less and the item is easily available, the buyer may opt for petty cash purchase. 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 Purchase Indent No
Is this a regular items
Yes
Is there an annual costmet
for it ?
Market a short list of possible sources
No
Was last supplier satisfactory?
Obtain Quotations 12
No Yes Yes
Is it time to check the market yet?
Prepare comparative statement
No Select Supplier
Place Order Evaluate Performance
Finalize terms of contract
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, 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
13
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 department takes out the copy of the relevant purchase order and verifies to ensure : i) ii) iii) that goods actually ordered have been received. the supplies are according to the delivery schedule (i.e., excess supply is not received). 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
14
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. Part Receipt Inspection Results No. Description & Part No. As per Actually Accepted Remarks Recd. W/o opn. U/d Rej.
Vendor : Receipt :
Accounts :
Stores :
Planning/Sub Contract 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) iv) f) for j) Conformance to dimensions. iii) iv) Conformance to materials specifications Conformance to performance. Weighing Measurement of length.
Inspection of Goods: Inward inspection does the following inspection
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
15
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. payment is due. It is then passed for payment if the
METHODS OF BUYING
A number of factors influence the selection of a buying method. They are: i) ii) iii) iv) Nature of the item Regularity of its demand Quantities required Susceptibility to price variations 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) Hand to mouth buying Schedule buying, Market purchasing, Speculative Buying Contract buying, Blanket orders Tender buying Seasonal buying Group purchasing Sub-contracting, Control purchase organization
Different buying methods are as follows :
16
12) 13) 1)
Directorate General of Suppliers and Disposal Reverse Auction (wells - based)
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) b) c) d) Purchases are made only when demand arises Purchases are made to cover immediate requirements Quantity purchased is generally small through at times large quantity may be purchased. The terms of contract are negotiated. Competitive bids are generally not obtained as there is no sufficient time. Advantages of the method : i) ii) iii) iv) i) ii) iii) iv) Lower inventory investment Low carrying charges Reduced deterioration and obsolescence of materials. Lesser losses due to price declines. Comparatively higher price is paid due to urgencies and loss of quantity discounts Possible interruptions in production due to market shortage of materials at the time of need. Higher ordering costs due to frequent purchases. Acceptance of sub-standard quality in emergencies.
Disadvantages of the method :
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) ii) items required for prototypes and for products under development items which are used infrequently and would not be required to stock so that they are purchased when they are needed for
17
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) v) vi) vii) Cover immediate requirements of items where prices are expected to fall in the near future. Procurement of replacement spares Items which have a limited shelf life 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. 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 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. It is a common practice to give 2-3 months confirmed schedule and 2-3 months
18
ii) iii)
Buyer is assured of supply of goods while the supplier is assured of business. Supplier can effectively plan his factors of production which buyer can plan his requirements of finance.
Sustainability of the systems : i) ii) iii) 3) Items of regular use such as cutting tools castings, forgings, lubricants etc. Items produced to buyer's design and requiring long lead time to manufacture. Proprietary items form suppliers who insist on long term schedules. 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) ii) iii) iv) Purchases are made to cover production requirement for a considerable period. Quantity purchased in generally large. The atmosphere is normally favourable for negotiation. Purchases are made when the prices are low. The buyer gets discounts on large purchases. Advantages : i) ii) iii) iv) i) ii) iii) Low purchase price Greater profit margin on finished goods. Savings in procurement expenses as purchasing are normally consolidated. Security against shortages. Inventory holding charges are considerably higher. Large scale obsolesce may result, if design charges occur. 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 Dis-advantages :
19
inventory carrying charges and deterioration and should be constantly balanced against price advantage. Suitability : i) ii) iii) non-perishable items items which have steady and regular consumption. Basic materials such as coal, steel, coke etc., cutting tools, bought out parts which are less susceptible to radial changes in specifications. iv) v) vi) 4) Seasonal items since prices are low during season. Priority items to make purchases in advantage of suppliers' agreement period. Pre-budget purchases. 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. 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) ii) iii) Contracts are given to suppliers for large amount of future requirements, or, for a certain period (say, a year) Quantity received per occasion is generally small. The buying department usually finds sufficient time to secure competitive bids and negotiable terms of contract. Advantages :
20
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) iii)
The buyer's company is assured of regularity in supply despite market fluctuations. 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) v)
Prices and other terms of contract are generally favourable to the parties involved. 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 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) ii) A blanket order specifies the categories of items covered by the order. The items covered by the order generally have low unit value.
21
iii) iv)
More than one middleman may be selected to avoid hold ups in case of non-availability of an item with one. 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) 7) The method is best suited for general hardware, electrical supplies, stationery, small cutting tools etc. 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) ii) The buying department corallites a biddler's list and invites them to submit bids. 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) ii) Tender buying is the purchaser's most important single tool to select qualified supplier on the basis of competitive prices. 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 :
22
i) ii)
For each new product, material, or, service, a buyer must obtain quotation from at least three potential suppliers. 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 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. features of seasonal buying are : Such items may be required by food processing and similar seasonal industries. Important
23
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) iii) 9)
Market prices are the lowest during season, when the items can be purchased at the cheapest rates. Manufacturers/farmers are contacted and direct purchases are made.
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) iii) Maximum and minimum levels are fixed for each group. 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 : A large company may have division wise stores. i) ii) Each store to make its own stores 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. The material requirements of these stores can be sourced by two methods :
24
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. 13) A formal document is raised for the purpose called the "rate contract" Reverse Auctioning : Web-based Purchase initiative.
PURCHASING UNDER DIFFERENT CIRCUMSTANCES
Purchasing (or, the Buying decision) can take place under the following conditions : i) ii) iii) below: a) b) c) I) identification of several decision alternatives, called strategic ranking of strategic accounting to desirability, based on the payoff of each strategy. Selection of the optional strategy. Buying Under Certainty : The salient features of the decision process of buying are i) ii) iii) There is a direct cause-cum-effect relationship between alternative and its consequences. Each alternative has only one condition of choose from which makes decision making simple and straight forward. Alternatives and consequences of each alternative are known with certainty. Buying under certainty Buying under risk Buying under uncertainty.
Decision making (of buying) under such circumstances follow the route as
25
Typical examples of materials being purchased under this category: a) b) c) d) Buying on non-stock items (against specific indents) Buying of routine items (i.e. regular consumption items) Purchase of capital equipment (against specific indent) Project purchases
Techniques used : i) ii) iii) II) i) ii) iii) iv) EOQ Replenishment systems MRPI
Buying Under Risk : The salient features are : The buying decision has more than one alternative. All possible outcomes of each decision alternative are known Each outcome can be assigned a definite probability by the decision maker, from past historical, or, market research date. The decision criteria for selecting the best alternative is based on EMV (=Expect ed Monetary Value) Typical examples : a) b) Determining the requirements of safety stock of an item. 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. a) b) c) Set up a payoff matrix, determine EMV Selection of optimum alternative based on EMV Techniques used : EMV (=Expected Monetary Value) Method -
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) ii) The buying decision has more than one alternative All possible outcomes of each alternative are known but occurrences of the outcomes are uncertain
26
iii)
There are different decision criteria for deciding which decision alternative is the best. Determining optional quantity of our insurance
Typical example :
spare in the absence of any historical data. Techniques : Based on different criteria defined as : i) ii) iii) i) Maximum (gain) criteria, or, minimum (loss) criteria. Maximum (gain) criteria, or, minimum (low) criteria Hurwicz Alpha Criterion 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 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(?) ? ? ? ? Steps : : : : : 0 to 1 0? total pessimism (i.e., maximum criterion) 1?total optimism (i.e., maximum critenion) 1/2? nentralism
27
i) ii) iii) iv)
Determine the largest payoff(say, Mi) and the smallest payoff(say; mi) for each strategy. Estimate the value of ? Calculate expected value for each strategy, as Expected value = ? - Mi + ( 1 - ? ) . Mi 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) ii) Inward Store to keep incoming materials until they are accept and taken into stock. 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) (2) Rejection Store : to stock defective (non-confirming) goods until they are sent back to their suppliers. 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).
28
ii) iii) iv)
Component Part Store to stock components and parts produced in economic lot size. Maintenance Store to stock spares of plant and machinery. 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) b) "Bonded store" to stock materials "hypothecated with banks", or, to stock "excisable goods" etc. 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.
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.
29
-
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 : 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 premises. Store room should not be near the factory wall. of factory
30
(6)
Main Store should be place such that suppliers representatives, drivers and other outsiders do not have easy access.
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) ii) iii) iv) v) vi) vii) viii) ix) Easy receipt, storage and issue of materials. Sufficient space for each movement of men and material handling equipment. Optimum utilization of storage space. Clear identification of materials. Quick location of items, Ease in physical stocking, Protection against five risk to the store and rest of the establishment. Easier and better supervision of stores Adequate capacity and provision for future expansion.
Location Code Number : Location code number of an item implies material can be found. Proper locating i) ii) provides convenience in receiving and issuing of stocks. 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.
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iii) iv) v) vi) -
Eliminates the possibility of working issue of the item. Improves housekeeping and vendors a neat and orderly appearance to the stores. Reduces the possibility of misplacement of items. Makes the task of physical stock taking simple and efficient. 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.
One of the most popular locationing systems is as follows :
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. 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.
32
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) ii) iii) iv) v) vi) vii) viii) ix) x) Verification of correctness of paperwork and appropriateness of supply before accepting the goods, Unloading of materials, In warding of the consignments, Verification of quantities, Informing purchase/indentor/PPC regarding receipts of goods, Preparing necessary documents such as discrepancy notes, goods inward notes etc. Arranging inspection of materials, Returning all rejected goods back to suppliers, Forwarding accepted materials to appropriate stores for storage, Returning all chargeable empties back to suppliers.
Receiving Procedure Issue of Materials : Procedure : i) ii) iii) iv) v) Requests for the issue material should be logged in the organization register which should be maintained date wise. Material requisitions should be scrutinized to verify whether it is signed by the authorized signatory. Stores keeper should next check up the availability of indented material in full, or, part. If the material is knot available, the requisition may be keep pending for issue later on receipt of material. 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.
33
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 : i) ii) iii) iv) v) vi) vii) viii) ix) 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. clerical error Incorrect location of parts Carelessness in handling of parts. Shortage due to atmospheric condition Theft, pilferage and malpractices Unaccounted materials destroyed in destructive tests. Misplacement of paper and vouchers Poor storage conditions. Material issued because of urgency, without supporting paperwork. Causes of Discrepancies :
Methods of stocktaking : There are three methods of stocktaking : i) ii) iii) Annual stock taking Continuous, or, perpetual stock taking, Re-order point stock taking.
34
A)
Annual stock taking : Annual stock taking is the process of making a complete once a year count of all materials, finished parts, work-inprocess, finished goods, tools and supplies. The stock verification is generally undertaken at, or, near the close of the financial year. Advantages : i) ii) the method is simple, less costly and satisfactory. 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) i) ii) Annual stock taking does not require permanent staff. Finalization of accounts at times gets delayed of stocktaking is not completed within the stipulated period. 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 minimized. dud to pilferage, malpractices and misappropriation by the conmiring staff can not be effectively Disadvantages :
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 :
35
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) d) e) f)
Discrepancies are detected and corrected at an early date and frequently. The control on stock is made more effective due to surprise checks. This lesser the risk of loss, pilferage etc. Interim P & L A/c. can be compiled quickly as correct stock figures are readily available. 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) ( C)
It costs less because regular stores personnel are utilized for perpetual stock verification.
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 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) b) c) d) unloading at goods inwards stores loading on to an internal transport movement to stores for the purpose of storage movement from stores to place of use (first work station)
36
e) f) g) h) i) j) k)
movement to and from work stations movement to and from inspection bays. movement to and from assembly benches. movement to and from finished goods stores. movement to and from dispatch department movement during packing. loading of packed materials on to an external transport.
Objectives : A well-planned material handling system should achieve the following objectives : i) ii) iii) iv) v) Speed and economy in movement of materials Prevention of damage to materials. Safety and prevention of accidents in material handling. Minimization of fatigue in case of manual handling. Better house keeping and efficient storekeeping.
Material Handling : Plant layout and materials handling are closely interrelated. Only a good layout can ensure least material handling and use costly material handling equipments. i) ii) Unnecessary material movements should be avoided as they damage the materials and causes loss of man-hours spent in shifting materials. 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. 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.
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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) 2) 3) 4) 5) 1) Planning Principles Operating Principles Equipment Principles Costing Principles General Principles 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 : 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.
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c)
Heavy
materials
(>20
Kgs.)
should
be
handled
mechanically. 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 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 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 monorail derieces connecting difference department is a very efficient material handling system.
39
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. c) Palletisation and unit load concepts should be used to reduce terminal time. "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 d) dead weight of the equipment should be reduced to the minimum weight of trays, trolleys and pallets should be the least possible. "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.
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e)
Reduces maintenance and repairs cost.
"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 : 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.
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c) (5)
"Handling cost appraisal" principle : "Periodic analysis of materials handling costs highlights areas of improvements"
General Principles : a) "Safety" principle : "Materials handling efficiency increases as working conditions are made safer and safer." That is : b) 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. "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 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
42
operating efficiency of the plant.
The following factors need to be
considered to make a judicious selection of the equipment.
Factors to be considered
1. Material to be handled
Details
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 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 :
43
i) ii) iii) iv) v) vi) vii) viii)
freeing lower and middle management from filing, nonproductive clerical functions common to manual systems. Standardizing pertinent data and terminology Providing instant availability of information from records. Improving communication within and outside the company Ensuring adaptability and fast response to change in priorities, prices of other variables. Saving in equipment and floor due to virtual elimination of filing, eliminate also duplicate data files. Reducing inventory investment due to speed and more accurate response time. 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) ii) iii) iv) v) preparing forecasts of materials based on their past wages. Providing historical information on suppliers, prices, post purchase orders. Selecting the most efficient source of supply based on analysis of supplier's quotations Purchase order and delivery schedule preparation and taking print-outs thereof. Comparing actual deliveries against the delivery schedule and sending follow-up activities for pending delivery materials. vi) vii) Keeping upto date record of receipts of materials and providing information on outstanding orders. Matching supplier's invoice with P.O. and GRR , auditing price, discount, freight, taxes etc. and passing of bills viii) II) Verifying payment terms, printing out cheques and holding them until payment due date. Stores Management : Computers can be programmed to : i) Verify that quantities received from suppliers re strictly according to the delivery schedule/P.O.
44
ii) iii) iv) v) vi) vii) III)
Prepare GIN for the materials received from suppliers. Compute pending quantities against a P.O. Analyze no. of GRRs pending with Q.A. Find the status of GRRs awaiting updating in the stores ledger, Compute stock on hand, compare it against re-order level and generate purchase ideates, Prepare consumption statements and month end stock ledger (inventory reports).
Inventory Control & Material Planning : i) ii) inventory valuation carry out inventory planning and materials
Management Reports on Materials : i) ii) iii) iv) v) vi) vii) viii) Purchase Part History, Vendor Delivery record Purchase Material price various Analysis of P.O. levels Vendor wise Purchases Items below re-order levels and above max. levels. Materials consumption for the period. Accounts payable (age wise)
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:
45
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) ii) iii) i) stage of conversion process nature of materials utility of materials. Classification of the basis of stage of conversion : Stores Direct Material Raw WIP Mtls. Works made Parts Purchased Parts Indirect Materials
Standard Bought out parts Finished Goods.
Special
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
46
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) ii) iii) Accurate and logical identification Avoidance of long and unwrieldy description 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. 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
47
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) ix)
Accurate and reliable recording and accounting Easier computerization. 1) 2) 3) 4) 1) (I) i) ii) iii) (II) (a) 1 2 3 4 (b) Alphabetical system Alpha-Numerical system Numerical system Colour Coding system. Alphabetical systems : Particulars Acids (AC) Sulfuric Nitric Carbonic Acid Acid Acid SU NI CB AC-SU AC-NI AC-CB Sub-Alphabet Vocabulary
Basic Systems of Codification :
Numerical Systems : Sequential Code : Item Description Housing Impeller Cover Bearing Block Code 1001 to 2000 2001 to 3000 3001 to 5000 5001 to 6000 : : : : For raw materials for electrical items for mechanical items for machinery spares Code 1001 1002 1003 1010
Sr. No.
( c)
Decimal Code
48
Main Class Tools (40)
Sub-Class Drill 01
Particulars
Vocabulary Main. Sub.I/II 40.01.01 40.01.02 40.01.03
Centre drill B2.5 Centre drill B4 Centre drill B57
(III)
Alpha-Numerical two methods.
System
:
This
is
the
combination
of
alphabetical and numerical systems and is an important over the Item Group Items I Acids : i)Sulphuric Acid ii)Nitric Acid iii)Carbonic Acide II Chemicals i)Methylene Chloride ii)Ethyle A iii)Xylene Two popular Systems of codification : (1) (2) The Brisch System The Kodak System CH 101 102 103 CH-101 CH-102 CH-103 AC 51 52 53 AC-51 AC-52 AC-53 Codes Main Sub Vocabulary
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 1. 2. 3. 4. 5. 6. 7. 8. 9. Organization and Operations. Primary materials. Bought out commodities Components to user's own design. Sub-assemblies and assemblies to user's own design Tools and portable equipment Plant and machinery Bldg., series and utilities Scrap and waste Reserved
49
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 2 2 Sub Class 1 5 Minor Class 4 52 Size(1/2)" Ø 1" Material (SS) Kind(C'Sink Screw) 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:
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(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) : 00-11 21.35 36.40 41.49 50.52 53.68 69.78 79.83 84.87 94.99 (2) Main Class Cutting tools(40) 1 2 3 (3) Tools (40) Main class Sub-class categorization Raw materials Machines and Mechanical Equipments Mechanical products and Loose tools Electrical products and Electrical Equipment Laboratory Equipments Chemical, Chemical Equipments and Misc. Office Equipments and other misc. items. Furniture and Fixtures Semi-finished and finished products Miscellaneous Each preliminary class is further divided into sub-class Sub-Class (Code) 0 Description (Kind of cutting tool) Drills, reamers, counter bars Broaches Cutters and tools Single Point tools Taps and dies Kinds of Item Code Full Item Code Broaches Counter Coun.bars Drills Reamers (4) Main Sub Class Class (40) Broaches, Kind of Item 00 10 20 30 40 40-0-00-xx-xxx 40-0-10-xx-xxx 40-0-20-xx-xxx 40-0-30-xx-xxx 40-0-40-xx-xxx
Each sub-class is then divided into kinds of items. Drills,reamer Counter bores, Broaches
Each kind of item is further split upto "types" Types within Identification Code a kind Reamer, taper(05) (Type Code) 400-6005-xxx
Tools Drills,reamer Reamers
51
Counter bores (60) (5)
Reamer, shell,spiral (60)
400-6060-xxx
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 Class Tools (40)
Sub Class Drills,reamer Broaches,
Kind of Types within Item (60) a kind Reamers
Sizes
Identification Type 400-6010-10x 400-6010-15x
within Reamer,1/8" Reamer, 5/32"
(6) 1)
The last digit-tenth digit is assigned to minor variables, such as : Colour Code for identification of pipeline : IS: 2379: of 1963 Colour Identification of Pipelines (IS2379:1963)
Sr. No.
Con tents
Ground Colour Sea green Sea green Sea green Sea green
First Colour Second Band Colour Band French Blue French Blue Single red Light orange Dark Violet 0
1. Cooling Water. Chilled water 2. Drinking Water 3. Treated(soft)water 4. Hot water(60º-100ºC) 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 1. Free cutting steel i) En1A ii)En8 iii)En9 2. Carbon Steel i) En18 ii) En19
Blue Colour White White White
Steps One Blue Two Blue
White White
Two Yellow One Red
52
iii)En 24 department Cutting Oil drum Machine Oil Hydraulic oil
White
Two Red
3. Colour Code for lubricants : used by the maintenance Blue Yellow Red 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) 3) 4) Performance Requirements, Design Requirements : ISI2835:1989 : Design and construction of steel chimney 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. : etc.
53
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 VED GOLF FSN SDE S-OS HML XYZ (II) (III) EOQ Value based Criticality Based Govt. Ordinary Local - Foreign Fast-slow-non moving Scarce-Difficult-Easy Season-Off Seasonal High-Medium-Low Inventory Investment Ref. : MTM(MLM( Handouts
EOQ Modified Models : Inventory carrying cost Economic Order Quantity Annual consumption in units Price per unit(Rs.) Procurement cost per unit(Rs.) Constraints on EOQ i) ii) iii) iv) v) Follow-up difficult Suppliers' Minimum order quantity Lead Time consumption Government Regulations Seasonal Availability : = = = = = I qo s Cu Cp
54
vi) vii) viii) i) ii) iii)
Shelf Life Space Restriction More than one constraints Price Discount Seasonality of Prices Market condition. Numerical
Additional Constraints :
Importance of Materials Management :
Organization's Goal in maximization of ROI. P C S = Profit = Capital = 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 : i) ii) iii) iv) v) vi) vii) viii) ix) Basic cost of materials Government levies and taxes Ordering costs Inventory carrying costs, Packaging cost Material handling costs Freight costs, Insurance cost Wastage during receipt, storage, production etc. There are 10 objectives of materials management which are as follows: i) To maintain steady flow of materials to ensure uninterrupted production,
Objectives of Materials Management :
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ii) iii) iv) v) vi) vii) viii) ix) x)
To achieve economy in cost materials by adopting cost reduction techniques like value analysis, variety reduction, JIT, MRP etc. To ensure consistency of quality by providing right materials, of the right quality, in the right quantity and at right time. To reduce inventory investment through scientific inventory control To improve corporate image by improving good buyer seller relations. To maintain good records of purchase, stores, traffic etc. to eliminate possibility of corruption. To preserve/conserve materials in stock so that losses due to pilferage, deterioration , obsolesces etc., are kept at minimum To reduce operating cost by minimizing/eliminating wastage and improving productivity of materials. To improve competitive strength of the firm by providing the best quality products using quality materials at the lowest possible cost. 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. ii) iii) To maintain continuity of supply to ensure production schedule at minimum inventory investment, 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) vi) To render assistance in standardization, variety reduction, value analysis and other cost reduction programmes. To advise on probable prices, deliveries, and performance of item under consideration by the design, development and estimating department,
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vii) viii)
To create goodwill and enhance the company's reputation for fairness and integrity through dealings with the suppliers, 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) ii) iii) iv) v) vi) vii) viii) ix) x) xi) xii) xiii) xiv) Locating, selecting and developing qualified sources of supply. Scrutinizing purchase indents and deciding method of purchase Floating enquiries, processing quotations, conducting negotiations and releasing purchase orders Pre-delivery follow-up and shortage chasing Co-ordination with inward inspection including timely return of defective materials back to suppliers, Endorsing suppliers invoices for payment Processing supplier's request for price increase including price negotiations. Attending to supplier's representatives and traveling salesman Arranging discussion meetings between supplier's representative and company's officials, Disposal of surplus, absolute and scrap material, Advising management as regards to new materials, new products, forward buying etc. Acting as a link between company's finance department and suppliers for timely payment/settlement of supplier's bills. Attending periodical activities like applying for import license, quota etc. Maintaining company's image among suppliers. Buying Procedure : Main steps in procurement procedure are as follows: i) ii) iii) iv) v) vi) vii) Indenting Purchase requirements Scrutinizing Purchase indents Market study and selection of sources of supply, Order Preparation Follow-up with suppliers, Receiving materials, Inspection of goods,
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viii) ix) x) (II)
Storage and record keeping, Invoicing and payment Scrutiny of the invoices.
Stores Management : Functions : The working of store need to be organized to perform the following functions. i) ii) iii) iv) v) vi) vii) viii) requisitioning from purchasing department an economical quantity of material for delivery at the most appropriate time, Exercising control on quantity of materials received, Storing and protecting materials against hazardous condition, weather, deterioration and pilferage, Issuing materials against properly authorized material requisitions, Maintaining exact records of all receipts, issues and balances to facilitate ordering of required materials, Maintaining balances to facilitate ordering of required materials, Maintaining adequate stocks of materials to serve production needs, Keeping inventory investment within desired limits. 1) 2) 3) 4) 5) Receiving Store Main Store Finished product Store(Warehouse) Special store, Scrap yard.
Types of Stores : Functionally, stores are of five types :
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) b) c) goods meant for this company are only received. goods are not received in advance of the period specified. quantity received from supplier does not exceed the quantity ordered.
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3) 4) 5) 6) 7) 8) 9) 10) (III)
In warding of the consignment in the receiving stores. Verification of quantities Notifying indenter and purchase regarding receipt of materials. Preparation of Goods Receipt Report (GRR) Inspection of materials. Delivery of inspected materials to appropriate stores Return of defectives materials back to suppliers. Returning all chargeable empties back to suppliers.
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) 2) 3) 4) 5) Service to the customers Continuity of productive operations Effective use of capital Economy in buying 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. 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 :
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Types of Classification
Classification 1. 2. 3. 4. ABC analysis HML analysis (High-Medium-Low) VED analysis (Vital-Essential Desirable) SDE analysis (Search-Difficulty-Local foreign) 5. GOLF analysis (Government-OrdinaryLocal-Foreign) 6. 7. 8. SOS analysis (seasonalFSN analysis (Fast-Slow-Non-moving) XYZ analysis Inventory investment. Seasonality Issues from stores. Source of procurement. Procurement difficulties Criterion Employed Usage value (i.e., consumption per period x price per unit) Unit price (i.e. it does not take consumption into account) Criticality of the item (i.e. loss of production)
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Standard Inventory Model EOQ - Model :
: S Cu. q Cp
Annual consumption of the item (units) : Unit price (Rs.) Order quantity(units) Procurement cost/Order(Rs.) inventory carrying cost. Fig. : Effect of Order quantity on costs. : : :
Inventory carrying cost expressed as a % of average inventory investment : i.
Two costs are involved for the inventory discussions : procurement cost and
Materials Economic s Disposal of supplies material
Waste Managem -ent
Material Planning
Purcha -ing
Functions Of Materials Management
Inventory control
Transport a-tion
Stores Accountiing
Store Keeping
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
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Inventory carrying cost = Annual Total cost (ATC) For minimization of ATC, D(ATC) / dq = -s.Cp/q2 + Cuxi./2 S.Cp/q2 = Cu.i./2, x % = (I) 2.S.Cp / cu. X 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 =0 q/2 x Cu x i. = s/q x Cp + q/2 x Cu x i.
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) 2) P = Set-up rime reduction. Autonomous, or, modular cells. Total number of defective pieces Total number of units inspected = Sum of defective prices in all samples 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
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-
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 Determine the gross requirements of the finished products The gross requirement is the aggregate quantity taken from three sources: i) ii) iii) period wise pending sales orders on hand. period wise forecasted sales management decision to alter quantities derived under (i) and (ii) above to smoothen production.
Procedural Steps in MRP (Materials Requirements Planning) : Step 1 :
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 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 : Step 6 :
Screen out B and C category of items. 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. ordered/manufactured. At times, it needs to be
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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 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
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may be required in order that the product is ready to be delivered to the customer.
Sales Order Forecast Inventory on Hand
Determine gross requirements of finished products
Determine net requirements of finished products Develop master production schedule Explode Bill of materials, determine gross part requirements
Component parts & Raw material inventory Scrap Allowance
Determine net profit requirements Adjust requirements For scrap allowance Schedule/release planned orders
No
Have all levels Been Exploded ? Yes Aggregate inventory Requirements
Issue planned orders
Complete planned and Delivery orders 65
Expedite (if necessary) Fig. : A flow chart of the steps involved in a MRP Programme
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