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1.

Strategic Supply Management (SMM = Strategic Materials Management)

Supply Chain Management

Logistic Management

IMM ( Integrated Materials Management )

Purchase Stores Inventory


Management Management Management

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


3. Purchase/Procurement/Sourcing Management :
(Selection of Right Source),
Developing it and building
On the relationship from 1 to 3
Relationship Management

Trust 2 3 Alliance
Relationship

Transactional Contractual Type of


Relationship Relationship Relationship

B C ADD = Ancillary
Development Department
New A D
Typical
Purchase
Source Dept.

Old Old New Products


The Attributes of sourcing for Domain A is quite different from those
For B, C and D

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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 = Material Flow
IF = Information Flow
CF = Cash Flow

5. Price Management/Cost Strategy :

Process of
Conversion
Suppliers
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. Purchasing Cycle
7. Buying Methods : 13 Types : Negotiation
Power Time Information.
8. Purchasing under uncertainty/Different situations.
9. Vendor Rating : Parametrs
Quality
Delivery
Post-Sales Service
Responsiveness to change/New product development
Management Strength
Financial Capacity
10. Purchasing as a Outsourcing Strategy's starting point :
Operating it as a 'Profit centre'
11. Price Sustenance and gradual decline :
@7% inflation

C4 - CIF
Price -@7%learning curve
Cost reduction
BPR

to Time

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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) High cost of Capital
iv) Purchase is not a mere art of bringing Purchasing in today's
concept includes a wide range of related activities such as

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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 Secondary duties Optional
duties
a)Receipt, scrutiny of a)Make-or-buy decisions 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 surplus,
absolute and scrap
materials

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


its biggest spending department and literally the "custodian" of the company's
purpose. About 50 to 60% of the company's income is spent on materials.
The very fact that purchase department is responsible for such a high
percentage of company's money highlights its role in profit-making potential of
the company. To earn a rupee, sales volume equal to ten rupees, or more is
required which implies that a rupee saved is equal to a ten rupee sale. Also, a
sale is an one time sale. A saving, on the other hand, in a repetitive saving.
Every rupee saved goes to profit directly. Therefore, effective purchasing can
make a tremendous effect on the profitability y of the company purchase
department contributes to profits in the following manners :
i) Purchasing and competitive price : Skillful negotiation can easily cut
down procurement cost upto 5% from the total cost of goods
purchased.
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) Purchasing and Waste control :
vii) Purchasing and economical disposal of supplies materials : This helps
in controlling the material cost within acceptable limits.

PURCHASING CYCLE

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


"buying goods of right quality, in the right quantities, at the right time and at the right
price" Purchasing cycle consists of the following 8 major activities :
1. Establishing and communicating the need for procurement
2. Scruting of the purchase indents
3. Market study and selection of sources of supply.
4. Order preparation
5. Follow up
6. Receiving and inspection
7. Store and Record keeping
8. Invoicing and payment

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Establishing the Scrutiny of the
need for Purchase indent
procurement

Approved sources *
Order Purchase Market
Preparation Research

Follow up with Receiving and


supplier Inspection

Invoicing and Storage & record


payment 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 No.: Date:


Please Purchase the following materials for ………..
Sr. Description Code Qty. When Stock Average Previous
No. Required Required On hand Cons. 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. Stock
Sr.No. Drawing Descrip- Qty,/ Source Material Required Reqd. On Stock
No. tion Set Code For (Set) Hand shortage

Chkd. By : Date Appr. By : Date :

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


activity of the purchase department. The indent is scrutinized to see whether :
a) it is signed by the authorized signatories in order to avoid irresponsible
purchases.
b) It is routed through stores department to certify non-availability of the
item in stores.
c) The description of the required item is correctly and clearly given.
d) Whether, or, not qualified and developed sources are available.
e) Last supply of the stated item is completed, or, pending
f) Quantity shown against the item is correctly and clearly written.
Each Purchase indent after scrutiny is logged in the purchase indent register
and their given to concerned buyer.

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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.
XYZ LIMITED DELIVERY SCHEDULE Ref. :
Date :
Vendor Vendor's Name Mode of Kindly register our schedule for the following items and supply the materials in
Code & Address delivery the lots indicated as below.
Sr. Item/ Purchase No. of Ja Feb Mar Ap May Ju July Aug Sep Oc Nov Dec
No. Code Order Lots n r n t

Important : Make separate delivery challan for each item.


Make deliveries only for confirmed quantities
Advise immediately for inability/delay expected to meet confirmed
delivery schedule.
Quote correct code description, ref. P.O. and vendor code.
b) purchased and it also gives
i) For commodities and items whose price fluctuate widely from time
to time, an enquiry is sent to probable sources and quotations are
received. A comparative statement is prepared from the quotations
received from the suppliers which is followed by provisional
selection of one, or, two sources. Vendors are called for
negotiations and price terms and contract are finalized with one/two
such vendors.

XYZ LIMITED PURCHASE ENQUIRY


To : Enquiry No. :
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

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1.Quotation should be sent in SEALED ENVELOPES. For XYZ Ltd.

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 Code :
STATEMENT Last P.O.:
Price :
Supplier's Name M/s. M/s. M/s.
1 Quoted Price
2 Packing & forwarding
charges
3 Excise duty
4 Sales tax
5 Freight
6 Octroi
7 Carriage Inwards
8 Landed cost
9 Payment Terms
10 Delivery
Recommendations: Ordered Placed on M/s.__________________

ii) For non-stock items, the sources are selected as per (i), (ii), or (iii)
depending upon the nature of the item (i.e., whether the item is
required to commercial standards, or to buyer's design)
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) When the amount involved is less and the item is easily available,
the buyer may opt for petty cash purchase.
vi) For new items (i.e., t hose which have not been purchased before),
the buying department may have to dig out information on likely
sources and undertake the activity of selection.
4- Order preparation :
Having selected supplier to supply material, which is done by placing the
Purchase Order. A Purchase order is a formal document prepared by the
buying department on behalf of the company to authorize the supply of
goods and services in the quantities, at the time and at the price specified
therein the document.
A purchase order, in fact, is a legal document and serves as an
evidence of the contract between the buyer and the seller.
XYZ LIMITED PURCHASE ORDER
M/s. Our Order No. : Date :
Your reference No. Date:
Please supply the under-mentioned goods to our works subject to confirmations
overleaf.
Sr. No. Description Quantity Per Rate Value

Flow Chart of Guidelines to Select a Supplier

Purchase
Indent

No
Is this a
regular items

Yes

Is there an Market a short list of


annual costmet possible sources
for it ?

No
Was last
supplier Obtain
satisfactory?
Quotations

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No
Yes
Yes
Is it time to Prepare comparative
check the statement
market yet?
No

Select
Supplier

Finalize terms of
Place contract
Order

Evaluate
Performance

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) that goods actually ordered have been received.
ii) the supplies are according to the delivery schedule (i.e., excess
supply is not received).
iii) Purchase Order No., Part Name, Part No. are mentioned clearly
and correctly.
After having satisfied the above points, the receipt clerk marks the
entry of the receipt materials into a register called "Goods Receipt

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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
As per Actually Accepted Remarks Recd. U/d Rej.
& Part No.
W/o opn.

Vendor : Accounts : Stores : Planning/Sub Contract


Receipt : Purchase :

d) Intimation of Receipt of material :


e) Physical Count of the received material : The verification method of
quantities may be one, or, more of the following types.
i) Counting by number
iii) Weighing
iv) Measurement of length.
f) Inspection of Goods: Inward inspection does the following inspection
for
j) Conformance to dimensions.
iii) Conformance to materials specifications
iv) Conformance to performance.
Removal of the accepted and rejected materials : The GRR is
handed over to the inspection department. The inspector checks the
received materials and affixes stamp ("Accepted", or, "Rejected") on the
receipt tag.
Then the duly signed and selected TAG is returned to the receipt
stores. The GRR Officer sorted out and accepted. The GRRs are sent to

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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. It is then passed for payment if the
payment is due.

METHODS OF BUYING
A number of factors influence the selection of a buying method. They are:
i) Nature of the item
ii) Regularity of its demand
iii) Quantities required
iv) Susceptibility to price variations
Different buying methods are as follows :
1) Hand to mouth buying
2) Schedule buying,
3) Market purchasing,
4) Speculative Buying
5) Contract buying,
6) Blanket orders
7) Tender buying
8) Seasonal buying
9) Group purchasing
10) Sub-contracting,
11) Control purchase organization

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12) Directorate General of Suppliers and Disposal
13) Reverse Auction (wells - based)

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


according to the requirements" refers to the frequent purchases of an
item in small quantities. Important characteristics of hand to mouth
buying are :
a) Purchases are made only when demand arises
b) Purchases are made to cover immediate requirements
c) Quantity purchased is generally small through at times large
quantity may be purchased.
d) The terms of contract are negotiated. Competitive bids are
generally not obtained as there is no sufficient time.
Advantages of the method :
i) Lower inventory investment
ii) Low carrying charges
iii) Reduced deterioration and obsolescence of materials.
iv) Lesser losses due to price declines.
Disadvantages of the method :
i) Comparatively higher price is paid due to urgencies and loss of
quantity discounts
ii) Possible interruptions in production due to market shortage of
materials at the time of need.
iii) Higher ordering costs due to frequent purchases.
iv) Acceptance of sub-standard quality in emergencies.
Responsibility of buying Department :
The effectiveness of the buying department depends on their
connections with vendors. The selected vendors must be known for
quality, reliability and integrity so that they fill buyer's order without
taking advantage of the situation. A list of approved vendors is
necessary to be prepared for this.
Suitability of the method : This method is applicable to :
i) items required for prototypes and for products under
development
ii) items which are used infrequently and would not be required to
stock so that they are purchased when they are needed for

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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) Cover immediate requirements of items where prices are
expected to fall in the near future.
v) Procurement of replacement spares
vi) Items which have a limited shelf life
vii) Items which are bulky ( e.g., packing materials like wooden
boxes and thermocole packing etc. ) which need a lot of space
for storage.
2) Scheduled Buying : Scheduled buying is the process of procuring an
item in staggered deliveries according to the delivery schedule given to
the supplier by the buyer. The salient features of scheduled buying are:
i) A Purchase Order covering annual requirements (alternatively, a
P.O. without specifying the order quantity called open order) is
placed with the supplier.
ii) The supplier is given the estimate of the prominent needs
covering a mutually agreed period of time. It is a common
practice to give 2-3 months confirmed schedule and 2-3 months
tentative schedule.
iii) Fresh delivery schedules are given to the supplier prior to
completion of the previous schedule. Fresh schedule
supersedes the previous schedule. Fresh schedule usually
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.

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ii) Buyer is assured of supply of goods while the supplier is
assured of business.
iii) Supplier can effectively plan his factors of production which
buyer can plan his requirements of finance.
Sustainability of the systems :
i) Items of regular use such as cutting tools castings, forgings,
lubricants etc.
ii) Items produced to buyer's design and requiring long lead time to
manufacture.
iii) Proprietary items form suppliers who insist on long term
schedules.
3) Market Purchasing : Market purchasing, also called forward buying,
refers to the procurement of sufficient quantity of an item in advance of
its need at a time when prices are low (and expected to rise). Important
features of forward buying are :
i) Purchases are made to cover production requirement for a
considerable period.
ii) Quantity purchased in generally large.
iii) The atmosphere is normally favourable for negotiation.
iv) Purchases are made when the prices are low. The buyer gets
discounts on large purchases.
Advantages :
i) Low purchase price
ii) Greater profit margin on finished goods.
iii) Savings in procurement expenses as purchasing are normally
consolidated.
iv) Security against shortages.
Dis-advantages :
i) Inventory holding charges are considerably higher.
ii) Large scale obsolesce may result, if design charges occur.
iii) Price advantages if not realized, may result in loss to the
company.
Responsibility of the Buying Department : The buying department must
keep alert of the market conditions. It must constantly study the
statistics and factors that influence the availability of an item, or, its
price balance, and be able to forecast the changing trends. And high

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inventory carrying charges and deterioration and should be constantly
balanced against price advantage.
Suitability :
i) non-perishable items
ii) items which have steady and regular consumption.
iii) Basic materials such as coal, steel, coke etc., cutting tools,
bought out parts which are less susceptible to radial changes in
specifications.
iv) Seasonal items since prices are low during season.
v) Priority items to make purchases in advantage of suppliers'
agreement period.
vi) Pre-budget purchases.
4) Speculative Buying : Speculative buying refers to the buying large
requirements of an item when its price is low with the intention to sell
bulk of it at a higher price for speculative profits. Important features of
speculative buying are :
i) Purchases are no way related to the company's production
programme. An item which is not every required for production
may be purchased.
ii) Speculative buying does not base decisions on quantity. Its
single aim is to make speculative profits. The quantity
purchased in thus generally high and is as much as the
company finance can permit to buy.
Suitability : Speculative buying is not really a function of the buying
department. It should be ordinarily discouraged.
5) Contract Buying : Contract buying is the purchasing mode under
contract, normally formal, of needed materials, the delivery of which is
frequently spread over a period of time. Important features of contract
buying are:
i) Contracts are given to suppliers for large amount of future
requirements, or, for a certain period (say, a year)
ii) Quantity received per occasion is generally small.
iii) The buying department usually finds sufficient time to secure
competitive bids and negotiable terms of contract.

Advantages :

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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) The buyer's company is assured of regularity in supply despite
market fluctuations.
iii) The buyer needs to keep very little working stock and safety
stock. This reduces capital lock up and the cost of carrying
inventory to the lowest minimum.
iv) Prices and other terms of contract are generally favourable to
the parties involved.
v) The buyer can plan his requirement of finance as he has an
advance idea as to when and what amount he has to pay to his
vendor.

Type : Contract buying is of three types :


- Rate contract, where the rate is fixed and not the
quantity. Some indications of the probable requirements,
however are given.
- Running contract, where the rate and the quantity both
are fixed for the contract period. As soon as the specified
quantity is supplied by the vendor, the contract
automatically comes to and end.
- Service contract, where the various services are obtained
periodically.
Suitability : Contract buying is suited to the procurement of materials
and production items of regular use. Service contract may be entered
to obtain annual servicing of P.Cs, A.Cs, etc.
6) Blanket Order Buying : Blanket orders refers to the purchase of
variety of items from single source, usually a middle man. Important
features of blanket orders are :
i) A blanket order specifies the categories of items covered by the
order.
ii) The items covered by the order generally have low unit value.

21
iii) More than one middleman may be selected to avoid hold ups in
case of non-availability of an item with one.
iv) The supplier is given requirements on phone who supplies and
bills at the "prevailing prices less agreed discount". The records
of the supplier are open to inspection on demand.
Responsibility of buying department :
i) The middleman selected should be large stockiest who are
known for their honesty and reliability. The stockiest in the
vicinity of the factory should be given preference over others.
ii) The buying department must continuously watch the items in the
group and periodically check up whether the demand for any
item has risen considerably to justify its removal from the group
and purchase as an individual item.
Suitability of the method :
i) The method is best suited for general hardware, electrical
supplies, stationery, small cutting tools etc.
7) Tender Buying : Government departments and public sector
undertakings in India follow this method of buying private sector
organizations too adopt tender buying, if the volume of the purchase
exceeds the prescribed limit, as desired by the management. Salient
features of the system are :
i) The buying department corallites a biddler's list and invites them
to submit bids.
ii) Bids on receipt are evaluated by comparison and the right
supplier is selected. Lowest price is the retention used except
when supplier quoting the lowest price has questionable delivery
time, quality, reliability, or, financial stability.
Advantages :
i) Tender buying is the purchaser's most important single tool to
select qualified supplier on the basis of competitive prices.
ii) It eliminates possibility of favoritism, patronage and personal
preferences.
Disadvantages : Tender buying is costly and time-consumes and
therefore, used by the private sector undertakings only when the value
of purchases is high.
Responsibility of Buying Department :

22
i) For each new product, material, or, service, a buyer must obtain
quotation from at least three potential suppliers.
ii) Past performance in case of old supplier must be taken into
account while deciding on the contract of a new item. Buyers
must guard against suppliers who submit extremely low
quotations initially and increase prices later.
iii) Quotations should be evaluated considering the capabilities of
the competing firm. The bid should be high enough to yield a
reasonable margin of profit to the potential vendor.
Types of tender : Tenders are of four types :
i) Single tender : refers to the system of tendering wherein the
details of the requirements are communicated only to one
company. Competition in this system is altogether eliminated
and price is fixed by mutual agreement. Single tender system is
used when there is only one supplier of the item. Quotation from
the sole selling agents of the manufacturers belong to this
group.
ii) Limited, or, closed tender refers to the system of tendering
wherein enquiry is sent to a limited number of suppliers who are
on the approved list of suppliers and tenders/quotation are
received in response.
iii) Open tender system is the system of tendering where the
enquiry is advertised in the news papers and tenders are
received in response. Open tender system is used for items
which are required in large value and/or are difficult to procure.
iv) Global tender wherein the enquiry is advertised inside and
outside the country, and tenders are received in response. This
system is followed for purchases involving huge investments
such as procurement of turnkey projects etc.
8) Seasonal buying : Seasonal buying refers to "buying of the annual
requirements of an item during its season" and t his method is used for
items available in a particular season only. Such items may be
required by food processing and similar seasonal industries. Important
features of seasonal buying are :

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) Market prices are the lowest during season, when the items can
be purchased at the cheapest rates.
iii) Manufacturers/farmers are contacted and direct purchases are
made.
9) Group Purchasing :
Group purchasing refers to buying items of isivial value in a single P.O.
important features of group purchasing are :
i) items required are classified into few basic groups, like drills and
taps are placed in one group, plug gauges in another group,
screws and bolts in another group etc.
ii) Maximum and minimum levels are fixed for each group.
iii) Stock levels are reviewed periodically, say once in a month, or,
in two months once and order is placed to one single/two
sources for all items in the group at a level equal to the
difference between the 'maximum level' and 'stock on hand'.
10) Sub-contracting :
Sub-contracting is the work placed with outside suppliers for part - or,
full-machining/job work operations according to buyer's design
specifications. Sub-contracting is the hiring of another firm to perform
some of the manufacturing operations, or, to furnish certain parts and
sub-assemblies to be incorporated into the buyer's end products.
11) Central Purchase Organization :
A large company may have division wise stores. The material
requirements of these stores can be sourced by two methods :
i) Each store to make its own stores
ii) A central stores to make purchases and supply materials in turn
to division wise stores.
The advantages of central purchase organization are :
a) The central purchase organization (CPO) can obtain quantity
discounts, lower rate and better contract terms due to large
purchases made possible due to consolidation of the
requirements of individual stores.

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. A formal document is raised for the
purpose called the "rate contract"
13) Reverse Auctioning : Web-based Purchase initiative.

PURCHASING UNDER DIFFERENT CIRCUMSTANCES


Purchasing (or, the Buying decision) can take place under the following
conditions :
i) Buying under certainty
ii) Buying under risk
iii) Buying under uncertainty.
Decision making (of buying) under such circumstances follow the route as
below:
a) identification of several decision alternatives, called strategic
b) ranking of strategic accounting to desirability, based on the pay-
off of each strategy.
c) Selection of the optional strategy.
I) Buying Under Certainty : The salient features of the decision process
of buying are
i) There is a direct cause-cum-effect relationship between
alternative and its consequences.
ii) Each alternative has only one condition of choose from which
makes decision making simple and straight forward.
iii) Alternatives and consequences of each alternative are known
with certainty.

25
Typical examples of materials being purchased under this category:
a) Buying on non-stock items (against specific indents)
b) Buying of routine items (i.e. regular consumption items)
c) Purchase of capital equipment (against specific indent)
d) Project purchases

Techniques used :
i) EOQ
ii) Replenishment systems
iii) MRPI
II) Buying Under Risk : The salient features are :
i) The buying decision has more than one alternative.
ii) All possible outcomes of each decision alternative are known
iii) Each outcome can be assigned a definite probability by the
decision maker, from past historical, or, market research date.
iv) The decision criteria for selecting the best alternative is based
on EMV (=Expect ed Monetary Value)
Typical examples :
a) Determining the requirements of safety stock of an item.
b) Determining the quantity to be purchased of the item individual
one time purchase decision, e.g., Christmas Trees, Umbrella,
crackers etc.)
d) Determining the order quantity of insurance spares.
Techniques used : EMV (=Expected Monetary Value) Method -
a) Set up a payoff matrix,
b) determine EMV
c) Selection of optimum alternative based on EMV
III) Buying Under Uncertainty : This category encompasses these buying
decision where even the probabilities of the different event cannot be
estimated. Such a situation occurs when there is no past experience,
or, historical data to enable competition of probability of the events.
The salient features are :
i) The buying decision has more than one alternative
ii) All possible outcomes of each alternative are known but
occurrences of the outcomes are uncertain

26
iii) There are different decision criteria for deciding which decision
alternative is the best.
Typical example : Determining optional quantity of our insurance
spare in the absence of any historical data.
Techniques : Based on different criteria defined as :
i) Maximum (gain) criteria, or, minimum (loss) criteria.
ii) Maximum (gain) criteria, or, minimum (low) criteria
iii) Hurwicz Alpha Criterion
i) Maximum gain criterion ( or, minimum loss criterion) :
Maximum gain criterion was developed by Abraham Wald and is
known the eritenion of pessimism. The critenion forces the
decision makes to be conservative and pessimistic, thinking that
the nature is an active opponent and will always work to be
disadvantage of the decision maker examines the minimum
payoff of all alternatives and select the one with maximum of the
minimum payoffs, call maraimin.
Minimore loss critenrion is the same as the maximum in
gain criterion, difference being that minimize is used when the
payoff matrix contains costs, or, losses, while maximum is
adopted when payoff represents gains, or, profits.
ii) Manimase gain critenion (or, minimum loss criterion) : Maximise
gain critenion, almost in optimism, which assumes that the
nature is on the side of the decision-maker and will work to his
advantage. This criterion selects a strategy which maximizes the
maximum gains ( i.e. maximum) and aims at t he best of the
best.
iii) Hururic Alpha critenion : The maximin and manimax criterion are
the teo extremes on the seak of optimision, the former
representing dismissal pessimism and the later fantastic
optimision Hururic Alpha critenion propagates a midway
approach by advising or coefficient of optimism, called alpha(α)
α : 0 to 1
α : 0→ total pessimism (i.e., maximum criterion)
α : 1→total optimism (i.e., maximum critenion)
α : 1/2→ nentralism
Steps :

27
i) Determine the largest payoff(say, Mi) and the
smallest payoff(say; mi) for each strategy.
ii) Estimate the value of α
iii) Calculate expected value for each strategy, as
Expected value = α - Mi + ( 1 - α ) . Mi
iv) Select the strategy with the highest expected value as the
optimal strategy.

RECEVING AND STORAGE MANAGEMENT


Store function concerns receiving, movement, storage and issue of materials -
raw materials, bought out parts, tools, spares, consumables etc. - required for
production, maintenance and operation of the plant and finished goods until its
dispatch to customers.
Maynaid defines the responsibilities of stores management as "to receive
materials, to protect them while in storage from damage, or, unauthorized removal,
to issue materials in the right quantities, at the right time, to the right place and to
provide these services at the least cost."
Types of Stores :
(1) Receiving Store : performs activities necessary to exercise control
on quality and quantity of purchased material before they accepted and
taken into stock.
i) Inward Store to keep incoming materials until they are accept
and taken into stock.
ii) Quarantine Store to temporarily stock, materials which are under
dispute and require suppliers' (or transporters') certification ( e.g.
quantity discrepancy in the consignment, transit damage to the
goods etc.)
iii) Rejection Store : to stock defective (non-confirming) goods until
they are sent back to their suppliers.
(2) Main Store to perform activities concerning storage and issue of
accepted materials and maintenance of records. Main store may be
either centralized and housed in a large godown, or decentralized and
located near their point of use. Main store may be divided as under :
i) Tool Crid Store to stock cutting tools, hard tools, gauges,
instruments etc. to be issued to the workmen in the beginning of
the shift and to be received at the end of the shift (or, job).

28
ii) Component Part Store to stock components and parts produced
in economic lot size.
iii) Maintenance Store to stock spares of plant and machinery.
iv) Raw material store to stock bar stocks, castings and forgings
etc. which requires a lot of space and can be stocked in areas
open to sky.
(3) Finished Product Stores, or, Warehouse : to perform activities
concerning receipt, packing and dispatch of finished goods to different
distinction, and handling of the related papers and documents.
(4) Special Store : to perform activities of receipt, storage and issue of
special materials. Typical examples of special stores are :
a) "Bonded store" to stock materials "hypothecated with banks", or,
to stock "excisable goods" etc.
b) Statutory stock to stock materials namely Kerosene, diesel and
other petroleum products requiring strict conformance to safety
precautions stipulated as per statutory regulations.
c) Temperature controlled stores : to stock perishable items such
as meat, fish, milk, vegetables, fruits etc., or, active ingredients
like antibiotics, vitamins etc.
(5) Scrap yards to perform activities of receipt, segregation and storage of
different types of scrap.

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 of factory
premises.
- Store room should not be near the factory wall.

30
- Main Store should be place such that suppliers representatives,
drivers and other outsiders do not have easy access.
(6) Minimization of risk of spoilage and deterioration :
- due consideration should be given to temperature, humidity
etc.
(7) Flexibility (for future expansion) : While selecting a suitable store site,
future expansion needs must be considered, if sufficient space has not
been kept for future expansion requirements, to avoid the need to shift
store to another location at a future data.
(8) Overall integration of factors : Since it is almost impossible to satisfy
each and every factor, store location should be such that it results in
overall integration of factors.

STORE LAYOUT
Store layout means physical arrangement of space of storage, materials
movement, material handling equipment, office and its records and theory provide for
the most efficient receipt, storage and issue of materials. Main criteria for store
layouts are :
i) Easy receipt, storage and issue of materials.
ii) Sufficient space for each movement of men and material handling
equipment.
iii) Optimum utilization of storage space.
iv) Clear identification of materials.
v) Quick location of items,
vi) Ease in physical stocking,
vii) Protection against five risk to the store and rest of the establishment.
viii) Easier and better supervision of stores
ix) Adequate capacity and provision for future expansion.

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


can be found. Proper locating -
i) provides convenience in receiving and issuing of stocks.
ii) Helps to know where each and every item is kept, with thousands of
items in store, it is impossible to remember the place in the store where
the item is kept.

31
iii) Eliminates the possibility of working issue of the item.
iv) Improves housekeeping and vendors a neat and orderly appearance to
the stores.
v) Reduces the possibility of misplacement of items.
vi) Makes the task of physical stock taking simple and efficient.
One of the most popular locationing systems is as follows :
- All the racks from one end of the store to the other are serially
numbered as 1,2,3…
- In each rack, the shelves are alphabetically numbered from top to
bottom as A,B,C…..
- The pigeonholes in each shelve are number numerically from left to
right.
For example, the location number O3-D-02 will represent :
- Third rack in the store
- Fourth shelf from the top (denoted by D) in third rack.
- second pigeonhole from left.
Where materials are located on floor, or, open yards, the storage area is
marked off, by painting on the floor into blocks and codified.

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


item should have a part description and part number. Besides, for easier
identification of materials, following methods are used -
1) Tagging, or, labeling : Identification tags, made on paper board, or,
tin plate can be either kept along with items, or affixed on the item
itself.
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) Verification of correctness of paperwork and appropriateness of supply
before accepting the goods,
ii) Unloading of materials,
iii) In warding of the consignments,
iv) Verification of quantities,
v) Informing purchase/indentor/PPC regarding receipts of goods,
vi) Preparing necessary documents such as discrepancy notes, goods
inward notes etc.
vii) Arranging inspection of materials,
viii) Returning all rejected goods back to suppliers,
ix) Forwarding accepted materials to appropriate stores for storage,
x) Returning all chargeable empties back to suppliers.
Receiving Procedure -
Issue of Materials : Procedure :
i) Requests for the issue material should be logged in the organization
register which should be maintained date wise.
ii) Material requisitions should be scrutinized to verify whether it is signed
by the authorized signatory.
iii) Stores keeper should next check up the availability of indented material
in full, or, part.
iv) If the material is knot available, the requisition may be keep pending for
issue later on receipt of material.
v) Before taking the material to the issue counter, the issue clerk should
up date the "issue column" of the material requisition and make an
entry in the bin card and in the stores ledger/ledger card.
vi) Where the material is to be taken out of the company (e.g., issues to
vendors/ sub-contractors/customers), a gate pass should be prepaid
giving the following details :
- Descriptions/Code no. of material.
- No. of packages.
- Issue voucher no. and date
- To whom sent.

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 :
- is required to correct discrepancies between physical stock and
book balance and thereby ensure better material control.
- is the primary requirement for certification of the financial statements.
- provides a moral deterrent on the stores personal against fraud,
malpractices and pilferage.
- helps to audit stores procedures.
Causes of Discrepancies :
i) clerical error
ii) Incorrect location of parts
iii) Carelessness in handling of parts.
iv) Shortage due to atmospheric condition
v) Theft, pilferage and malpractices
vi) Unaccounted materials destroyed in destructive tests.
vii) Misplacement of paper and vouchers
viii) Poor storage conditions.
ix) Material issued because of urgency, without supporting paperwork.

Methods of stocktaking :
There are three methods of stocktaking :
i) Annual stock taking
ii) Continuous, or, perpetual stock taking,
iii) Re-order point stock taking.

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-in-
process, finished goods, tools and supplies. The stock verification is
generally undertaken at, or, near the close of the financial year.
Advantages :
i) the method is simple, less costly and satisfactory.
ii) The stock figures in the balance sheet and P&L A/c. are more
correct because verification is done at the time of preparation of
final accounts.
iii) Annual stock taking does not require permanent staff.
Disadvantages :
i) Finalization of accounts at times gets delayed of stocktaking is
not completed within the stipulated period.
ii) Since all movements from and into the stores are suspended
during the period of stocktaking, there is accumulation of work
right in the beginning of the financial year.
iii) Staff called from other departments to assist stores personal in
stocktaking are not conversant with the stocktaking work and
are not accountable for discrepancies which affect s accuracy
and effectiveness of stocktaking.
iv) Discrepancies of even serious nature are not detected since
sufficient time is not given for investigation which defeats the
very purpose of stock taking.
v) As the activity is conducted only once in a year, the
discrepancies dud to pilferage, malpractices and
misappropriation by the conmiring staff can not be effectively
minimized.
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) Discrepancies are detected and corrected at an early date and
frequently.
d) The control on stock is made more effective due to surprise
checks. This lesser the risk of loss, pilferage etc.
e) Interim P & L A/c. can be compiled quickly as correct stock
figures are readily available.
f) The firm can easily tide over its financial difficulties by pledging
their inventory with banks and other financial institutions as
inventory figures are available easily and regularly.
g) It costs less because regular stores personnel are utilized for
perpetual stock verification.
( C) Re-order point Stocktaking : Re-order point stock taking is the process
of physical verification of an item when its stock falls below the re-order
level.

MATERIAL HANDLING
In some industries in the core sector manufacturing, material handling cost
represents as much as 8-10% of the total cost of the product. Therefore,
transportation and material handling should deserve a very high kind of
organizational attention and focus. Material handling may be defined as the art and
science of movement, handling and storage of materials during different stages of
manufacturing considered as material flow into, though and away from the plant. It is
in fact, the technique of getting the right goods safety to the right place at the right
time and at the right cost.
Material handling in a company takes place t various stages, such as;
a) unloading at goods inwards stores
b) loading on to an internal transport
c) movement to stores for the purpose of storage
d) movement from stores to place of use (first work station)

36
e) movement to and from work stations
f) movement to and from inspection bays.
g) movement to and from assembly benches.
h) movement to and from finished goods stores.
i) movement to and from dispatch department
j) movement during packing.
k) loading of packed materials on to an external transport.

Objectives :
A well-planned material handling system should achieve the following
objectives :
i) Speed and economy in movement of materials
ii) Prevention of damage to materials.
iii) Safety and prevention of accidents in material handling.
iv) Minimization of fatigue in case of manual handling.
v) Better house keeping and efficient storekeeping.
Material Handling : Plant layout and materials handling are closely inter-
related. Only a good layout can ensure least material handling and use costly
material handling equipments.
i) Unnecessary material movements should be avoided as they damage
the materials and causes loss of man-hours spent in shifting materials.
ii) Productive time of workers can go waste, if they have to hunt for tools
and materials throughout the whole plant. A good plant layout should
ensure that :
- all functional areas and aisles are clearly identified and named.
- Separate areas for raw materials, tools, work-in-progress,
inspection and finished goods should be clearly defined.
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.

37
iv) Space costs money. Layout should be such that no space is wasted
and there is minimum movement of materials and men. In a good
layout, the width of the risks, heights of the ceiling, areas for storage
etc. are planned in a manner that duplication of movements, back
tracking of materials, obstacles to smooth material flow do not take
place while introducing economical material handling equipments, or,
expanding production activities at a later date.

Principles of Good Material Handling :


1) Planning Principles
2) Operating Principles
3) Equipment Principles
4) Costing Principles
5) General Principles
1) Planning Principles : Material hurdling should be planned and
well integrated with production activity to obtain maximum
overall operating efficiency. This require a system approach and
it should include the following :
a) Plant Layout Principle : "Good plant layout and minimum
materials handling are akin to each other." Daly good layout can
ensure minimum materials handling and as such all studies
relating to problems of material handling should be proceeded
by the study of plant layout.
b) "Delegation of responsibility" principle : "Efficiency in material
handling results when it is recognized as an important function
and is given weight age equal to that of the other cost centers"
Few important considerations are :
- 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.

38
- Heavy materials (>20 Kgs.) should be handled
mechanically.
c) Minimization of re-handling principles : "Re-handling adds to
cost, increases spoilage and leads to wasted movements" and
must be avoided. The major consideration here are as follows :
- materials should be moved directly to the point of use.
- Materials must be kept at a height at which they are to be
worked upon.
- Materials should never be kept on the floor. Pallets,
platforms and trolleys should be employed to keep
materials.
d) "Space saving" principle : "Storage space is best measured in
terms of cent re contents." That is -
- Materials should not be made to spread on floor since it
occupies more space.
- Palletiration and stocking of materials by means of fork-lift
trucks reduces requirement of space and enables swifter
movement of materials.
- Congestion retards flow of materials and reduces
efficiency of material handling.
- Since space costs money, use of constantly circulating
overhead monorail derieces connecting difference
department is a very efficient material handling system.
2) Operating Principles :
a) "Unit load handling" principle : "Material handling cost is
inversely proportional to the size of the load (unit load)" The
considerations here are -
- 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

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.
- Palletisation and unit load concepts should be used to
reduce terminal time.
c) "Dead Weight" Principle : "Economy of the equipment is directly
proportional to the ratio of load handled to the dead weight of
the equipment."
To improve efficiency of the material handling equipment -
- dead weight of the equipment should be reduced to the
minimum
- weight of trays, trolleys and pallets should be the least
possible.
d) "Standardization" Principle : "Standardization of materials
handling equipment increases efficiency and gives economy in
operation of the equipment." It :
- permits interchangeability of equipments between
departments
- reduces investment in spares inventory as fewer parts
are required to be stocked.

40
- Reduces maintenance and repairs cost.
e) "Maintenance" Principle : "Systematic maintenance (preventive
and predictive type) increases efficiency and productivity of
material handling equipments." To get trouble free service -
- repairs and replacements must be anticipated.
- Planned preventive maintenance programme should be
implemented for all material handling equipments.
f) "Speed: Principle : "Economy in material handling increases with
efficiency and speed of material handling." Following
considerations should be kept in mind -
- pallets should be made square in shape so that forks of
the forklift can enter them from any side. This reduces
pickup time.
- Two-way Traffic routes may be followed to eliminate
"empty runs".
- Gange-ways should be kept clean.
- No. of boxes, pallets, or, containers available at
workplace should be sufficient to eliminate waiting of the
material handling equipments.
g) "Versatility" Principle : "Economy in material handling is obtained
by the use of equipments that are capable of variety of
applications."
- This way the company can increase their up-time of
utilization.
4) Costing Principles :
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.

41
c) "Handling cost appraisal" principle : "Periodic analysis of
materials handling costs highlights areas of improvements"
(5) General Principles :
a) "Safety" principle : "Materials handling efficiency increases as
working conditions are made safer and safer." That is :
- Hot materials should be handled and moved
mechanically.
- Gangways should be kept lighted and undistracted to
avoid damages and injuries.
- Operators should be well trained to handle the handling
equipments.
- Aisles should be wide and uncongested.
- Workmen should be provided with protective clothing,
wherever necessary.
- Safety regulations, statutory, or, otherwise, should be
strictly adhered to.
b) "Training" Principle : "Training of workmen in good material
handling techniques and systems and educating them towards
importance of their work normally helps to develop right
attributes to material handling."
c) "Identification" principle : "Materials must be identified by
labeling on pallets and boxes." This is important failing which
unlabelled boxes may require to be opened to look for what they
contain and also when certain required materials are not
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 Details


1. Material to be handled a) Size and shape of the items
b) Quantity & weight of material
c) Material characteristics (solid,
liquid, gas, toxic, inflammable,
explosives etc.)
d) Susceptibility to damages
during handling.
2. Plant building a) Temporary, or, permanent
b) Width of ansles/doors
c) Height of the ceiling
d) Levels of floors and load
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) freeing lower and middle management from filing, non-
productive clerical functions common to manual systems.
ii) Standardizing pertinent data and terminology
iii) Providing instant availability of information from records.
iv) Improving communication within and outside the company
v) Ensuring adaptability and fast response to change in priorities,
prices of other variables.
vi) Saving in equipment and floor due to virtual elimination of filing,
eliminate also duplicate data files.
vii) Reducing inventory investment due to speed and more accurate
response time.
viii) Enabling better control over operation because of timely
availability of information for sound decision making.
Activities of MM covered by computerization :
I) Purchasing : Computerization is used for
i) preparing forecasts of materials based on their past
wages.
ii) Providing historical information on suppliers, prices,
post purchase orders.
iii) Selecting the most efficient source of supply based on
analysis of supplier's quotations
iv) Purchase order and delivery schedule preparation and
taking print-outs thereof.
v) Comparing actual deliveries against the delivery
schedule and sending follow-up activities for pending
delivery materials.
vi) Keeping upto date record of receipts of materials and
providing information on outstanding orders.
vii) Matching supplier's invoice with P.O. and GRR ,
auditing price, discount, freight, taxes etc. and passing
of bills
viii) Verifying payment terms, printing out cheques and
holding them until payment due date.
II) Stores Management : Computers can be programmed to :
i) Verify that quantities received from suppliers re strictly
according to the delivery schedule/P.O.

44
ii) Prepare GIN for the materials received from suppliers.
iii) Compute pending quantities against a P.O.
iv) Analyze no. of GRRs pending with Q.A.
v) Find the status of GRRs awaiting updating in the stores
ledger,
vi) Compute stock on hand, compare it against re-order level
and generate purchase ideates,
vii) Prepare consumption statements and month end stock
ledger (inventory reports).
III) Inventory Control & Material Planning :
i) inventory valuation
ii) carry out inventory planning and materials
Management Reports on Materials :
i) Purchase Part History,
ii) Vendor Delivery record
iii) Purchase Material price various
iv) Analysis of P.O. levels
v) Vendor wise Purchases
vi) Items below re-order levels and above max. levels.
vii) Materials consumption for the period.
viii) Accounts payable (age wise)

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) stage of conversion process
ii) nature of materials
iii) utility of materials.
i) Classification of the basis of stage of conversion :

Stores

Direct Material Indirect Materials

Raw WIP Works made Purchased


Mtls. Parts Parts

Standard Special
Bought out parts

Finished Goods.

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) Accurate and logical identification
ii) Avoidance of long and unwrieldy description
iii) Prevention of duplication - A "Locknut" may be called "withdrawal nut",
"slotted nut", "ring nut", "check nut" etc. This can result in stocking of
an item at different places under different names. However, one single
code no. will avoid the duplication.
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) Accurate and reliable recording and accounting
ix) Easier computerization.
Basic Systems of Codification :
1) Alphabetical system
2) Alpha-Numerical system
3) Numerical system
4) Colour Coding system.

1) Alphabetical systems :
Particulars Sub-Alphabet Vocabulary
(I) Acids (AC)
i) Sulfuric Acid SU AC-SU
ii) Nitric Acid NI AC-NI
iii) Carbonic Acid CB AC-CB

(II) Numerical Systems :


(a) Sequential Code :
Sr. No. Item Description Code
1 Housing 1001
2 Impeller 1002
3 Cover 1003
4 Bearing 1010
(b) Block Code
1001 to 2000 : For raw materials
2001 to 3000 : for electrical items
3001 to 5000 : for mechanical items
5001 to 6000 : for machinery spares
( c) Decimal Code

48
Main Class Sub-Class Particulars Vocabulary
Main. Sub.I/II
Tools Drill Centre drill B2.5 40.01.01
(40) 01 Centre drill B4 40.01.02
Centre drill B57 40.01.03

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


alphabetical and numerical systems and is an important over the
two methods.
Item Group Items Codes
Main Sub Vocabulary
I Acids :
i)Sulphuric Acid AC 51 AC-51
ii)Nitric Acid 52 AC-52
iii)Carbonic Acide 53 AC-53
II Chemicals
i)Methylene Chloride CH 101 CH-101
ii)Ethyle A 102 CH-102
iii)Xylene 103 CH-103
Two popular Systems of codification :
(1) The Brisch System
(2) The Kodak System
The Brisch System : Brish systems classification as formulated by G.E.
Brisch. The system is design-oriented. A 10-dight typical class
brakedown in an engineering company is given below :
O Organization and Operations.
1. Primary materials.
2. Bought out commodities
3. Components to user's own design.
4. Sub-assemblies and assemblies to user's own design
5. Tools and portable equipment
6. Plant and machinery
7. Bldg., series and utilities
8. Scrap and waste
9. Reserved

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 Sub Class Minor Class


2 2 1 5 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) : categorization
00-11 Raw materials
21.35 Machines and Mechanical Equipments
36.40 Mechanical products and Loose tools
41.49 Electrical products and Electrical Equipment
50.52 Laboratory Equipments
53.68 Chemical, Chemical Equipments and Misc.
69.78 Office Equipments and other misc. items.
79.83 Furniture and Fixtures
84.87 Semi-finished and finished products
94.99 Miscellaneous
(2) Each preliminary class is further divided into sub-class
Main Class Sub-Class Description
(Code) (Kind of cutting tool)
Cutting tools(40) 0 Drills, reamers, counter bars
Broaches
1 Cutters and tools
2 Single Point tools
3 Taps and dies
(3) Each sub-class is then divided into kinds of items.
Main class Sub-class Kinds of Item Code Full Item Code
Tools Drills,reamer Broaches 00 40-0-00-xx-xxx
(40) Counter bores, Counter 10 40-0-10-xx-xxx
Broaches Coun.bars 20 40-0-20-xx-xxx
Drills 30 40-0-30-xx-xxx
Reamers 40 40-0-40-xx-xxx
(4) Each kind of item is further split upto "types"
Main Sub Kind of Types within Identification Code
Class Class Item a kind (Type Code)
Tools Drills,reamer Reamers Reamer, 400-6005-xxx
(40) Broaches, taper(05)

51
Counter bores Reamer, 400-6060-xxx
(60) shell,spiral
(60)
(5) Each type of item is next arranged according to its size and the
next two digits-eight and ninth digits - are utilized for the
purpose.
Main Sub Kind of Types within Sizes Identification Type
Class Class Item a kind within
Tools Drills,reamer Reamers Reamer,1/8" 400-6010-10x
(40) Broaches, (60) Reamer, 5/32" 400-6010-15x

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

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


1963
Colour Identification of Pipelines (IS2379:1963)
Sr. Con tents Ground First Colour Second
No. Colour Band Colour Band
1. Cooling Water. Sea green French Blue -
Chilled water
2. Drinking Water Sea green French Blue Single red
3. Treated(soft)water Sea green Light orange -
4. Hot water(60º-100ºC) Sea green Dark Violet 0
2) Colour Codes for raw materials : No standard system exists for
colour code for identification of raw materials. The practice
varies from company. For some company in Pune (engineering
industry), following colour code for the raw material are followed:
Specification Blue Colour Steps
1. Free cutting steel
i) En1A White -
ii)En8 White One Blue
iii)En9 White Two Blue

2. Carbon Steel
i) En18 White Two Yellow
ii) En19 White One Red

52
iii)En 24 White Two Red
3. Colour Code for lubricants : used by the maintenance
department
Cutting Oil drum Blue
Machine Oil Yellow
Hydraulic oil Red etc.
Standardization
Industrial standardization is the process of establishing agreement
upon acceptable levels of various characteristics (e.g., dimensions, physical
characteristics, chemical composition, performance etc.) on the basis of
specific studies, experience, recommendations of the statutory bodies, or the
Government. The established agreement, or, uniform identifiation is termed as
standard (or, specification).
Standard differs from specification. Distraction lies in the intention of
use. Specification is intended for recurrent use. Every standard m ay relate to
one, or more of the following aspects of product quality :
1) Dimensions : They are intended to ensure interchangeability and to
reduce variety e.g.
ISI 3099 : 1991 : relates to the geometrical tolerances
ISI 3902 : 1993 : relates to the dimensions of ferries components
ISI 5387 : 1969 : deals with dimensions for stillages.
2) Performance Requirements,
3) Design Requirements :
ISI2835:1989 : Design and construction of steel chimney
4) Safety Requirements.
Different Levels of Standards :
- Individual company standards, e.g. TELCO Stds.
- Industry Standards e.g.
(the society of Motor Manufacturers & Traders)
Director General of Mine Safety, DGS&D, Textile
Commissioner etc.
- National Standards, e.g. IS, BS, Din etc.
- International Standards, e.g., International organization
for standardization (ISO).
Various Foreign Standards in use in India :
Following important foreign standards re in use in India. :

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 Value based
VED Criticality Based
GOLF Govt. Ordinary Local - Foreign
FSN Fast-slow-non moving
SDE Scarce-Difficult-Easy
S-OS Season-Off Seasonal
HML High-Medium-Low
XYZ Inventory Investment
(II) EOQ Ref. : MTM(MLM( Handouts
(III) EOQ Modified Models :

Inventory carrying cost = I


Economic Order Quantity = qo
Annual consumption in units = s
Price per unit(Rs.) = Cu
Procurement cost per unit(Rs.) = Cp
Constraints on EOQ :
i) Follow-up difficult
ii) Suppliers' Minimum order quantity
iii) Lead Time consumption
iv) Government Regulations
v) Seasonal Availability

54
vi) Shelf Life
vii) Space Restriction
viii) More than one constraints - Numerical
Additional Constraints :
i) Price Discount
ii) Seasonality of Prices
iii) Market condition.

Importance of Materials Management :


Organization's Goal in maximization of ROI.
P = Profit
C = Capital
S = Sales

Materials Management helps in increasing both the Profit Margin and the Capital
Turnover; thereby increasing the ROI.
Costs Involved in the Management of Materials :
i) Basic cost of materials
ii) Government levies and taxes
iii) Ordering costs
iv) Inventory carrying costs,
v) Packaging cost
vi) Material handling costs
vii) Freight costs,
viii) Insurance cost
ix) Wastage during receipt, storage, production etc.
Objectives of Materials Management :
There are 10 objectives of materials management which are as follows:
i) To maintain steady flow of materials to ensure uninterrupted production,

55
ii) To achieve economy in cost materials by adopting cost reduction
techniques like value analysis, variety reduction, JIT, MRP etc.
iii) To ensure consistency of quality by providing right materials, of the right
quality, in the right quantity and at right time.
iv) To reduce inventory investment through scientific inventory control
v) To improve corporate image by improving good buyer seller relations.
vi) To maintain good records of purchase, stores, traffic etc. to eliminate
possibility of corruption.
vii) To preserve/conserve materials in stock so that losses due to pilferage,
deterioration , obsolesces etc., are kept at minimum
viii) To reduce operating cost by minimizing/eliminating wastage and improving
productivity of materials.
ix) To improve competitive strength of the firm by providing the best quality
products using quality materials at the lowest possible cost.
x) Speedy disposed of surplus materials.
Integrated Approach to Materials Management : For best results, all activities
related to materials must be placed under one department, viz., materials
management department.
(I) Purchasing Management :
Objectives of scientific purchasing include the following :
i) to procure at a competitive price the needed materials, supplies,
tools and services of the right quality, in the right quantity and at
the right time.
ii) To maintain continuity of supply to ensure production schedule
at minimum inventory investment,
iii) To ensure the production of goods of better quality at the
competitive price by procuring materials which best suit the
product and the purposes for which they are intended
iv) To suggest better substitutes to materials which are currently
being used with a view to lower cost and maintain quality of the
products.
v) To render assistance in standardization, variety reduction, value
analysis and other cost reduction programmes.
vi) To advise on probable prices, deliveries, and performance of
item under consideration by the design, development and
estimating department,

56
vii) To create goodwill and enhance the company's reputation for
fairness and integrity through dealings with the suppliers,
viii) To enable company to maintain competitive position and earn a
fair return on its investment.
Functions of Purchase Department : Major functions of purchase
department include the following :
i) Locating, selecting and developing qualified sources of supply.
ii) Scrutinizing purchase indents and deciding method of purchase
iii) Floating enquiries, processing quotations, conducting
negotiations and releasing purchase orders
iv) Pre-delivery follow-up and shortage chasing
v) Co-ordination with inward inspection including timely return of
defective materials back to suppliers,
vi) Endorsing suppliers invoices for payment
vii) Processing supplier's request for price increase including price
negotiations.
viii) Attending to supplier's representatives and traveling salesman
ix) Arranging discussion meetings between supplier's
representative and company's officials,
x) Disposal of surplus, absolute and scrap material,
xi) Advising management as regards to new materials, new
products, forward buying etc.
xii) Acting as a link between company's finance department and
suppliers for timely payment/settlement of supplier's bills.
xiii) Attending periodical activities like applying for import license,
quota etc.
xiv) Maintaining company's image among suppliers.
Buying Procedure : Main steps in procurement procedure are as
follows:
i) Indenting Purchase requirements
ii) Scrutinizing Purchase indents
iii) Market study and selection of sources of supply,
iv) Order Preparation
v) Follow-up with suppliers,
vi) Receiving materials,
vii) Inspection of goods,

57
viii) Storage and record keeping,
ix) Invoicing and payment
x) Scrutiny of the invoices.
(II) Stores Management : Functions : The working of store need to be
organized to perform the following functions.
i) requisitioning from purchasing department an economical
quantity of material for delivery at the most appropriate time,
ii) Exercising control on quantity of materials received,
iii) Storing and protecting materials against hazardous condition,
weather, deterioration and pilferage,
iv) Issuing materials against properly authorized material
requisitions,
v) Maintaining exact records of all receipts, issues and balances to
facilitate ordering of required materials,
vi) Maintaining balances to facilitate ordering of required materials,
vii) Maintaining adequate stocks of materials to serve production
needs,
viii) Keeping inventory investment within desired limits.
Types of Stores : Functionally, stores are of five types :
1) Receiving Store
2) Main Store
3) Finished product Store(Warehouse)
4) Special store,
5) Scrap yard.
Receiving Procedure :
1)In warding at the security gate
2)Verification of correctness of paperwork and appropriateness of
supply -
Materials in the receiving department on receipt, before being
unloaded, are checked for correctness of paper work and
appropriateness of supply. The Purchase order, or, delivery schedule
copy helps the receipt department to ensure that :
a) goods meant for this company are only received.
b) goods are not received in advance of the period specified.
c) quantity received from supplier does not exceed the quantity
ordered.

58
3) In warding of the consignment in the receiving stores.
4) Verification of quantities
5) Notifying indenter and purchase regarding receipt of materials.
6) Preparation of Goods Receipt Report (GRR)
7) Inspection of materials.
8) Delivery of inspected materials to appropriate stores
9) Return of defectives materials back to suppliers.
10) Returning all chargeable empties back to suppliers.
(III) Inventory Management : Objectives to be kept in mind while designing
an inventory control system (which is an optimization exercise between
losses due to non-availability and cost of carrying stocks):
1) Service to the customers
2) Continuity of productive operations
3) Effective use of capital
4) Economy in buying
5) Reduction of risk of loss - the possibility of the risk loss on
account of obsolescence and deterioration should be
management to weed out absolute and non-moving periodically
and automatically.
6) Reduction of administrative workload - the administrative work
load on the purchasing, receiving, inspection, stores, accounts
and other related departments should be latest minimum.
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 Criterion Employed
1. ABC analysis Usage value (i.e., consumption per period x
price per unit)
2. HML analysis Unit price (i.e. it does not take consumption
(High-Medium-Low) into account)
3. VED analysis Criticality of the item (i.e. loss of production)
(Vital-Essential Desirable)
4. SDE analysis Procurement difficulties
(Search-Difficulty-Local
foreign)
5. GOLF analysis Source of procurement.
(Government-Ordinary-
Local-Foreign)
6. SOS analysis (seasonal- Seasonality
7. FSN analysis Issues from stores.
(Fast-Slow-Non-moving)
8. XYZ analysis Inventory investment.

60
Standard Inventory Model :
EOQ - Model :
Annual consumption of the item (units) : S
Inventory carrying cost expressed as a % of average inventory investment : i.
Unit price (Rs.) : Cu.
Order quantity(units) : q
Procurement cost/Order(Rs.) : Cp
Two costs are involved for the inventory discussions : procurement cost and
inventory carrying cost.
Fig. : Effect of Order quantity on costs.

Waste
Materials Material
Managem Purcha
Economic Planning
-ent -ing
s

Disposal
Functions
of
Of
supplies Inventory
Materials
material control
Management

Transport Store
Stores
a-tion Keeping
Accountiing

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
= q/2 x Cu x i.
Annual Total cost (ATC) = s/q x Cp + q/2 x Cu x i.
For minimization of ATC,
D(ATC) / dq = -s.Cp/q2 + Cuxi./2 =0
S.Cp/q2 = Cu.i./2, x
% = 2.S.Cp / cu. X i.
(I) JIT (Just in Time ) : Just-in-time is to produce and deliver finished
goods just in time to be assembled into finished goods,
fabricate/purchase parts just in time to into sub-assemblies, and
procure raw materials just in time to be transformed into fabricated
parts. JIT is not just an inventory control, or inventory reduction
technique. It is a philosophy, or an approach to productivity which is
applicable to all facts of the manufacturing process including material.
Technique of JIT : Techniques used to reduce non-value-added
activities include :
1) Set-up rime reduction.
2) Autonomous, or, modular cells.
P = Total number of defective pieces
Total number of units inspected

= Sum of defective prices in all samples


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
Procedural Steps in MRP (Materials Requirements Planning) :
Step 1 : Determine the gross requirements of the finished products
The gross requirement is the aggregate quantity taken from
three sources:
i) period wise pending sales orders on hand.
ii) period wise forecasted sales
iii) management decision to alter quantities derived under (i)
and (ii) above to smoothen production.
Step 2 : Determine the net requirements of finished products. The gross
requirements obtained in Step 1 are adjusted by the available
inventory of the product to obtain net requirements. That is : Net
requirement = Gross requirements - Inventory available.
Step 3 : Develop a master product schedule. From the net requirements
for each time period as determined in Step 2, a master
production schedule is prepared. Master production schedule is
the key to MRP.
Step 4 : Explode the bill of materials and determine gross requirements
For each assembly, a structured bill of material is available
and it contains the information to identify each item of the
assembly and the quantity required per assembly of which it is a
part. This is all done by an appropriate computer software, on a
level-by-level basis.
Step 5 : Screen out B and C category of items.
Step 6 : Determine the act requirements of items.
The gross requirements of an item obtained in Step 4 is
adjusted for the "stock on hand" and "stock on order". At times,
it may be formed that the item is overstocked and does not
require to be replenished. At times, it needs to be
ordered/manufactured.

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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 Determine gross requirements of


finished products
Forecast

Inventory on Hand Determine net requirements of finished


products

Develop master production


schedule

Explode Bill of materials, determine


gross part requirements

Component parts &


Determine net profit
Raw material inventory requirements

Scrap Allowance 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

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Expedite (if necessary)
Fig. : A flow chart of the steps involved in a MRP Programme

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