Purchasing & Material Management 1

8/3/2019 Purchasing & Material Management 1

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Smita Khandelwal


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Purchasing & Materials Management

Excerpts of the Course

MaterialsThe Profit Centre

Organization of Material Function

Cost Reduction by Codification

Music -3D view of Materials Management

Financial Aspects in Materials Management

Inventory Management & EOQ P&Q Systems of Inventory

Warehousing Management

Stock Valuation & Verification

Disposal of obsolete & Scrap Items

Purchasing Cycle

Right Modes of Transport

Vendor Rating

Negotiations

International Buying


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Unit No. 1

MaterialsThe Profit Centre


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Materials Management as Profit Centre

Organizational Expenses

-Sales & Marketing- HRD

- Finance & Taxation

- Business Overheads

- Operations

Every Rupee saved adds to P&L Accounts


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1:- The Profit Centre

Is Material Management is about Negotiation & Buying?

BOM

Enquiries & Quotation

Comparative Analysis, Commercial Negotiations & terms agreement.

Release of PO, Delivery Schedule and Follow-up

Logistics and StorageBilling & Payment

Forecasting of materials

Vendor Management & Evaluation


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Material Management - Objective

5 Rs of Materials Management

1. Right Quality2. Right Quantity

3. Right Time

4. Right Source

5. Right Price


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SUPPLY BASE OPTIMSATION OR RIGHT SIZING

TQM OF SUPPLIERS

GLOBAL SOURCING

LONG TERM SUPPLIER RELATIONSHIP

EARLY SUPPLIER DESIGN INVOLVEMENT

SUPPLIER DEVELOPMENT

TOTAL COST OF OWNERSHIP


TYPES OF PURCHASING STRATEGIES


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NEGOTIATIONS..

YOURSELFbalance between confidence & diffidence

EMOTIONConflict Handling-assertiveness

PEOPLEPractical-Speculative, Objective-Speculative

RELATIONSHIPSBuildworkingrelationships



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NEGOTIATIONS..

RITUALknow the rules of the game

CULTUREDo homework on the culture

TRUTHBe truthful & check for truth in your opponent

CREATIVE BARGAININGIntroduce more variables, communicate creativity



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NEGOTIATIONS..

PLANNINGIts all about information

TARGETSRephrase your objective

RAISING THE GAMERaise the level of abstraction to suit you.

TIME-TABLINGSlow down things to give you breathing space



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Unit No. 2

Organization of Materials Function


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2 :- Organization of Materials Function

-To have uninterrupted & Effective Flow of materials with lowest cost e.g.

Small shopkeeper & Department Stores- Location of Purchasing depends on type of

- Industry (Food Industry, Shelf Life)- Variety (Cosmetics, Merchandizing)- Volume (Mass production)

- Purchase function: Stores, inventory, planning, cost reduction,

Transportation, value engineering.- Purchase is not function of

-Finance (Min inventory, Max Cash Flow)- Production (Max Inventory, Min Cash Flow)- Administration (Waste of Inventory & Cash Flow)

- First Source of outside supplier hence public relations, corporate image.


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Purchase Enquires

Source identification and quote by tenders Negotiations & PO Follow-up with supplier, transport Stores, Quality inspection and documentation Receipt, Acceptance of correct material, rejection of incorrect material. Payment of supplier bills

Purchasers at Corporate Situation are been seen as Corporate Image &Public relation officer for organization.

PURCHASER PROCESSES


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o Economy of Saleso

Volume Negotiationo One Point contact with allo Resource Utilization

o Delay in Procuremento Inferior Quality

o Restoring emergency procuremento Team understanding technical specso In process inventory due to compiled quantityo Improper Planning / Cancellations, rejections

Centralized Procurement


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o Better Commitmento

Knowledge of needso Short communication timeo Better liaison & Performance Controlo Speedy Execution & Short inventoryo Lesser Economy of Scale

o Resource wasteo No Volume / Bulk discounto Higher Logistical Cost

DELEGATION OF POWER Material & User Department

Manpower Planning

De- Centralized Procurement


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Unit No. 3

Cost Reduction by Codification


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3 :- Cost Reduction by Codification

Representation item by number, alphabet, group digit, subgroup, type,

dimension, stores & bin location, sometimes suppliers name.

Number : Supplier country, Area CodeAlphabet : Item Starting alphabetGroup digit : Production, Administrative, Packaging, FinanceSubgroup : Metal, Wood, Paper

Type : Raw Material, Stationary, consumables, Tools, sparesDimension : Size, CapacityStores & Bin Location : Material, Administrative, Rack location, Tray / BinSuppliers Name :ESSAR, NAVNEET, CAMLIN, FEVICOL, BOSCH

Pin Code / Pan Card / Mobile No


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While deciding codes:o logical, simple & easy ruleso Uniqueo similar group & easy retrievalo flexibility to add new items

Why codification?o Easy recognitiono Small nameso Logical groupingo No duplicationo Less itemso Bulk ordering with staggered deliveryo Less lead time and More Working Capitalo Simplification, Standardization & Computerizationo Stock Transfer


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Coding System

The Brisch System:

Conceived by E G Brisch & J Gombinski. Block of numerals separated bydecimals.First Block: Major Classification e.g. Raw Material, Fasteners etcSecond Block: Secondary Classification by types & kindsThird Block: Dimensions or other distinguish features.

XX XX XXXMAIN SUB CLASS MINOR VERIFICATIONFASTENERS TYPE OF SCREW (BSW, CSK) Material (Size , 1, L)

The KODAK System:Developed by Eastman Kodak Co. of USA. Its a 10 digit numerical code. ThreeGroup of digits separated by hyphens. E.g.(XXXX - XX - XXXX) (XX - XXXX - XXXX) (XXX - XXXX - XXX)

Main Sub Type Dimensions MinorClass Class & Kind & Characteristics Variants

S CSS 0020 / S 200 S 34


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PSHCSSM10020 / SPR200ASR34

PSHCSSM10020

P : Production DepartmentS : Steel itemH : HardwareCSS : CS ScrewM10020 : M100 x 20

SPR200ASR34S : Stationary DepartmentP : Paper productR : Long Register200 : 200 PagesAS : Administration Stores

R : Rack No34 : Shelf no.

Way AheadInternational Codification


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Unit No. 4

3D View of Materials Management


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Inventory Control: Selective Treatment - Pareto Principle

CLASSIFICATION Criterion Employed Purposes

ABC Analysis Usage Value =Consumption x Price

To Decide stocking policies, improve store keeping, degree of control

HML Analysis Unit Price To access storage & security requirement, Control consumption , Frequencyof stock, buying & control policies, power of cash purchase.

VED Analysis Criticality of Item(Prodn Loss)

Spares Inventory Control

SDE Analysis Procurement Difficulties Method of buying, responsibility of buyers

GOLF Analysis Nature of Suppliers Allocation of Procurement Responsibility

SOS Analysis Seasonability of Item Procurement strategies

MNG Analysis Stock Turnover Rate Disposal of surplus material, identification of non existing item to save space

FSN Analysis Inventory Turnover Ratio Disposal of Surplus & obsolete stock.

XYZ Analysis Value of Stocks on hand Which items to control to bring down current inventory


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Unit No. 5

Financial Aspects of MaterialsManagement


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HOLDING Cost

- Stock Out Cost: Cost of being out of stock i.e. loss due to non availability ofan item in stock.

SOC depends on nature of item or bought out parts

SOC = Premium Price Paid for Item = Market PriceVendor Price

SOC in case of FG is profit loss on lost sales

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

SETUP Cost: Change Over Time to switch from ONE ACTICITY TO ANOTHER

Setup Cost can be reduced by

Traditional Method : Time & Motion StudySMED : Single Minute Exchange of Dies


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Purchasing & Materials ManagementPurchasing & Materials Management

Item Cost:

Cost corresponds to price paid for the goods themselves.

Penalty Cost:

Cost paid for each demand item which cannot be served directly frominventory.


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ACQUISITION Cost:

Cost incurred apart from the Cost of Raw Material viz.- Cost of Procurement- Freight & Logistics

- Follow-up & Travel Charges- Operational Overheads- Meetings, Postage, Advertisement- Other capital cost & its Depreciation

Settlement of Bills:

Payment deliveries from Finance for the receipt of material from vendor.Clearing the Bills, Raising payment advice, Payment follow-up andcommunication with Vendor.Late payments would result in non appreciated relations & increase sourceprices as the interest would be additional multiple due to late payment.


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Accounting:

Receipt & Quality approved entry of Material & being a major cost incurredaspects refers to

- Pricing Issues

- Evaluation & Verification of Stocks- Credit Reversal of Taxes, Duties, Excise & other components

For A/c various terminologies are used for better evaluation viz.-FIFO (First In First Out)- LIFO (Last In First Out)

- Weighted Average

Two year end Stock value is to be include in Balance Sheet.


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AUDITS:To verify and check whether the integrity & effectiveness of transactions areconsistent with organizational Objectives, Procedures, Strategies, Policies &manual.

-Management Audit- Internal Audit- External Audit- Cost Audit- Social Audit- Proprietary Audit

- Accountant General Audit

DISCOUNTS


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DISCOUNTS

Trade Discount

Quantity Discount

Off Season Discount

Cash Discount

Standard Package Discount

OEM Discounts

Turnover Discounts

Shi i


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Shipping Terms :-

Ex Works @ Sellers Premises

FOB (Station of Dispatch) @ Sellers Station

FOR (Freight on Road) @ Buyers Station

Buyers Works @ Door Delivery

At Site @ Delivery at Site / Stores

Works Contracts @ Ready for Use


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Unit No. 6

Inventory Management & EOQ

Inventory Control:-


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Inventory Control:-

-Finished Goods inventory Reduction :- Pull Production- HeijunkaLearning Production

- WIP Inventory Management :- Small Batch Size- Setup Reduction- Cellular Layout / Flow Management

- Buffer Stock Management:- Lesser Defects- Absenteeism- Breakdowns

- Fundamental Problems:

- Small Lot Purchase- Supplier Proximity- Vendor Managed Inventory- Kanban- JIT

Motivation for holding Inventories:-


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Motivation for holding Inventories:-

-Economy of Scale-Uncertainty of Demand- Smoothing Demand Over Time

- Flexibility in Planning

Motivation for not holding Inventories:-

-Capital-Depreciation

- Flow Time


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EOQ : ECONOMIC ORDER QUANTITY

Annual Total Cost

Annual Procurement Cost

Annual Inventory Carrying Cost

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

EOQ q = 2xSxCpCu x i

S: ConsumptionCp: Cost of ProcurementCu: Cost Per Uniti: ICC

Assumptions for EOQ and valid on:-

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

But referred above EOQ may require modification due to business constraints viz.-Follow-up Difficulties

- Supplier Minimum quantity condition- Lead Time- Seasonal availability- Shelf Life- Packing Size- Space Restrictions

SOLUTION: - STAGGERED DELIVERIES


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E.G.

Consumption / Month = 75 Nos.Cost per unit = 25/-

Cost of Procurement = 36/-Inventory Carrying Cost per month = 1.5%

Soln:-

Annual Consumption = 75 x 12 = 900 units

Annual ICC = 1.5% x 12 = 0.18

qo = 2 x S x Cp = 2 x 900 x 36 = 120 Nos.Cu X i 25 x 0.18


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Purchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials Management

Unit No. 7

P & Q Systems of Inventory


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

Inventory Controls :- When inventory level hits a predefined value, an order offixed size is then launched. These areFixed Quantity ( Q system of Procurement)Periodic Review (P System of Procurement)

Order Quantity (Q)

Fixed Variable

Review Time Continuous X

Periodic X X


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SAFETY STOCK & SERVICE LEVELS

Safety Stock:

We may run out of stock because of a re-supply delay or higher than anticipatedusage. If we can predict demand then we merely place EOQ orders on time. Thus weneed to assure a minimum level of inventory, quantity of which replicates wrt Lead

Time, Consumption pattern and buffer Stock.

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


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Service Levels:

We risk a stock-out with unpredictable demand, usage and re-supply so introducing a

safety or buffer stock reduces the risks of variable demand/lead time. However, the

level of material consumption would vary due to constraints / bottlenecks of other

resources viz. non availability of manpower, power outrage which affects the Planning.

S l ti f R l i h t S t


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Purchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials Management

Replenishment System

When to Order

As per Stock As per Time

How Much to Order

Fixed Quantity Variable Quantity

Review SystemOptional

Replenishment

Reorder LevelSystem / Two Bin

System

Review System /Compulsory

Replenishment

Selection of Replenishment System


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Purchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials Management

Unit No. 8

Warehousing Management


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Purchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials ManagementPurchasing & Materials Management

Unit No. 9

Stock Valuation & Verification


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Need for Valuation:

For converting physical quantities into monetary figures for judging the performance of

organization as inventory forms the single largest assets in industrial process.

Stores Manager has physical custody for raw materials, capital goods, consumables,

spares, furniture etc and is responsible for safe upkeep. Since process of valuation

enables organization to measure its performance, a picture can be portrait on

methods of valuation adopted e.g. gross profit is obtained by deducting the cost of

material consumed from net sales and in bad year, a higher gross profit can beindicated by adopting a lower value for cost of materials consumed.


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Methods of Evaluation:

FIFO: FIRST IN FIRST OUT (material issued in chronological order)

LIFO: LAST IN FIRST OUT (material receipt last are issued first)

Date Receipt Issue StockQty Rate Value Qty Rate Value Qty Rate Value

5th Jan - - - - - - - - -

6th Jan 200 1.00 200 - - - 200 1.00 200

10th Jan 300 1.20 360 - - - 300 1.20 360

12th Jan - - - 100 1.00 100 100 1.00 100

14th Jan - - - 100 1.00 100 300 1.20 360

16th Jan - - - 150 1.20 180 150 1.20 180

Date Receipt Issue Stock

Qty Rate Value Qty Rate Value Qty Rate Value

5th Jan - - - - - - - - -

6th Jan 200 1.00 200 - - - 200 1.00 200

10th Jan 300 1.20 360 - - - 300 1.20 360

12th Jan - - - 100 1.20 120 100 1.20 120

14th Jan - - - 200 1.20 240 200 1.00 200

16th Jan - - - 150 1.00 150 50 1.00 50


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Average Price: The issues are valued on simple average price. Method is very accurate

due to approximation. As prices are not weighted by quantities purchased, the

Average prices obtained do not give a proper presentation facts. Since the valuation is

not at cost, the closing stock value will differ from actual value, giving rise to profit/loss

due to system adoption.

Weighted Average: Issues of production are split into equal batches from each

shipment at stock. Being realistic methods the price levels and stabilizing cost figures.

The total unit cost is arrived with weighted average is computed to production and a

new price is computed on purchases of extra material purchased.

Standard Cost: Forecasted unit price for specific period of one year or more is used to

evaluate the issue. Actual price being different from standard cost helps in evaluating

the performance of purchasing.


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Replacement Cost: Relevant in inflation in built economy, the purchases are valued on

price paid, issue price is based on replacement price i.e. price on replacing them on

date of issue. Value of stock on hand would be difference between the sum of

purchase price and sum of replacement prices.

Stock Verification: Reconciliation of stock, review of stock and book stock which differs

in almost all organizations. Magnitude of this will increase with more transactions as

mistakes may be committed in more no. of transactions. Issues with indents, improper

receipts, pilferage, obsolescence, deterioration & damage due to different causes of

improper storage, evaporation, spillage etc.

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

accounts. These are usually done on Quarterly, half yearly or yearly basis to have

balance between physical count of material wrt book of accounts.


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Unit No. 10

Disposal of Obsolete & Scrap Items


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Management of SOS: Holding SOS results in non moving stock & cost. These includes

ICC (30%), maintaining records, security cost, preservation, capital loss & opportunity

cost, Manpower, space.

Category of SOS: Obsolete stock are not damaged but not required & have economic

value. Items like spare parts, foods & drugs, change in product designs, technological

innovation, cannibalization, inaccurate forecasts, wrong purchases, wrong

codification, poor maintenance, stores handling. All SOS being non moving cannot be

obsolete being coverage from insurance.

These items either have no immediate use nor are reasons of above mentioned errors.

Dormant/slow moving stocks are those categories whose usage is infrequent.

Reason for Obsolescence:

Sudden Development of High Tech

New tech

Automation


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Rationalization

Design Change

Product Change

Diversification

Cannibalization

In few cases standard design & non standard varieties elimination .

Control of SOS: Stock records & item movement is one of the effective method for SOS.

FSN type of Inventory Classification is adhered to identify & control of SOS. Scrap is

residue from Manufacturing process, which cant be used in organization. Usually scrap

is categorized in Ferrous Scrap, Metal Scrap, Waste.

Disposal: Disposal of SOS is effective vide

Inviting Offers

Annual Scrap Contract

Public Auction


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Unit No. 11

Purchasing Cycle


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

PO should contain:

Order No

Date

Serial No

Full Name & Address of Supplier

Consignees Name & Address

Terms & Conditions of purchase (Price, Payment mode, Delivery date / schedule)

Goods Description in all aspects

Quantity, Code

Supplier Quote reference

Packaging & Transport instructions

Inspection Procedures, Warranty, Insurance & Cancellation Provisions

Authorized Signatures, Acknowledgement,

Penalty/bonus.


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Raising of PO

Chasing & Follow-up

Transportation

Incoming Inspection

Bill Settlement

Documentation


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Unit No. 12

Right Mode of Transport


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Transport Cost: Accounting to 15-20% of the cost of material purchased. At time cost of

transportation is more then the cost of raw material due to

- Vendor located in remote place

- Critical item requiring special transportation

- Cheaper items to be imported with higher duties & taxes.

As buyer we need to seek constant improvements in transportation to cut down

transportation cost achieving greater speed and better quality of service in the light of

technological advances in transportation, handling, purchasing, and logistical

management.

It is possible to reduce the cost of transportation by appropriate choice of mode of

transport, route selection, rate verification, auditing, application of linear programming

techniques for optimum transportation costs.

Choice of Mode of Transport: Depends upon type of material, rate charges, distance,

volume, safety, loading & handling charges, taxes etc.


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Railways: More economical for longer distance and heavy volumes.

Road Transport: Carry assignments of smaller weightsat a lesser cost. Since other mode

cant reach everywhere, RT is only mode to be relied upon for linkages of source.

Water Transport: WT is generally resorted in case of imports & is cheaper mode of

transport but takes longer time.

Air Transport: AT is one of the most costliest transport mode but the fastest. Perishable or

smaller shelf life items are been shipped. Buyer needs to make setoff to the cost of

transport wrt the opportunity cost.

Containerization: Depot-Depot. Door-Door with cheaper handling charges. Reduce

rates compare to AT, Lesser CIF-Taxes-Duties.


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Few Dos & Dont in Transportation:

- Shouldnt permit vendor to ship the material

- Inspect Freight bills carefully

- Double check supplier packaging

- Shouldnt allow vendor to use premium transportation when not necessary

- Clear identification for freight rate purposes

- Dont offer damaged consignments.


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Unit No. 13

Vendor Rating

V d b t i t ibl t t i ti d th b th &


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Vendors are best intangible assests to any organization and thus both new &

established vendors are coming for critical review of their plant capacities, financial

capabilities, performance in todays scenario.

Evaluating Potential Suppliers:

- Step is to evaluate each prospective supplier individually.

- The type of evaluation required to determine supplier capability varies with the

nature, criticality, complexity, and dollar value of the purchase to be made.

- The evaluation also varies with the supply managers or sourcing teams knowledge

of the firms being considered for the order.

- Complex, high-dollar-value, and perhaps critical, purchases, additional evaluation

steps are necessary.

- For complex, high-dollar-value, and perhaps critical, purchases can include surveys,

financial condition analysis, third party evaluators, evaluation conferences, plant

visits, and selected capability analyses.

Supplier Surveys


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- Supplier Surveys

- Financial Condition Analysis

- Third Party Evaluators

- Evaluation Conference- Facility Visits

- Quality Capability Analysis

- Capacity Capability Analysis

VENDOR

Raw Material

Special Process

Surface Protection

Quality System

Supplier Audit

Supplier assessment and orientation


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Supplier assessment and orientation

Supplier selfevaluation

Quality system survey

Design validation Manufacturing validation

Production part approval process

Source approval testing

Demonstration of total quality capability

Audit of supplier quantity system

Achieve ship to use status

Implement quality maintenance activities

Pre-certification review

Certification

IBM Quality Rating System: Uses quality costs as basis for rating suppliers


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IBM Quality Rating System: Uses quality costs as basis for rating suppliers.

VQR = Desired Cost of Inspection x 100

Actual Cost of Inspection

Bell Quality Rating System: Vide Lot Quality Index assessment is done on lots received

against lots rejected, by disposition & category.

LQI = X/L

Where, L is Total No. of lots received during period.

X is (L1x1.00)+(L2x2.10)+(L3x2.90)

L1 is lots received and accepted

L2 is lots rejected by sampling but labeled

L3 is lots rejected and disposition and needs rework

Weights were determined at company after study of complexity & No. of operations.


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Unit No. 14

Negotiations

Objective of Negotiation Process


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Objective of Negotiation Process

Price Factor

Strategy & Tactics

Qualities of NegotiatorWhat to Negotiate

Process of Negotiation

Theory of Bargaining

Precautions of Negotiation

Negotiations


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NegotiationsIs an art by which a buyer & seller, usually face to face, tends to resolve differences to reach at theprecise terms of contract.

Purpose of Negotiations- Delivery.

- Packaging, Parking and transportation.- Insurance- Bonus penalty clauses,- Frequency of reporting progress.

NEGOTIATIONS TECHNIQUE CAN BE BEST LEARNT FROM LABOUR UNIONS:UNION OFFICIALS:-

- NEVER ENTER A NEGOTIATION WITHOUT BEING FULLY PREPARED.- NEGOTIATE ONLY WITH MGMTS REPRESENTATIVE HAVING LEGAL POWER TO CONLCUDE CONTRACT.- PUT THEIR INITIAL DEMANDS VERY HIGH.- CLASSIFY THEIR DEMAND INTO HIGH IMPORTANT AND NOT IMPORTANT & MAKE MGMTCONCEDE TO THEIR VITAL DEMAND IN EXCHANGE FOR CONCESSION OF LEAST IMPORTANT.- DETERMINE WELL IN ADVANCE WHAT CONCESSIONS THEY CAN MAKE AND WHICH CONCESSIONS outof this are of vital importance to the management.- They hold back vital concessions and make only minor concessions.

Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get.

Crucial elements in Negotiations:


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Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get.

Principles of Negotiations:

Prior knowledge of opponents bargaining strengths helps buyer to plan his appropriate tactics.1. Sellers Strengthsi. Sellers need for the order.ii. Sellers confidence in securing the order.iii. Time available for negotiations.iv. Criticality of items involved.v. General market condition.

vi. Monopolistic status.vii. Knowledge of cost elements.2. Good initial planning can increase your chance of success.3. Talk to the right person.4. A buyer also has some selling to do.5. A good offence is the best defense.6. Time constraints in negotiations, as in other activities, are subject to 80-20 rule.7. Diversions at the appropriate time era essential for keeping control and avoiding bad judgment.

8. Hard won concessions, regardless of its value to the buyer, provide greater satisfaction to thereceiver (the seller) of the concession.9. Tact and diplomacy is necessary to make supplier do face saving.10. Negotiations should not end up with an unhappy supplier.11. Commitments once made must be kept.12. Critical review of ones own performance after the negotiations usually helps in sharpeningnegotiations skills.


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Unit No. 15

International Buying

Why Imports


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Why Imports

Cost, Options, Quality, Benefits from Govt for Imports, International markets.

Import Policy: Import Trade Control

Classification of Importers:

Actual Users (Industrial)

Actual Users (Non-Industrial)

Registered Exporters

Registered Importers

Licensing

EXIM policies, Registration, Documentation, Duties & Taxation, Logistical Policies

Letter of Credit

Bill of Lading

Customs ClearanceWay Ahead in International Buying

International buying for cost, better options, quality, association with 3PL/4PL, Economy

of purchases with multiple options and branding.


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Case Study for ABC Analysis

ABC Analysis


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ABC Analysis

Identify the SKUs that we need should spent time on. Prioritize SKUs by their value to firm

Create logical grouping

Adjust as needed


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Annual Value = Price x Demand

A Class Items with

80% Stock Value & 20% SKUs

B Class Items with15% Stock Value & 30% SKUs

c Class Items with5% Stock Value & 50% SKUs


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Case Study Buyer Seller Relationship

Arctic India Ltd


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Mr. Mullick is a Materials Manager with Arctic India Ltd, a medium sized engineering firm engaged in

manufacture of domestic appliances. Over the last few years, Mr. Mullick had developed very intimate

relations with his suppliers. On the day of marriage of his sister one of his supplier presented to him a

costly gift, a Television set. The policy regarding the gifts in the company reads, Gifts beyond Rs. 200shouldntbe accepted.

His plea with the supplier that cant accept the gist makes the supplier snub him Is Malti only your

sister. She is my sister as well & I am giving the gift to my sister Mr. Mullick is confused. if he doesnt

accept the gift, the supplier will create a scene & if he accepts there is of course going to be problem.

Analyze the situation & suggest best course of action for Mr. Mullick to follow.Mr. Mullick if cant refuse the gift, he should accept the gift however should inform to concerned

authority in the organization about the gifts.

Is the policy on gifts properly framed?

No, Policy should further be extended to acceptance of gifts provided information/approval from

concerned person in organization. What course of action on part of Mr. Mullick would have prevented this?

Mr. Mullick should have emphasized supplier & make him understand the relationship shared

among them due to business relationship & cannot be shared at personal touch. If the gift is on

conclusion of personal relation should have been referred earlier with Mr. Mullick & organization.

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


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per year. Each bearing cost the company Rs. 36, the procurement cost & Inventory

carrying cost have been calculated at Rs. 30 & 20% respectively.

Calculate the EOQ of bearing

Data:

Total Consumption S = 300

Unit Cost Cu= 36/-

Cost of Procurement Cp= 30/-

ICC i = 20%

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


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no's of readers whose details are

Operations Management 20

Production Management 15

Supply Chain Management 14Inventory Control 11

Purchasing & Material Management 16

Total Quality Management 4

Enterprise Resource Management 5

Logistics Management 12Theory of Constraints 8

Information Technology in Operations 6

Retail Management 7

Operations Research 2

The librarian needs your help to identify the categories of book with respect to the readers and needsto know the location of storing the books to can have ease to issue the books to readers without much

time delay.

The librarian needs your helps to categories the books using Inventory Control Model and design the

storage plan to avoid any time delay.

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

i ( i f )


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

The Librarian needs to use HML Analysis to identify the frequency the stock wrt to readers and designs

storage plan accordingly.

The HML Analysis can be carried out based on the nos of reader for the books in descending orderwhich would be



Production Management 15

Supply Chain Management 14Logistics Management 12

Inventory Control 11

Theory of Constraints 8

Retail Management 7

Information Technology in Operations 6Enterprise Resource Management 5



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

G 15% d L G 5% Th l l ti th b k i t t


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Group 15% and Low Group 5%. Thus, calculating the books in percentage category



Production Management 15Supply Chain Management 14

Logistics Management 12

Inventory Control 11

Theory of Constraints 8

Retail Management 7Information Technology in Operations 6

Enterprise Resource Management 5




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Layout of Library

Operation Books Storage

HI

G

H

MEDI

UM

LO

W


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SESSION IX


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Inventory Control in JIT Age

Good Companies practicing JIT view inventories as road block to World Class Mfg.


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Inventories:-

Hide Problem (Production, Material Shortage)

Consume Resources (Other process, Pending Work)

Cause Various Waster (Rejection, Depreciation)

To Reduce the inventory

o Finished Goods in Inventory Reduction

o Pull Production

o HeijunkaLearning Production

o WIP Inventory Reduction

o Small Batch Size

o Setup Time Reduction

o Cellular Layout

o Pull Production & Kanban System

o Reduce Buffer by solving chronic problems of defects, Absenteeism, Breakdown

o Attacking fundamental problems of Small Lot Purchasing, Supplier Proximity, VMI, Kanban, Local

Vendor

Small Lot Size: Lot Size refers to quantity of an item purchased / produced / shipped at a time.


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Purchased : Purchase or Order Qty

Produced : Production or Process Batch

Shipped : Delivered Quantity

Transported : Transfer Batch

Lot Option Size: Lot for Lot Quantity (LFL)

Period Order Quantity (POQ)

Economic Order Quantity (EOQ)

Economic Manufacturing Quantity (EMQ)

JIT recommends small lot size, an ideal lot size is one piece flow or make one & move one

Advantages Disadvantages

Low Inventory Investment Frequent Machine Setups

Quick Problem Identification Loss of Production Capacity

Quality Improvement Setup Losses

Lower Manufacturing time Greater Skill of labor

Shorter Delivery & Waste Elimination

Less / Zero Overtime

Less Space and Obsolescence

Setup Time Improvement


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Stores Management

Stores Management involves receiving movement, storage and issue of items, raw material required


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for production, maintenance and operation of plant and finished goods until their dispatch to

customers

Store is the custodian of all materials and responsibilities of

Receiving

Storage

Preservation

Issue

Accounting

Stores is required for

Time lag between receipt & consumption if materials / parts

Economy of buying

Business constraints

Forward buying

Prevention of loss of sales

Economy in manufacturing

Reduction in operations waiting time

Scientific Stores Management:


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Identification of stores

Receipt of materials

Inspection of materials

Storage

Identification & Location of stock

Security of stores

Stock control

Issues & dispatch

Stock records

Stores accounting

Stock verification

Surplus stock management

Administrative control

Co-ordination & co-operation with interfacing departments

SYSTEMS OF STORAGE

CLOSED STORE SYSTEM OPEN STORE SYSTEM


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CLOSED STORE SYSTEM OPEN STORE SYSTEM

Material physically stored in closed area Material stored closed to point of use

Direct access to store personnel only Direct access of workmen

Material movement in/out of store when

accompanied by authorized documents

No authorized document needed as materials

can be picked up by operations

Expensive item liable to pilferage No chance of pilferage

Light material easy to issue Material are too heavy or bulky

Delicate, perishable items can be stores Production supervisors responsibility

Stores personnel responsibility No perpetual records

Perpetual records

TYPE OF STORES

RECEIVING STORES Incoming material, Rejection

MAIN STORES Stocking, Inventory

FG STORES FG Goods

SPECIAL STORES Bonded, Special materials

SCRAP YARD Scrap, waste, Residue

Security of stores includes specific measures against:


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Prevention of Theft (By Outsiders)

Prevention of Pilferage (By Employees)

Prevention of Malpractices (By Stores personnel)

Prevention of Fire

Prevention of Rodents & Termite Measures

Prevention of Theft

High Compound Wall

Minimum No. of Window, Glass Shutters & Open Ventilators

Fittings of windows & skylights with bars and wire mesh

Security guards at strategic points

Outsiders not to be permitted to enter store beyond serving counters

Patrolling to look after store by watchman during OFF hours

Expensive items to be kept locked in steel almirah

Insurance against burglary

Vehicle should bring only companies items should be allowed

Vehicle should be weighed @ incoming & outgoing

Prevention of Pilferage:

t f l th i d l


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Entry of only authorized personnel

Personnel items not allowed to be carried inside store

Items liable for pilferage to be mono grammed with Co.'s name or marked for identification

Fresh material against return of old ones

Surprise check / audits

Immediate enquiry incase of malpractices

Prompt disciplinary actions

Adequate publicity of punishment for pilferage

Daily security check of storage with personnel

Prevention of Malpractices:

Through checks of outgoing vehicles

Gate passes to take material out of company

Indemnity bonds or bank security from store employees

Rotation or change of duties

Recruitment of store personnel from different communities

Prevention of Fire:

D & St i f fi i t t t i l


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Doors & Staircase of fire resistant materials

No smoking in stores

Adequate earthing

Prevention of leakage of inflammable oil / grease / fluids

Small combustible materials to be stored in covered metal bins

Large quantity to be stored in small lots in more location with gaps

Telephones at strategic locations with ready access to telephones

Material storage inside store to be planned keeping fire hazard in mind

Appropriate provision of fire fighting equipment & Fire insurance cover

Smoke detectors

Fire drills & Regular inspection by local fire brigade officers

Segregation of Risk Materials

Fire doors & emergency exits to be kept absolutely clear

Prevention of Malpractices:

Fumigation of Stores

Rat Traps

Regular spray pesticides and fungicides


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SESSION X


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Q & A

Q Which of the following is not one of the Rs of Materials Management


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Q. Which of the following is not one of the R s of Materials ManagementA. Right SourceB. Right QuantityC. Right Place

D. Right Price

Q. Which of the below is not a Purchasing FunctionA. Quotation EnquiryB. Cost ComparisonC. Technical DataD. Negotiations

Q. What is the disadvantage of Centralized ProcurementA. One Point contact to allB. Restoring Emergency ProcurementC. Volume NegotiationsD. Economy of Scale.

Q. Delegation of Power (Authority) is important in which type of ProcurementA. CentralizedB. De-CentralizedC. Both of the aboveD. None of the above

Q. Representation of Components by their part nos is referred as


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p p y pA. IdentificationB. CodificationC. DemarcationD. None of the Above

Q. Which of the below are standard codification system used worldwideA. JITB. Brisch SystemC. IBM SystemD. Toyota Process Control

Q. Which of the following Statements for ABC Analysis is not trueA. Used to decide stocking policiesB. Used to improve Store KeepingC. Offers Degree of ControlD. Evaluates on material consumption

Q. Which of the following Statements for HML Analysis is not trueA. Used to plan access StorageB. Helps in identifying in Security requirementsC. Used based on Frequency of StockD. Used for disposal of Surplus & Obsolete inventory

Q Stock Out cost is


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Q. Stock Out cost isA. Cost of material in stockB. Loss of opportunity cost with material not in stockC. Cost of Procurement

D. None of the above

Q. Setup Cost isA. Change over time from one activity to anotherB. Machine DowntimeC. Production time LossD. A, B and C

Q. Of the following which is true in case of penalty costA. Delay in Material DeliveryB. Rejection of MaterialC. Early ShipmentD. None of the above

Q. How many years stock value is to be included in Balance SheetA. One YearB. Six MonthsC. Two YearsD. Not to be included

Q. Finished Goods Inventory Reduction can be done with


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Q. Finished Goods Inventory Reduction can be done withA. Pull ProductionB. Push ProductionC. Lean Production

D. A & C Only

Q. Buffer Stock Management is practiced to addressA. Emergency StockB. Reduce Setup CostC. KanbanD. Lesser Defects

Q. Procurement vide EOQ is not practiced forA. Minimum Cost of ProcurementB. Optimized Quantity of ProcurementC. Minimum Inventory Stock CostD. Annual Inventory Consumption

Q. Which of the following assumptions are not made calculating EOQA. Unit Price is independent of Order QuantityB. Unit Price is constantC. Supplier agrees to Minimum Order QuantityD. ICC & APC are common


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Q. One of the Principles relevant while designing the warehouse isA D i C it i


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A. Design CriteriaB. Inventory StockC. Safety StockD. None of the above

Q. Material Handling in a warehouse is analyzed based onA. Procurement Scale of EconomiesB. Production Scale of EconomiesC. Movement Scale of EconomiesD. None of the above

Q. StockValuation doesnt helps inA. Performance of OrganizationB. Gross Profit AnalysisC. Increasing the Profit MarginD. Inventory Management

Q. Which of the mentioned method uses forecasted pricing for stock valuationA. Weighted AverageB. Standard CostC. Average PriceD. Replacement Cost

Q. Holding of Surplus and Obsolete Stock doesnt results inA Non Moving Stock


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A. Non Moving StockB. Inventory Carrying CostC. Capital lossD. Production Cost

Q. Which among the below is not a reason for ObsolescenceA. New TechnologyB. Bulk PurchaseC. RationalizationD. Diversification

Q. Scrap generated from manufacturing process is not categorized inA. Metal ScrapB. WasteC. Recycle ScrapD. Ferrous Scrap

Q. A Purchase Order is not valid unless it doesnt haveA. Warranty ClauseB. Cancellation ProvisionC. Authorized SignaturesD. Serial No

Q. Transportation Cost cannot be reduce byA S l ti Ri ht d f T t ti


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A. Selecting Right mode of TransportationB. Reducing the Cost of ProcurementC. Better Route SelectionD. Rate Verification

Q. Road as a mode of transportation is generally used forA. Smaller VolumesB. For Heavy VolumesC. ImportsD. For Longer Distance

Q. As a Purchaser we shouldA. Allow Premium Transport ModeB. Inspect Freight BillsC. Permit vendor to Ship materialD. Negotiate for Transportation

Q. The mode of transportation isnt selected based onA. Material TypeB. Vendor TypeC. Criticality of MaterialD. Cost of Transportation

Q. Methodology not used for Supplier Survey


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A. Supplier SurveysB. Third party EvaluatorsC. Profile Evaluation

D. Facility Visits

Q. Among the following tools which is used for Vendor ratingA. IBM Quality SystemB. BRISCH SystemC. Toyota Quality SystemD. GE Supplier Chain System

Q. Which of the following are crucial elements in NegotiationsA. InformationB. TimeC. PowerD. All of the Above

Q. Classification of Importers is not done based onA. Actual UsersB. Customs UsersC. Registered ExportersD. Registered Importers


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Documents

Purchasing & Material Management 1