Purchasing and Materials Management

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PR 2030 PURCHASING AND MATERIALS MANAGEMENT

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THIS NOTES ONLY MEANT FOR REFERENCE PURPOSE

SUBJECT / MATTERS CONTAINED IN THESE MUST BE

EXPLAINED IN DETAILED MANNER FOR EXAMINATIONS

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PR 2030 PURCHASING AND MATERIALS MANAGEMENT L T P C 3 0 0 3

UNIT I FUNCTIONS OF MATERIALS MANAGEMENT 6 Introduction to materials management – objectives – Organization – Functions – Operating Cycle – Value analysis – Make or buy decisions.

UNIT II PURCHASING MANAGEMENT 8 Purchasing policies and procedures – Selection of sources of supply – Vendor development – Vendor evaluation and rating – Methods of purchasing – Imports – Buyer – Seller relationship – Negotiations - Insurance and claims managements

UNIT III STORES MANAGEMENT 8 Store function – Location – Layout – Stock taking – Materials handling – codification – Inventory pricing – MIS for stores management

UNIT IV MATERIALS PLANNING 12 Forecasting - ABC analysis – Materials requirements planning - Inventory systems – Quantity – periodic – Deterministic models – Aggregate planning – JIT.

UNIT V INVENTORY MANAGEMENT 11 Basic EOQ Model – Discount Model - Finite Production – Lot size under constraints – Application of O.R. Techniques in Materials Management.

TOTAL: 45 PERIODS TEXT BOOKS: 1. Lamer Lee and Donald W.Dobler, Purchasing and Material Management, Text and Cases, Tata McGraw Hill, 1996. REFERENCES: 1. Gopalakrishnan P.Handbook of Materials Management, Prentice Hall of India, 1996. 2. Guptha P.K. and Manmohan, Problems in Operations Research, Sultan Chand & Sons, 1994 3. R. Kesavan, C.Elanchezhian and T.Sundar Selwyn, Engineering Management, Eswar Press 2005

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UNIT I FUNCTIONS OF MATERIALS MANAGEMENT

INTRODUCTION

Materials management is a function, which aims for integrated approach towards the management of materials in an industrial undertaking. Its main objective is cost reduction and efficient handling of materials at all stages and in all sections of the undertaking. Its function includes several important aspects connected with material, such as, purchasing, storage, inventory control, material handling, standardisation etc. MATERIALS MANAGEMENT ORGANIZATION The major resources in any organization to manage are the materials out of seven main resources required to run any organization. They are management, materials, money, man power, machines, methods and matrix or facilities which include systems, plants, location and buildings etc. The purpose of materials management organization in any industry is to plan the materials requirements for the production of goods and services. The structure of the organization must be such so as to have the efficient management of materials controlling its flow, conservation and utilization. Its objective is to use judiciously and economically. The product must be produced from the available materials purchased at the economic price and bring together under one organizational component sharing responsibilities of all the aspects affecting flow, conservation, utilization, quality and cost of materials. Materials management include inventory management, purchase management, value analysis, store keeping, maintenance and upkeep of the inventories in hand and in process.

Fig 1. STRUCTURE OF MATERIALS MANAGEMENT DEPARTMENT

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Fig 2. ORGANIZATION STRUCTURE WITH FUNCTIONAL ACTIVITIES

Fig 3. MATERIAL MANAGEMENT ACTIVITIES IN AN ORGANISATION

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The organization of materials management must be such as to efficiently integrate the activities concerned with materials and regulate its use as per requirements in the production so as to have stability. The structural development and authority within the hierarchy of the system must be harmonious and integrative for proper decision making and achieving goals of the organization through proper information supply system.

SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT Materials management is defined as ―the function responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost‖.

Scope of Material Management

Material Purchasing Stores Management Inventory Other related Planning Management Functions and a). Standardisation Control b). Simplification c). Specification d). Value Analysis e). Ergonomics f). Just-In-Time

The functions of materials management can be categorized in the following ways:  Material Planning and Control  Purchasing  Stores Management  Inventory Control or Management  Standardisation  Simplification  Value Analysis  Erogonomics  Just-in-Time (JIT) 1. Materials planning and control:

Based on the sales forecast and production plans, the materials planning and control is done. This involves estimating the individual requirements of parts, preparing materials budget,

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forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales. 2. Purchasing:

This includes selection of sources of supply finalization in terms of purchase, placement of purchase orders, follow-up, maintenance of smooth relations with suppliers, approval of payments to suppliers, evaluating and rating suppliers.

3. Stores management or management:

This involves physical control of materials, preservation of stores, minimization of obsolescence and damage through timely disposal and efficient handling, maintenance of stores records, proper location and stocking. A store is also responsible for the physical verification of stocks and reconciling them with book figures. A store plays a vital role in the operations of a company.

4. Inventory control or management: Inventory generally refers to the materials in stock. It is also called the idle resource of an enterprise. Inventories represent those items, which are either stocked for sale or they are in the process of manufacturing or they are in the form of materials, which are yet to be utilized. The interval between receiving the purchased parts and transforming them into final products varies from industries to industries depending upon the cycle time of manufacture. It is, therefore, necessary to hold inventories of various kinds to act as a buffer between supply and demand for efficient operation of the system. Thus, an effective control on inventory is a must for smooth and efficient running of the production cycle with least interruptions.

5. Other related activities (a) 3S (i) Standardization: Standardization means producing maximum variety of products from the minimum variety of materials, parts, tools and processes. It is the process of establishing standards or units of measure by which extent, quality, quantity, value, performance etc. may be compared and measured.

ADVANTAGES OF STANDARDIZATION 1. Work study section is benefited with efficient break down of operations and effective work measurement. 2. Costing can obtain better control by installing standard costing. 3. More time is available to the supervisors to make useful records and preserve statistics. www.Vidyarthiplus.com www.vidyarthiplus.com 8 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

4. Reduced reductions and scrap. 5. Helps supervisors to run his department efficiently and effectively. DISADVANTAGES OF STANDARDIZATION Following are the disadvantages of standardization: 1. Reduction in choice because of reduced variety and consequently loss of business or customer. 2. Standard once set, resist change and thus standardization may become an obstacle to progress. 3. It tends to favour only large companies. 4. It becomes very difficult to introduce new models because of less flexible production facilities and due to high cost of specialised production equipment.

(ii) Simplification: The concept of simplification is closely related to standardization. Simplification is the process of reducing the variety of products manufactured. Simplification is concerned with the reduction of product range, assemblies, parts, materials and design.

ADVANTAGES OF SIMPLIFICATION Following are the advantages of simplification: 1. Simplification involves fewer, parts, varieties and changes in products; this reduces manufacturing operations and risk of obsolescence. 2. Simplification reduces variety, volume of remaining products may be increased. 3. Simplification provides quick delivery and better after-sales services. 4. Simplification reduces inventory and thus results in better inventory control 5. Simplification lowers the production costs. 6. Simplification reduces price of a product. 7. Simplification improves product quality

(iii) Specifications: It refers to a precise statement that formulizes the requirements of the customer. It may relate to a product, process or a service. Example: Specifications of an axle block are Inside Dia. = 2 ± 0.1 cm, Outside Dia. = 4 ± 0.2 cm and Length = 10 ± 0.5 cm.

(b) Value analysis :

The customer value the product and pay its cost if it justifies its use and functionality. The Value Engineering or Value Analysis evaluates this value of the product. The analysis is necessary to find out the valuewww.Vidyarthiplus.com of the product. This analysis which attempts to find out the www.vidyarthiplus.com 9 PR 2030 PURCHASING AND MATERIALS MANAGEMENT value of the product and reduces the cost is called Value Engineering or Value Analysis.

STEPS IN VALUE ANALYSIS In order to answer the above questions, three basic steps are necessary: 1.Identifying the function: Any useful product has some primary function which must be identified a bulb to give light, a refrigerator to preserve food, etc. In addition it may have secondary functions such as withstanding shock, etc. These two must be identified.

2.Evaluation of the function by comparison: Value being a relative term, the comparisonValue analysis is concerned with the costs added due to inefficient or unnecessary specifications and features. It makes its contribution in the last stage of product cycle, namely, the maturity stage. At this stage research and development no longer make positive contributions in terms of improving the efficiency of the functions of the product or adding new functions to it. approach must be used to evaluate functions. The basic question is, ‗Does the function accomplish reliability at the best cost‘ and can be answered only comparison.

3. Develop alternatives: Realistic situations must be faced, objections should overcome and effective engineering manufacturing and other alternatives must be developed. In order to develop effective alternatives and identify unnecessary cost the following thirteen value analysis principles must be used: 1. Avoid generalities. 2. Get all available costs. 3. Use information only from the best source. 4. Brain-storming sessions. 5. Blast, create and refine: In the blast stage, alternative productive products, materials, processes or ideas are generated. In the ‗create‘ stage the ideas generated in the blast stage are used to generate alternatives which accomplish the function almost totally. In the refining stage the alternatives generated are sifted and refined so as to arrive at the final alternative to be implemented. 6. Identify and overcome road blocks. 7. Use industry specialists to extend specialised knowledge. 8. Key tolerance not to be too light. 9. Utilise the pay for vendors‘ skills techniques. 10. Utilise vendors‘ availablewww.Vidyarthiplus.com functional products. www.vidyarthiplus.com 10 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

11. Utilise speciality processes. 12. Utilise applicable standards. 13. Use the criterion ‗Would I spend my money this way?‘

(c) Ergonomics (Human Engineering): The human factors or human engineering is concerned with man-machine system. Ergonomics is ―the design of human tasks, man-machine system, and effective accomplishment of the job, including displays for presenting information to human sensors, controls for human operations and complex man-machine systems.‖

Objectives of Human Engineering Human engineering (ergonomics) has two broader objectives: 1. To enhance the efficiency and effectiveness with which the activities (work) is carriedout so as to increase the convenience of use, reduced errors and increase in productivity. 2. To enhance certain desirable human values including safety reduced stress and fatigue and improved quality of life. Thus, in general the scope and objective of ergonomics is ―designing for human use and optimising working and living conditions‖. Thus human factors (ergonomics) discover and apply information about human behaviour. Abilities and limitations and other characteristics to the design of tools, machines, systems, tasks, jobs and environment for productive, safe, comfortable and effective human use. Ergonomics aims at providing comfort and improved working conditions so as to channelise the energy, skills of the workers into constructive productive work. This accounts for increased productivity, safety and reduces the fatigue. This helps to increase the plant utilisation.

(d) Just-In-Time: Production methodology which aims to improve overall productivity through elimination of waste and which leads to improved quality.

Benefits of JIT The most significant benefit is to improve the responsiveness of the firm to the changes in the market place thus providing an advantage in competition. Following are the benefits of JIT: 1. Product cost—is greatly reduced due to reduction of manufacturing cycle time, reduction of waste and inventories and elimination of non-value added operation. 2. Quality—is improved becausewww.Vidyarthiplus.com of continuous quality improvement programmes. www.vidyarthiplus.com 11 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

3. Design—Due to fast response to engineering change, alternative designs can be quickly brought on the shop floor. 4. Productivity improvement. 5. Higher production system flexibility. 6. Administrative and ease and simplicity

OBJECTIVES AND FUNCTIONS OF MATERIAL MANAGEMENT The objectives and functions of materials management can be categorized in two ways as follows:  Primary objectives  Secondary objectives

(A) Primary objectives (i) Efficient materials planning (ii) Buying or Purchasing (iii) Procuring and receiving (iv) Storing and inventory control (v) Supply and distribution of materials (vi) Quality assurance (vii) Good supplier and customer relationship (viii) Improved departmental efficiency

(B) Secondary objectives (i) Efficient production scheduling (ii) To take make or buy decisions (iii) Prepare specifications and standardization of materials (iv) To assist in product design and development (v) Forecasting demand and quantity of materials requirements (vi) Quality control of materials purchased (vii) Material handling (viii) Use of value analysis and value engineering (ix) Developing skills of workers in materials management (x) Smooth flow of materials in and out of the organization

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To fulfill all these objectives, it is necessary to establish harmony and good co-ordination between all the employees of material management department and this department should have good co-ordination with the other departments of the organization to serve all production centers.

The basic objectives of management in an organization are: (1) Sales increase through sales promotion (2) Profit maximization (3) Improvement in customer services (4) Globalization of its product sales (5) Meet the technological changes (6) Good employer - employee relationship (7) Selection of alternative materials (8) Reduction in manufacturing and other cost. (9) Social objectives In order to fulfill these basic objectives of management the objectives of materials management should be set in such a way that they should totally help to meet ultimate goals. The functions of materials management are discussed below: A) Primary Functions To meet the primary objectives, the primary functions of the materials management are given :

(i) Materials Requirements Planning (MRP) Planning of materials requirements in manufacturing is a necessary function in any organization, as inventory of materials involve about 60% of the total investment of the organization. The profit earned depends on the utilization of these materials and reducing the inventory of the materials. The latest technique used is called Just in Time (JIT) is referred practically to no inventory. However, in the present situations in any of the organization particularly manufacturing organization, it is not absolutely possible to keep no inventory of materials required for production. The MRP is a technique used to plan the materials starting from the raw materials, finished parts, components, sub-assemblies and assemblies as per Bill of Materials (BOM) to procure or produce them to support a Master Production Schedule (MPS). It is used on computers productively by any company that uses a MPS to manufacture products that require assemblies, components and materials to produce the final products. The MPS is exploded using the bills of materials to determine requirements of lower-level assemblies, components, finished parts and raw materials. It plans orders to meet these needs. www.Vidyarthiplus.com www.vidyarthiplus.com 13 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(ii) Purchasing All the organizations needs an efficient and economic purchasing and procurement of its various supplies of materials from the suppliers. The materials management department has to perform this function of purchasing and procurement of materials very efficiently. Since 50% to 60% of sales turnover is spent on the purchase of various materials, the amount of profit earned on this sales very much depends how economically the materials are purchased and utilized in the organization. The profitability depends on the efficiency by which this particular function of purchasing and procuring the requisite materials at appropriate time will be done and its availability is assured.

The functions of purchasing are as follows:

 The requisition of material is necessary by proper authority to initiate its purchase.  To select proper supplier for the materials requisitioned, before placing an order.  To negotiate about the price of the material from the supplier and it will be purchased at the cheapest price.  The quality of material must be assured and should not be compromised with the cost of the material.  The material should be purchased of right quantity and right quality at proper time at the cheapest cost.  To set the proper purchase policy and procedure.

(iii) Inventory Planning and Control The modern concept of inventory planning is that the materials should be purchased and brought in the stores just before it enters the production or sold out so that inventory cost is negligible. The zero inventories are the ideal planning. There are three types of inventories. (i) Raw materials (ii) Purchased goods (iii) Finished parts and components The inventory control of these various materials lies with the materials management department, production department and sales department. Inventory at different levels is necessary to make sure about the availability of all these types of materials and goods and their proper flow from one facility to another at different levels of production centers in a manufacturing concern. The storing of various types of materials and parts as inventory is therefore very essential before its delivery and use at different production centers. This involves inventory planning and control of materials in the stores department. Many a time, the supplier may not be in a position to supply www.Vidyarthiplus.com www.vidyarthiplus.com 14 PR 2030 PURCHASING AND MATERIALS MANAGEMENT the materials of the ordered quantity at the proper time. To maintain the continuity in production and line balance in assembly work, the various types of inventories are necessary to be maintained and kept in the stores The raw materials before being supplied to a production process, some of it is sent to store as inventory and rest is sent to production facility as per its requirements and in the same way, various parts manufactured and assembled as components and assemblies are also stored as finished parts inventories at the different places in the stores. The final products before being supplied to the customers are also stocked as inventory of the final products of the organization to meet the fluctuating demand and to regularize the supplies in the market. Thus, the inventory control is a very important function of the materials management department. The various types of inventory models are developed for the different materials to economise the purchase, supply, inventory control and production control to analyze and optimize the costs involved in ordering, set-up and inventory carrying of materials required in the production. (iv) Ascertaining and Maintaining the Flow and Supply of Materials Distribution of materials requisitioned by the various production centers and other departments must be ascertained and its flow and continuity of supply must be maintained by the materials management department. Insufficient or zero inventories many times create the situations of stock-outs and leads to stoppage of production. Failure of materials handling devices is also responsible for disruption of material supplies. Alternatives or emergency supply systems can be used for assuring production lines to continue. Uncertainty in demand and production quantity is the main factor. As the customer requirements as per his needs and liking, are changing very fast. The management has to maintain continuity in production to meet this uncertainty in demand and control the situation by proper flow of materials supply and distribution at various production facilities and other departments as per changes in production quantity. (v) Quality Control of Materials The quality of the product manufactured by the organization depends upon the quality of the materials used to manufacture that product. It is a very important and necessary function of materials management to purchase the right quality of materials. The inspection, quality control, simplification, specification, and standardization are the activities which are to be followed for the measurement of quality of the materials. The quality assurance is decided by inspection and checking. The various properties of materials as per their specifications and standard. The size and dimensional measurements within tolerance limits assures the interchangeability and reliability of components and parts. Quality is largely determined by consumer taste and liking. The market is under buyer‘swww.Vidyarthiplus.com control. Customer decides the quality of the product. Material www.vidyarthiplus.com 15 PR 2030 PURCHASING AND MATERIALS MANAGEMENT quality control aims at delivering product at higher and higher quality at lower cost. The product will be specified not only by its dimensional accuracy but its quality standards, durability and dependability, high performance, reliability and aesthetic value. Each of this factor aids cost to the product. In order to achieve high quality, the materials input to the product should be of high quality, which will have higher cost. The performance decides the reliability, which is obtained through high quality production. The performance is checked by quality inspection and accuracy. This also aids cost to the product. The quality of the materials also decides the selection of vendors and the relationship between buyers and suppliers. The specifications, size and quality of materials must be referred and if possible the standard should be followed for specifications and sizes. The types of tests required for assuring the quality should be specified and conducted to establish the standards. (vi) Departmental Efficiency The objective of this function is to ensure the efficiency of the system adopted. If the system and procedure adopted for materials management are inefficient or faulty, none of the objectives mentioned above can be fulfilled, howsoever the procedure may be good. In order to maintain the things in proper way as per planning an efficient control is necessary in the department over each and every process. Management Information System (MIS) and feedback control at every stage of working must be adopted to control and make the management and employee work as efficiently as possible to achieve the best results.

(B) Secondary Functions There can be number of secondary functions. Some of them are discussed below: (i) Standardization and Simplification The standards and specifications of various types of materials are fixed by design and technical department of the organization and they are followed by production department. Standards define the quality, reduction in sizes and variety, interchangeability of parts and products. It ensures efficient utilization of materials and reduces wastages. Standard materials are always available at reasonable cost. It also helps purchasing department in selection of materials and vendors. If less variety of items purchased and put in the stores the types of inventories will be reduced and in this way the cost of carrying the inventories in the stores will be reduced. The objective of this function will be to produce standard product reducing the overall cost of the product. (ii) Design and Development of the Product The variety in product and functionality are the important factors to promote the sales of a product. The new techniques of designing a product using Computer Aided Design (CAD) has www.Vidyarthiplus.com www.vidyarthiplus.com 16 PR 2030 PURCHASING AND MATERIALS MANAGEMENT made possible to develop variety of products at faster rate. The new technological development in manufacturing using Computer Aided Manufacturing (CAM) can produce variety of products at much faster rate with all types of flexibility in the manufacturing as compared to conventional methods. Materials management department has to act according to use of such variety of materials to produce variety of parts and ensure the supply of such materials. It should also be decided how to purchase and produce such variety of products with flexibility and economic cost.

(iii) Make and Buy Decisions The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that has developed a product or part—or significantly modified a product or part—is having trouble with current suppliers, or has diminishing capacity or changing demand. These types of decisions are the policy decisions of the management. The capacity of the organization and the various facility developed by the organization to manufacture various items is the main objective of every organization. This is the important planning activity of every undertaking. But when a company grows fast, its sales increases at rapid rate then it becomes an important matter to decide whether the company should buy the parts and components or increase and establish its facilities to cope up with the increased demand and sales. This will be greatly concern to materials management department. It will help in selecting the suppliers to buy the items at reduced cost. The material evaluation, its availability, alternative materials selection, procurement and inventory control are the functions influence the make and buy decisions. The make and buy decisions are largely based on cost economics and cost benefit analysis made by the organization using the existing production capacity of labour, skill and machines available with the factory and how best they can be utilized.

Factors that may influence firms to buy a part externally include:

 Lack of expertise

 Suppliers' research and specialized know-how exceeds that of the buyer

 cost considerations (less expensive to buy the item)

 Small-volume requirements

 Limited production facilities or insufficient capacity

 Desire to maintain a multiple-source policy

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 Procurement and inventory considerations

 Brand preference

 Item not essential to the firm's strategy

(iv) Coding and Classification of Materials This is an important function of the materials management to help the production and purchasing department of every organization. It uses its own methods of classification of materials used to manufacture the product or a company selling various goods. ABC analysis is one of the simple and standard method used by most of the firms for classification and storing their variety of materials. The materials are recognized to purchase and store as an inventory by its codes and nomenclatures. The various methods of coding are used by every organization to control the variety of materials and its quantity and price rates.

(v) Forecasting and Planning Materials requirements planning is based on correct forecasting of sales and demand of the products in the market. The market fluctuations are to be observed to control production of the organization. The various methods of forecasting are available and the materials management department can choose the one which gives the best results to the company. Forecast of future demand of sales sets the planning of materials supply. Analytical methods are adopted for systematic forecasting and planning to procure the various materials required for production. In case of fluctuating demands, there can be uncertainties in supply as well. This can be overcome by maintaining the proper quantity in inventory of short supply materials at proper time. The different techniques available to use correct forecasting have to be utilized by materials manager to plan the procurement, purchase, supply, managing the outside and inside transport and storing of the materials to maintain the supply chain lines at every production facility to meet the changes in production quantity and schedule of production to meet the fluctuating demand of sales of products manufactured by the organization. To fulfill the objectives and functions of materials management and control the activities of this department, they are thoroughly studied and analyzed.

The main functions of materials management are summarized as follows:  Materials planning as per production requirements for quantity and time  Purchasing the required materials www.Vidyarthiplus.com www.vidyarthiplus.com 18 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

 Make or Buy decisions  Receipts and inspections of materials  Storage, warehousing securities and preservation  Distribution of materials  Transportation should be expedited and must be economically done  Inventory control  Disposal of over stock, surplus, scrap and salvage of materials  Developing new sources of supply at competitive way  Ancillaries industrial development  Indigenous source of supply for foreign materials  Material cost control and cost reduction  Co-ordination and co-operation with the other departments  Research and developments in materials management and their use

OPERATING CYCLE

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UNIT 2 PURCHASING MANAGEMENT

Purchasing is an important function of materials management. In any industry purchase means buying of equipments, materials, tools, parts etc. required for industry. The importance of the purchase function varies with nature and size of industry. In small industry, this function is performed by works manager and in large manufacturing concern; this function is done by a separate department. The moment a buyer places an order he commits a substantial portion of the finance of the corporation which affects the working capital and cash flow position. He is a highly responsible person who meets various salesmen and thus can be considered to have been contributing to the public relations efforts of the company. Thus, the buyer can make or mar the company‘s image by his excellent or poor relations with the vendors.

DEFINITION : The purchasing can be defined as the process of buying and procuring the materials, parts, components, equipments, spare parts, tools and supporting items required by industries or any organization to deliver its products as per customer requirements at the competitive rates and of good quality. OBJECTIVES OF PURCHASING The basic objective of the purchasing function is to ensure continuity of supply of raw materials, sub- contracted items and spare parts and to reduce the ultimate cost of the finished goods. In other words, the objective is not only to procure the raw materials at the lowest price but to reduce the cost of the final product. The objectives of the purchasing department can be outlined as under:  To avail the materials, suppliers and equipments at the minimum possible costs: These are the inputs in the manufacturing operations. The minimization of the input cost increases the productivity and resultantly the profitability of the operations.  To ensure the continuous flow of production through continuous supply of raw materials, components, tools etc. with repair and maintenance service.  To increase the asset turnover: The investment in the inventories should be kept minimum in relation to the volume of sales. This will increase the turnover of the assets and thus the profitability of the company.  To develop an alternative source of supply: Exploration of alternative sources of supply of materials increases the bargaining ability of the buyer, minimisation of cost of materials and increases the ability to meet the emergencies.  To establish and maintain the good relations with the suppliers: Maintenance of good relations with the supplier helps in evolving a favourable image in the business circles. Such relations are beneficial to the buyer in terms of changing the reasonable price, preferential allocation of material in case of material shortages, etc. www.Vidyarthiplus.com www.vidyarthiplus.com 20 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

 To achieve maximum integration with other department of the company: The purchase function is related with production department for specifications and flow of material, engineering department for the purchase of tools, equipments and machines, marketing department for the forecasts of sales and its impact on procurement of materials, financial department for the purpose of maintaining levels of materials and estimating the working capital required, personnel department for the purpose of manning and developing the personnel of purchase department and maintaining good vendor relationship.  To train and develop the personnel: Purchasing department is manned with varied types of personnel. The company should try to build the imaginative employee force through training and development.  Efficient record keeping and management reporting: Paper processing is inherent in the purchase function. Such paper processing should be standardised so that record keeping can be facilitated. Periodic reporting to the management

PURCHASING POLICY AND PROCEDURES : Purchasing Policy : Every organization sets the purchasing policy. In order to accomplish the aims and objectives of the organization, the directives and instructions issued to purchase the materials are called the policy of purchasing. Policy means the set of principles, purposes and rules of action framed written or otherwise applied to fulfill the goals of organization.

Advantages and Disadvantages of Policies Advantages

. Policies define and clarify top management objectives. . The written instructions communicate views of management. . It provides guidance to the person to adopt the working method of same type. . It provides framework for decision-making.

Disadvantages . In large size organization it is difficult to communicate the policy and particularly the changes, which are made quite often. . All the employees may not be aware of the purpose of policy. . Greater the number of policies it is more difficult to create awareness.

PROCEDURES OF PURCHASING : The policy statements are guidelines and they should be difficult to understand. Lengthy and too many policies have to be avoided. The purchasing policy provides the guidelines and direction in the following categories. It defines: www.Vidyarthiplus.com www.vidyarthiplus.com 21 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(a) Rules of purchasing (b) Conduct of purchasing personnel (c) Social and minority business objectives (d) Operational issues

PURCHASING PROCEDURE The procedure describes the sequence of steps leading to the completion of an identified specific task. The purchasing procedure comprises the following steps as indicated in Fig.

1. Recognition of the need: The initiation of procedure starts with the recognition of the need by the needy section. The demand is lodged with the purchase department in the prescribed Purchase Requisition Form forwarded by the authorised person either directly or through the Stores Department. The purchase requisition clearly specifies the details, such as, specification of materials, quality and quantity, suggested supplier, etc. Generally, the low value sundries and items of common use are purchased for stock while costlier and special items are purchased according the production programmes. Generally, the corporate level executives are authorized signatories to such demands. Such purchases are approved by the Board of Directors. The reference of the approval is made on requisition and a copy of the requisition is sent to the secretary for the purpose of overall planning and budgeting.

2. The Selection of the supplier: The process of selection of supplier involves two basic aspects: searching for all possible sources and short listing out of the identified sources. The complete information about the supplier is available from various sources, such as, trade directories, advertisement in trade journals, direct mailing by the suppliers, interview with suppliers, salesmen, www.Vidyarthiplus.com www.vidyarthiplus.com 22 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

uggestions from business associates, visit to trade fair, participation in industries convention, etc. Identification of more and more sources helps in selecting better and economical supplier. It should be noted that the low bidder is not always the best bidder. When everything except price is equal, the low bidder will be selected. The important considerations in the selection are the price, ability to supply the required quantity, maintenance of quality standards, financial standing etc. It should be noted that it is not necessary to go for this process for all types of purchases. For the repetitive orders and for the purchases of low-value, small lot items, generally the previous suppliers with good records are preferred.

3. Placing the order: Once the supplier is selected the next step is to place the purchase order. Purchase order is a letter sent to the supplier asking to supply the said material. At least six copies of purchase order are prepared by the purchase section and each copy is separately signed by the purchase officer. Out these copies, one copy each is sent to store-keeper, supplier, accounts section, inspection department and to the department placing the requisition and one copy is retained by the purchase department for record

4. Follow-up of the order: Follow-up procedure should be employed wherever the costs and risks resulting from the delayed deliveries of materials are greater than the cost of follow-up procedure, the follow-up procedure tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It is also necessary to review the outstanding orders at regular intervals and to communicate with the supplier in case of need. Generally, a routine urge is made to the supplier by sending a printed post card or a circular letter asking him to confirm that the delivery is on the way or will be made as per agreement. In absence of any reply or unsatisfactory reply, the supplier may be contact through personal letter, phone, telegram and/or even personal visit.

5. Receiving and inspection of the materials: The receiving department receives the materials supplied by the vendor. The quantity are verified and tallied with the purchase order. The receipt of the materials is recorded on the specially designed receiving slips or forms which also specify the name of the vendor and the purchase order number. It also records any discrepancy, damaged condition of the consignment or inferiority of the materials. The purchase department is informed immediately about the receipt of the materials. Usually a copy of the receiving slip is sent to the purchase department.

6. Payment of the invoice: When the goods are received in satisfactory condition, the invoice is checked before it is approved for the payment. The invoice is checked to see that the goods were duly authorised to purchase, they were properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the order, the calculations are arithmetically correct etc.

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7. Maintenance of the records: Maintenance of the records is an important part and parcel of the efficient purchase function. In the industrial firms, most of the purchases are repeat orders and hence the past records serve as a good guide for the future action. They are very useful for deciding the timings of the purchases and in selecting the best source of the supply.

8. Maintenance of vendor relations: The quantum and frequency of the transactions with the same key suppliers provide a platform for the purchase department to establish and maintain good relations with them. Good relations develop mutual trust and confidence in the course of the time which is beneficial to both the parties. The efficiency of the purchase department can be measured by the amount of the goodwill it has with its suppliers. SELECTION OF SUPPLIER Selection of the right supplier is the responsibility of the purchase department. It can contribute substantially to the fundamental objectives of the business enterprise. Different strategies are required for acquiring different types of materials. The selection of supplier for standardised products will differ from non-standardised products. Following factors are considered for the selection of suppliers:

SELECTION OF SOURCES OF SUPPLIER AND VENDOR DEVELOPMENT

The best buying is possible only when the decision maker is familiar with all possible sources of supply and their respective terms and conditions. The purchase department should try to locate the appropriate sources of the supplier of various types of materials. This is known as ‗survey stage‘. The government department, large manufacturing and business companies like public sector firms keep the records of approved suppliers depending upon their (i) Manufacturing capabilities (ii) Financial conditions (iii) Reputation (iv) Service facility (v) Quality of product produced by them

(i) Trade Journals and Trade Directories Trade journals or magazines routinely publish the information about different companies about their technical or innovative developments of a material, product, process or service. Advertisements in trade journals about the products and services also help in selection of suppliers. Almost all the industries publish the directories of firms and companies which produce their items and services required to facilitate to refer to the selection of supplier and vendors.

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(ii) Industrial Exhibitions and Trade Fairs These are the best ways of exposure directly for the industrial products to sell and purchase of items. It is also exhibiting the latest technological developments, introduction of new products and information about latest prices. (iii) Internet Searches Now the internet is providing lot of information and access to the remote suppliers. Ecommerce and E- Business is helping to make direct purchase from the manufacturers to get the items worldwide. (iv) Local or Distant Suppliers The problems associated with distant supplies is that the cost of transportation, packing, insurance, sales tax and octroi etc. are high and the repair and maintenance become difficult by such suppliers. Therefore, it is always preferred to select local suppliers to purchase the materials provided their performance and prices are comparable to distance suppliers. (v) Small or Big Suppliers There are various types of companies and manufacturers in India for example, largescale manufacturers, medium scale, small scale and mini-scale manufacturing concerns. Each one is having its own advantages and disadvantages for supplying their products. Large-scale manufacturers find large potential buyers. They supply goods at cheaper cost. The small-scale manufacturers however render more attention to their clients and ensure about quality of items and delivery time.

VENDOR DEVELOPMENT: The survey stage highlights the existence of the source. A business inquiry is made with the appropriate supplier. It is known as ‗Inquiry Stage‘. Here a short listing is made out of the given sources of suppliers in terms of production facilities and capacity, financial standing, product quality, possibility of timely supply, technical competence, manufacturing efficiency, general business policies followed, standing in the industry, competitive attitude, and interest in buying orders etc. A survey of the following will help in developing the possible sources of supply  Specialised trade directories.  Assistance of professional bodies or consultants.  The buyer‘s guide or purchase handbook.  The manufacturer‘s or distributor‘s catalogue.  Advertisements in dailies.  Advertisement in specialised trade journals.  Trade fair exhibitions. Hence these above plays a major role in vendor development.

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VENDOR EVALUATION: The evaluation of supplier is done through the weightage assigned by measuring their performance by purchase. The criteria are 1. Cost price 2. Quality 3. Delivery The following variables to be considered while evaluating the quotations of the suppliers: 1. Cost factors: Price, transportation cost, installation cost if any, tooling and other operations cost, incidence of sales tax and excise duty, terms of payment and cash discount are considered in cost factor. 2. Delivery: Routing and F.O.B. terms are important in determining the point at which the title to the goods passes from vendor to the buyer and the responsibility for the payment of the payment charges. 3. Design and specification factors: Specification compliance, specification deviations, specification advantages, important dimensions and weights are considered in line with the demonstration of sample, experience of other users, after sale services etc. 4. Quality performance: The buyer can compare the supplier quality and define supplier quality performance 5. Legal factors: Legal factors include warranty, cancellation provision, patent protection, public liability, federal laws and reputation compliance

VENDOR RATING: Vendor rating: The evaluation of supplier or vendor rating provides valuable information which help in improving the quality of the decision. In the vendor rating three basic aspects are considered namely quality, service and price. How much weight should be given to each of these factors is a matter of judgment and is decided according to the specific need of the organization. Quality would be the main consideration in the manufacturing of the electrical equipments while price would be the prime consideration in the product having a tense competitive market and for a company procuring its requirements under the blanket contract with agreed price, the supplier rating would be done on the basis of two variables namely quality and delivery. In order to compare the performance of various vendors, it is necessary to rate them. The rating of supplier (vendor) will be done on the following parameters. (i) Quality performance (ii) Delivery performance (iii) Price performance (i) Quality Performance The supplier can be judged for quality performance from the view point of rejected lots. If a supplier has supplied 100 pieces and 10 pieces are rejected out of this lot, he has rating of 90%. Weightage = Number of lot accepted X 100 Number of lot supplied www.Vidyarthiplus.com www.vidyarthiplus.com 26 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(ii) Delivery Performance Delivery performance can be made in two ways (a) Adherence to time schedule (b) Adherence to quantity schedule. (a) Adherence to time schedule Number of deliveries made in time × weightage Total number of scheduled delivery (b) Adherence to quantity schedule Quantity supplied × weightage Scheduled delivery (iii) Price Performance Price is very important criterion for evaluating a vendor which is as = Minimum price offered × weightage vendor‘s price.

PURCHASING METHODS : The following are some of the important purchasing methods: 1. Forward buying: Forward buying or committing an organization far into the future, usually for a year. Depending upon the availability of the item, the financial policies, the economic order quantity, the quantitative discounts, and the staggered delivery, the future commitment is decided. This type of forward buying is different from speculative buying where the motive is to make capital out of the price changes, by selling the purchased items. Manufacturing organizations normally do not indulge in such buying. However, a few organizations do ‗Hedge‘, particularly in the commodity market by selling or buying contracts. 2. Tender buying: In public, all semblance of favouritism, personal preferences should be avoided. As such, it is common for government departments and public sector undertakings to purchase through tenders. Private sector organizations adopt tender buying if the value of purchases is more than the prescribed limits as Rs. 50000 or Rs. 100000. The steps involved are to establish a bidders‘ list, solicit bids by comparing quotations and place the order with the lowest bidder. However, care has to be taken that the lowest bidder is responsible party and is capable of meeting the delivery schedule and quality requirements. Open tender system or advertisement in newspapers is common in public sector organizations. As advertising bids is costly and time consuming, most private sector organizations solicit tenders only from the renowned suppliers capable of supplying the materials.

3. Blanket order system: This system minimizes the administrative expenses and is useful for ‗C‘ type items. It is an agreement to provide a required quantity of specified items, over a period of time, usually for one year, at an agreed price.www.Vidyarthiplus.com Deliveries are made depending upon the buyer‘s needs. The system www.vidyarthiplus.com 27 PR 2030 PURCHASING AND MATERIALS MANAGEMENT relieves the buyers from routine work, giving him more time for focusing attention on high value items. It requires fewer purchase orders and thus reduces clerical work. It often achieves lower prices through quantity discounts by grouping the requirements. The supplier, under the system maintains adequate inventory to meet the blanket orders. 4. Zero stock: Some firms try to operate on the basis of zero stock and the supplier holds the stock for these firms. Usually, the firms of the buyer and seller are close to each other so that the raw materials of one is the finished products of another. Alternatively, the system could work well if the seller holds the inventory and if the two parties work in close coordination. However, the price per item in this system will be slightly higher as the supplier will include the inventory carrying cost Operations Management in the price. In this system, the buyer need not lock up the capital and so the purchasing routine is reduced. This is also significantly reduces obsolescence of inventory, lead time and clerical efforts in paper work. Thus, the seller can devote his marketing efforts to other customers and production scheduling becomes easy.

5. Rate contract: The system of rate contract is prevalent in public sector organizations and government departments. It is common for the suppliers to advertise that they are on ‗rate contract‘ for the specific period. After negotiations, the seller and the buyer agree to the rates of items. Application of rate contract has helped many organizations to cut down the internal administrative lead time as individual firms need to go through the central purchasing departments and can place orders directly with the suppliers. However, suppliers always demand higher prices for prompt delivery, as rate difficulty has been avoided by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of fixing a minimum quantity is called the running contract and is being practised by the railways. The buyer also has an option of increasing the quantity by 25% more than the agreed quantity under this procedure.

6. Reciprocity: Reciprocal buying means purchasing from one‘s customers in preference to others. It is based on the principle ―if you kill my cat, I will kill your dog‖, and ―Do unto your customers as you would have them do unto you‖. Other things, like soundness from the ethics and economics point of view being equal, the principles of reciprocity can be practiced. However, a purchasing executive should not indulge in reciprocity on his initiative when the terms and conditions are not equal with other suppliers. It is often sound that less efficient manufacturers and distributors gain by reciprocity what they are unable to gain by price and quality. Since this tends to discourage competition and might lead to higher process and fewer suppliers, reciprocity should be practised on a selective basis.

7. Systems contract: This is a procedure in tender to help the buyer and the sellers to reduce administrative expenses and at the same time ensure suitable controls. In this system, the original indent, duly approved by competent authorities, is shipped back with the items and avoids the usual documents like purchase orders, materials requisitions, expediting letters and acknowledgements, www.Vidyarthiplus.com www.vidyarthiplus.com 28 PR 2030 PURCHASING AND MATERIALS MANAGEMENT delivery period price and invoicing procedure, Carborandum company in the US claims drastic reduction in inventory and elimination of 40000 purchase orders by adopting the system contracting procedure. It is suitable for low unit price items with high consumption.

IMPORT PURCHASING :

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BUYER SELLER RELATIONSHIP :

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UNIT 3 STORES MANAGEMENT

Stores play a vital role in the operations of company. It is in direct touch with the user departments in its day-to-day activities. The most important purpose served by the stores is to provide uninterrupted service to the manufacturing divisions. Further, stores are often equated directly with money, as money is locked up in the stores. Finished parts or products ready for shipment and sale are called stock and they are separately stored in a place called stockroom. Each and every type of material needs a separate place, bin or container and a room to keep it and the type of store depends upon the type of material which is stored there. The position of stores is usually located near the production facility as indicated in the Fig. 1 below.

FUNCTIONS OF STORES : The functions of stores can be classified as follows:  To receive raw materials, components, tools, equipment‘s and other items and account for them.  To inspect and check the material after receipt and before storing it.  To provide adequate and proper storage and preservation to the various items.  To meet the demands of the consuming departments by proper issues and account for the consumption.  To minimise obsolescence, surplus and scrap through proper codification, preservation and handling.  To highlight stock accumulation, discrepancies and abnormal consumption and effect control measures.  To ensure good housekeeping so that material handling, material preservation, stocking, receipt and issue can be done adequately.  To maintain the materials efficiently, avoid wastages and thefts etc.  To assist in verification and provide supporting information for effective purchase action.  To keep up-to-date records of all incoming and out-going materials to match with the balance in the stores.

ORGANISING STORES:

The stores are organised according to types of materials received in the organisation for storing and layout and location of stores. The activities of stores department are as follows: Planning all the materials required for storing Receipt of materials Inspection and verificationwww.Vidyarthiplus.com of all the materials received www.vidyarthiplus.com 36 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Storing and issue of materials Preservation and maintenance of materials stored Transport and materials handling Record keeping of all the items Stock taking and auditing Inventory control

Finished goods inventory packing and dispatching

LAYOUT : The selection of location is a key-decision as large investment is made in building plant and machinery. It is not advisable or not possible to change the location very often. So an improper location of plant may lead to waste of all the investments made in building and machinery, equipment. Before a location for a plant is selected, long range forecasts should be made anticipating future needs of the company. The plant location should be based on the company‘s expansion plan and policy, diversification plan for the products, changing market conditions, the changing sources of raw materials and many other factors that influence the choice of the location decision. The purpose of the location study is to find an optimum location one that will result in the greatest advantage to the organization.

The layout planning of stores is very important for the following reasons:  Easy receipt, handling and issue of materials.  Maintaining continuity in flow of materials. It should have minimum movement.  The space for storing and handling the materials should be fully utilised.  Proper places are selected for storing proper type of materials.  Location should be such that minimum time and labour will be necessary to locate and get the materials.  Rearrangement of storage can be done easily if necessary.  Unloading platforms for quick receiving and disposal must be built at suitable height.  Layout should be economic and efficient. The methods of storing and layout must be such that it will eliminate wastage, erosion, rusting and deterioration. For that proper preservation, safety and inspection process must be used to prevent all these things. Looking to the above considerations necessary, the following types of layouts are suggested:  Straight through flow  Straight line flow  Layout of work element

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(1) Straight Through Flow It is simple layout. The item enters from one door, they are placed in straight rows. They will be picked from rows and move in one direction along the stores bay. Different types of stores will be arranged in every row and around that sufficient movement spaces will be provided. The large warehouses for the agricultural materials will have this type of arrangements. The centralised stores of industry will also have this layout

(2) Straight Line Flow In this layout, the stores are arranged according to items incoming and outgoing from each of the storing places. They are arranged in such a way so that straight line flow of material is done. This arrangement is shown below. The small items are normally stored in such stores

(3) Layout of Work Element The stores are arranged according to work element grouping together for that particular work. These types of arrangements are flexible enough to arrange for slow moving, medium moving and fast moving items. The layout can be changed easily.

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PHYSICAL VERIFICATION :

Stock Verification: Stock Verification may be defined as the process of physically counting, measuring or weighing the entire range of items in the stores and recording the results in a systematic manner.

Need for Stock Verification: Stores represent cash. It should be carefully protected, stored, checked and valed at the close of a perios. Since the value of stock is usually very much greater than the cash held at t time, It is necessary to verify time to time in order to ensure that the materials purchased and stored are intact in the storehouse and their quality and quantity have not detoriated dring the storage process. Hence Stock verification is needed.

STOCK TAKING AND AUDITING : All the materials received in the stores and kept as inventory must be audited time to time as a materials management system to keep properwww.Vidyarthiplus.com records. It must be followed to account the receipt, issue and balance www.vidyarthiplus.com 39 PR 2030 PURCHASING AND MATERIALS MANAGEMENT of materials and goods. The system may be handled manually or by computer database. Today, the various softwares have been developed to use computerised materials management system for keeping all records accurately and it is very helpful for auditing the stores records. The standardization, simplification, classification, coding and identification of materials are very necessary in a materials management system for storage and handling the materials. Store control is provided by properly recording the receipt and issue of materials and its physical verification.

The following things are recorded in a systematic stores management system.

 Using suitable codes and nomenclature of the materials.  Classification of different items received in the stores.  Rates of each item and their total cost and quantity.  Dates and quantity of receipt and issue of materials.  Names of suppliers.  Standards and specifications of the materials.  Methods of preservation, time of expiry and life of materials use.  Location of storage place of various items.

Some fool-proof methods of verification of all these records and stock taking must be used to physically control and check the inventories of all the materials and goods stored. If the discrepancies are discovered, its causes must be found out, errors should be corrected and persons who are responsible must be informed and warned about this so that in future this thing will not be repeated. The control must be exercised by the stores supervisors and unauthorised entry of any person in the stores must be prevented.

MATERIAL HANDLING : Materials Handling is defined as movement of materials in the plant from receiving center to distribution places and production centers. It is loading and unloading of different types of materials to and from the transporting vehicles or material handling devices. Keeping the materials in different racks, storage places and bins by the material handlingwww.Vidyarthiplus.com equipments helps the material management personnel. www.vidyarthiplus.com 40 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

The objectives of materials handling are . It increases space utilization by keeping the materials in racks one above the other. The materials handling generally affect space requirements. Storing various types of materials like raw materials, parts, sub assemblies, assemblies and finished parts is facilitated by material handling devices and methods, stored at proper space. . The operating efficiency is improved by reducing material handling. Material handling involves movement of materials mechanically using different equipments or manually. By increasing load per movement using proper material carriages improves productivity and saves cost of materials handling. . The timely delivery of materials to production center or customer is essential criteria in material handling. Materials, parts and finished products must be moved from the place of storage to their destination speedily and efficiently. It improves service level if speed of movement of materials is increased. . Reducing production cost by increased capacity, improving working conditions, improving customer services, increased equipment and space utilization and reducing cost of materials handling. The material handling problems are what materials are moved, who will move and how it will be moved. They are divided in to the types of materials, how moved and methods of handling them. It enables results of reactions of man, materials and machines. Functions of materials handling Planning the plant layout, building and production center to suit the particular type of materials handling equipments. To minimize the movement of materials and material transportation. Increase the speed of material handling equipments and devices. Eliminating the backtracking or minimizing it. The flow of material should be planned so that distance moved is minimum. Material handling devices should be safe and its movement should be such that accident should not occur. Wastage of materials should be avoided during materials movement, loading and unloading. The packages should not be damaged. The cost of materials handling should be minimum. The persons operating the materials handling equipments should be trained for their efficient handling and safe working. Selection of Materials Handling Equipments (i) It depends on types of materials moved. The size, shape, weight and volume of the materials decide the type of materials handling equipments to be used. (ii) Physical and chemical properties of materials decides the type of containers to be used to carry them. Solid, liquid and gaseouswww.Vidyarthiplus.com materials are carried in different types of containers. www.vidyarthiplus.com 41 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(iii) Layout of the plant, production center and other facilities are designed to suit the materials handling. Types of buildings, width of roads, corridors, pavements, floor levels, doors, height ceiling, size of rooms and storing places, single-storey buildings and multi storey buildings decides the types of transportation system used in materials handling and types of equipments are to be used in handling the materials. Use of conveyors and type of trucks are developed according to design of all the things mentioned above. (iv) Methods, direction and movement of materials also decide the type of materials handling equipments, which are to be used. The liquids and gases will flow through pipes. Small materials like coal, ores and powdered materials flow through various types of conveyors. Trucks, overhead cranes and lifts carry large materials. Movement of these materials can be horizontal or vertical. (v) Types of machines and equipments used for production also decide the type of material handling equipments are to be used. Various types of machines are used to produce different types of parts. The production can be continuous or intermittent. The CNC machines used in Flexible Manufacturing requires different types of material movement with pallet loading and uses robots to carry materials and parts. All the materials handling system is automatically controlled by computers. (vi) Production processes and methods of manufacturing are main things to decide the type of material handling equipments. The different types of production processes and manufacturing methods require different types of material handling devices and equipments.

The various factors, which are considered for selection of equipments for materials handling, are also based on the following things: 1) Material handling cost. 2) Cost of material handling equipments. 3) Material handling efficiency and automation needed. 4) Life of equipment. 5) Safety of equipments. 6) Maintenance of material handling equipments. 7) Ease of operation.

Types of Material Handling Equipments There are several types of material handling equipments used in Industry. They are operated manually. They are also operated mechanically or by using computers and other electrical and electronic devices. For convenience they are divided into four basic types of equipments used in Industries given as follows. (1) Conveyors. (2) Industrial trucks. (3) Cranes and Hoists (4) Auxiliary equipment. www.Vidyarthiplus.com www.vidyarthiplus.com 42 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

1. Conveyors: The conveyors are material handling devices used to move materials horizontally or vertically from one point to other point over fixed path. They are expensive devices and need space and fixed route. They are gravity or powered devices commonly used for moving uniform loads continuously. The primary function of conveyor is conveying the materials. The various types of conveyors are used in industries for materials handling are: (1) Belt Conveyors. (2) Roller Conveyors. (3) Trolley conveyors. (4) Pneumatic Conveyors. (5) Buckets. (6) Chutes. (7) Pipes. Conveyors are useful for movement of materials between two fixed points for uniform loads. Materials move continuously with constant load in a fixed path. It can handle hazardous materials. The conveyors can carry materials at high temperature. The conveyors can be installed overheads 2. Industrial Trucks: These are powered operated by using electricity, diesel, gasoline or propane. They are also hand operated. They are used for variable or fixed speeds and used for the movement of mixed or uniform loads over various paths having suitable running surfaces and clearances. Industrial trucks are more flexible than conveyors. They can be moved anywhere. They do not occupy fixed space. Since they can be transported anywhere they are very useful to carry materials and handling them in a manufacturing plant. The various types of Industrial trucks used in materials handling are (i) Two wheel hand trucks. (ii) Fork lift trucks (iii) Hand Stacker. (iv) Walkie trucks. (v) Tractor-trailer train. (vi) Platform truck. Industrial trucks are used to move the materials intermittently, stacking materials over racks and over different routes. Loading and unloading is also easy in these equipments 3. Cranes and Hoists: The cranes and hoists are the material handling devices, which can move materials horizontally or vertically. They are overhead devices used for moving varying loads intermittently between points within an area, and can be moved in a fixed area of operation. They are supported and guided on rails. Their primary function is transferring materials. They can be used to move heavy loads and large items. They are flexible to move the materials. The various types of cranes and hoist used are given as follows. www.Vidyarthiplus.com www.vidyarthiplus.com 43 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(i) Overhead travelling cranes. (ii) Gantry crane (iii) Jib crane. (iv) Stacker crane. (v) Mono rail. (vi) Hoists. Cranes and hoists are used for movement of materials in fixed area intermittently. They can handle variable load of different shape, size and weight of materials. It can transfer material from any location, which is within the range of the crane. Safety is very necessary in the area where cranes and hoists are operating. The safety devices must be used in their operation. 4. Auxiliary equipment: These equipments are devices or attachments used with material handling equipment to make its use more effective.They are classified as: (i) Pallets and skids. (ii) Containers. (iii) Below – the – hook devices (for cranes). (iv) Lift truck attachment. (v) Dock boards and levelers. (vi) Pallet loaders and unloaders. (vii) Positioners. (viii) Ramps. (ix) Weighing equipments. They are again considered to classify on the basis of (1) Their capabilities. (2) Factors considered in analyzing material handling problems.

CODIFICATION:

The code numbers can identify the various materials used in any organization. The codification is defined as giving a symbol or a numerical code to a particular item. This number or symbol is the unique code number of the item. After classification of different items in the store in to sub-groups and groups according to their characteristics and use for exact identification of that material or item a code is allotted. This code can be a number or symbol consisting alphabets and numbers together. For example, the blue color for painting iron parts is used and its code number can be Pb2054. The suppliers or manufacturers also use their trade names and numbers for the items, which they sell. But these trade names or brand names of companies are many a time confusing. They supply various items in the trade names. For example, Bajaj company sell large variety of goods by its trade name and symbol. Therefore, to avoid the confusion and to purchase, store and supply to production department a specific item of required www.Vidyarthiplus.com www.vidyarthiplus.com 44 PR 2030 PURCHASING AND MATERIALS MANAGEMENT quality and characteristics the materials management identify every item by a unique code. All the organizations follow some method of standard coding system. There are different types of coding systems used to suit different firms depending upon the type of materials they are using and selling. Whichever method is used for coding, it should be flexible and simple to adopt. It should not be confusing. Advantages of Codification The systematic coding has number of advantages for purchase, stores and production department. It is the part of materials management activity.  The long names and description of items need not to be repeated every time when an item is referred by code.  It helps in accurate identification of a particular item.  Duplication of material is avoided.  It helps in standardization of materials and products and reduces variety of them.  The storing of materials, sorting and documentation becomes easier.  It helps in location of materials.  It helps in accounting and costing.  It is useful for purchase department to select suppliers.  It is useful for communication of information about materials. Disadvantages of Codification  The mistakes may be there in writing codes and it is difficult to find out correct codes.  Codes may be misunderstood.  When large number of codes is used for different materials, there may be confusion  and it may be difficult to locate the materials without knowing the codes.

CODIFICATION SYSTEMS: The various types of systems of codification used in the materials management are as follows. (i) Numerical system (ii) Alphabetical system (iii)Mnemonic system (iv) Alpha-numeric system (v) Decimal system (i) Numerical system: The numerical system of codification uses only numbers as codes of various materials kept in the stores. It is a simple method and most of the organizations use this system of codification. It is also easily understood. To represent different groups of items, simple numbers are used. The block numbers are used to represent materials belonging to each of these items as sub-groups and a dash (-) or stroke (/) symbol is used in between the numbers to represent particular material in the subgroup. www.Vidyarthiplus.com www.vidyarthiplus.com 45 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Simple number: Either one number 0 to 9 is allotted to each item of a group. If total items in a group are more than 10, then two numbers 00 to 99 are allotted and so on. Block number: The material of same characteristics or having similarities are subgrouped as one item. These materials of sub-groups will be coded as block number. The block can be of three or more numbers for example 1–1000 or 1001–2000 etc. Symbol Dash (-) or stroke (/): It is used in between numbers to represent the material belonging to sub-group.

(ii) Alphabetical system: In alphabetical system the ‗Alphabets‘ are used as symbols or codes to identify the items of stores. Group of items according to their nature and use are allotted an alphabetical starting code and other alphabets are used to identify exact items. This system will be suitable when the number of items in the store will be less. While coding by alphabets, the duplication of symbols should be avoided.

(iii) Mnemonic system: This coding system also uses alphabets but the group of items according to their nature and use are allotted an alphabetical starting code from their names and other alphabets are used to identify exact item. This is given below. Use of starting alphabets as codes helps in memorizing the codes.

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(iv) Alpha-numeric system: The alphabets and numbers together are used in this system of coding. The group of items is coded by alphabets and subgroups and items of these groups are coded by numbers to identify the exact item. This system has advantage of both alphabetic and numeric system. The numbers used also give specifications like size, length, breadth, thickness, height, volume and weight etc.

(v) Decimal system: This system of codification is similar to numeric system. In this system, 10 units of decimal numbers 0-9 are used. Some significance is attached to every digit. Normally 7-8 digits are sufficient to give all characteristics of items. For example, first, second and third digits give class, group and sub-group of items. Fourth to eighth digits specify type, size, grade, shape and condition. The number before the decimal point represents sub-assembly or class of items.

If for any particular class characteristics more than 10 sub divisions are required then one digit decimal system can be substituted by two-digit decimal system. For example, for type, size and grade, more than 10 divisions are required then decimal is used after every two digits for type, size and grade to codify 100 items in each from 00-99 as shown below:

The decimal codification system is flexible to extend it but becomes complicated by using decimal points at various places. If the decimalwww.Vidyarthiplus.com point is wrongly inserted or omitted in the code, the whole system will www.vidyarthiplus.com 47 PR 2030 PURCHASING AND MATERIALS MANAGEMENT give wrong codes and confusion will create for other departments. Therefore, it is necessary to put decimal at correct place by understanding its significance by stores person.

INVENTORY PRICING: Pricing of Raw Materials When issues are made out of various lots purchased at varying prices, the problem arises as to which of the receipt price should be adopted for valuing the materials requisitions. 1. First in first out Materials received first will be issued first. The price of the earliest consignment is taken first and when that consignment is exhausted the price of the next consignment is adopted and so on. This method is suitable in times of falling prices, because the material charge to production will be high while the replacement cost of materials will be low. 2. Last in first out Materials received last will be issued first. The price of the last consignment is taken first and when that consignment is exhausted the price of the second last consignment is adopted and so on. In timing of rising prices this method will show a charge to production, which is closely related to current price levels provided that the last purchase is made recently. 3. Weighted average cost method Under this method, material issued is priced at the weighted average cost of material in stock: WAC = Value of material in stock/Quantity in stock. 4. Standard price method Under this method a standard price is predetermined. The price of issues predetermined for a stated period taken into account all the factors affecting price such as anticipated market trends, transportation charges, and normal quantity of purchase. Standard prices are determined for each material and material requisition are priced at standards irrespective of the actual purchase price. Any difference between the standard and actual price results in materials price variance. 5. Current price According to this method, material issued is priced at their replacement or realizable price at the time of issue. So the cost at which identical material could be purchased from the market should be ascertained and used for valuing material issues.

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MANAGEMENT INFORMATION SYSTEM (MIS) : It can be defined as an organised network of information flow aimed at supporting management by furnishing relevant, reliable and timely information. Use of personal computers and electronic data processing equipments in integrated data processing systems has provided materials executives with the tools to handle information flows with unbelievable speed, facility and accuracy. The increasing use of computers in many organisations has kindled new awareness of information needs and materials intelligence.

Material intelligence concept: The terms, materials, intelligence, purchase intelligence, creative purchasing, purchase information system, materials research , material information system, etc., signify one and the same system which helps the material manager to know where the required item is. Material research becomes important accounting for the bulk of cash outflow in te company. According to our research study, this is the most neglected area of materials management. Materials research includes the steps involved in systematic investigation for locating alternative supply sources. In this context, research is defined as the concept of purposive analysis that tries to establish a basis for prediction and control

Objectives of Material Intelligence:  The material intelligence should be a subsystem of total corporate information system  The selection of right quantity of information emphasises the fact that the life blood of any business systems concept of operation is a flow of information  Information is power. The objective of material information system should coincide with the objective of the materials function- that is to ensure continuous supply of uniform quality of the item with lowest cost of ultimate product/service rendered  In this process, one has to weigh the costs and benefits of collection, compilation, analysis, and presentation of the information.  It may be worthwhile to concentrate on high cost, critical, long lead items initially for the purpose of developing a system in sufficient detail to realise material management objectives.

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UNIT 4 MATERIALS PLANNING FORECASTING: Forecasting is the method of accurate determination of these demands of sales. It estimates the quantity of production on the basis of forecasted demand. It involves past and present data and after its analysis, the management is able to forecast the future requirements and decides the quantity and capacity of production and operations Types of Forecasting 1. Short-term forecasting 2. Long-term forecasting 1. Short-Term Forecasting When the sales forecasting is done for three months to one year, it is called short-term forecasting. Some of the items like perishable materials, vegetables, food products and some of the consumer items are forecasted daily, weekly or monthly. The demands of these products fluctuate in short period of time. Benefits of Short-Term Forecasting (i) The fluctuating demands in short periods will be predicted and the inventories of materials have to be kept to meet these fluctuations. (ii) Reduce the investment on cost of large amount of materials and to machines. (iii) To arrange the finances and control the cost. (iv) To decide the short-term sales. 2. Long-Term Forecasting When the sales forecasting is done for long period of time such as five years or more than five years, it is called long-term forecasting. For construction of buildings and plants of large manufacturing organization and large project works of Government, the long-term forecasting is done. Military organizations, satellites launching, ship building, railways construction and petroleum refineries works use long-term forecasting. Benefits of Long-term Forecasting (i) The future developments and expansion programs are based on long-term forecasting. (ii) For economic development of rural and other areas where industrial activities are less, the long- term planning and forecasting is necessary. (iii) To meet long-term financial requirements of large manufacturing organization, longterm forecasting is used.

Selection and Procedure for Forecasting For selection of a forecasting method, the following things are necessary: 1. Accuracy of data. The data should be accurately available. 2. Cost of evaluation of data andwww.Vidyarthiplus.com forecasting should be economic. www.vidyarthiplus.com 50 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

3. The method used for forecasting should be simple and easily adopted. It should be easy to understand. 4. Result-oriented technique should be adopted and it should give quick and timely results. For selecting the procedure of the forecasting, the following points are useful. (i) The proper method of forecasting should be selected. (ii) Whether short-term or long-term forecasting is necessary will be decided before selecting the method of forecasting. (iii) Collect the data as much as required for forecasting. (iv) Decide the length of period for which demand may not change much. (v) Use proper statistical method and find the forecast results. (vi) Select the time for forecast. (vii) Avoid the complexity in using forecasting and use only those factors which affects more in demand fluctuations. (viii) For forecasting the demand for new products the analysis must be carefully done

FORECASTING METHODS: The methods used for forecasting the new products are: (1) Survey of customers (2) Comparisons with existing products in demand (3) Market research (4) Market trials through sales agencies. (1) Survey of Customers This method is used for development of new products. There are two types of surveys can be done to know the requirements of customers. (i) Direct Survey Method In this method, the customers are directly approached to know what they want to buy in near future and how much. The sample survey of customers is done from different areas to know their liking. Taking into consideration the various factors like economic conditions, social, religious and habitual aspects of purchasing. This method has some of the advantages as follows. (a) Buyers liking may be irregular and changing. (b) The customers may not be able to select the particular thing properly from various alternatives. They may have more than one choices. (c) Economics and other factors will not allow the customers to buy the things of their choice. (ii) Indirect Survey Method The customer‘s purchasing habits and choices will be obtained from the market retail and wholesale shops. Sales representatives and agents. This method will give the actual sales of particular type of products in the market and customer requirements. www.Vidyarthiplus.com www.vidyarthiplus.com 51 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(2) Comparisons with Existing Products in Demand If the new product is to be developed and launched for sale in the market, it should be compared with the existing established product of similar type. In competitive way, through advertisement and sales promotion it can be substituted by customers for their use provided that its price may be less and more attractive. The role of salesman is very important in this method as he has better knowledge about customers‘ liking. (3) Market Research The various market conditions, political, social and economic environment are studied for product design and development. The various factors, which are to be considered to promote the sales of new product, are analyzed from the data available from the market and then the product is manufactured to suit the customers of different markets. (4) Market Trials Through Sales Agencies How the customers prefer a particular product to buy and use will be tried through the trials from some sales agencies or directly supplying the new product to customers. Gradually if the sales increase, the product will be manufactured in more quantity. The salesman‘s estimate from his area is better in his opinion to sell that product and it may be launched. For new product, all such trials from various areas are collected and the final estimates are analyzed. For the products, which are already established for that also, the salesman estimates are revised to consider the following factors in future sales: (i) Design changes required in the product. (ii) Changes in the prices because of design changes , material changes and improved processes used to manufacture the product. (iii) Techniques used for forecasting are projecting the future based on the past historical data and they are also called projection methods of forecasting, for established products the time series analysis is useful. It may be used for new products as well if available data are limited. All other methods given above can also be used for forecasting the existing established products as well.

INVENTORY CONTROL: The methods of inventory control vary from item to item which are stored as inventory. The items are selected on the basis of their values and priorities and other factors. Thousands of materials are purchased, stored and used during production processes every year in the company. Materials management department of the company has to transact and manage them for effective control and economic production. They will have to be classified and stored according to their cost, volume, use, and other factors of production and efficient inventory control.

ABC ANALYSIS: In this analysis, the classification of existing inventory is based on annual consumption and the annual value of the items. Hence we obtainwww.Vidyarthiplus.com the quantity of inventory item consumed during the year and multiply www.vidyarthiplus.com 52 PR 2030 PURCHASING AND MATERIALS MANAGEMENT it by unit cost to obtain annual usage cost. The items are then arranged in the descending order of such annual usage cost. The analysis is carried out by drawing a graph based on the cumulative number of items and cumulative usage of consumption cost. The ABC analysis is commonly used in most of the organizations to classify the materials according to their sales values. In this method, all the items of stores are classified in three groups as A, B and C as explained below. 1. The quantity of each item used annually multiply by its unit sales price is sales 2. value of that item. All such sales values of all the items are calculated and tabulated. 3. The items, its quantity sold and sales values are tabulated in decreasing order and 4. the sales values are added item-wise and shown in next column 5. The totals of quantity and sales values of all the items used annually are found out. The percentage sales values of each item is found out and percentage of quantity of each item is also found out. These two columns are added showing percentage of total sales values item wise and percentage of total quantity of sales. 6. Seventy percent of total sales value items will be listed in A category. Its percentage quantity used is found out. 7. About 20 % of total sales value items will be listed in B category. Its percentage quantity used is found out. 8. Balanced about 10 % of total sales value items will be listed in C category . Its percentage quantity will be remaining balance. This procedure will be understood by the example given below.

Characteristics of ABC Items A-Items These items have 70% of sales value but less in quantity about 15 to 20%. The capital should not be blocked in these items. They can be ordered frequently and consumed immediately. The purchase of these items will be controlled by Director and cared most in the company. They are only 10 to 15% quantity-wise and require special attention in stores. B-Items They have about 20 to 25% sales value and same quantity to purchase. Since they are medium valued items therefore large inventory of them is not necessary. They can be ordered frequently but at the same time the quantity ordered should be such that it will be economic to purchase and its shortage should not be there. They are less valued than A items and quantity-wise about 15 to 25%. C-Items They have the least sales cost about 10%. They are required in large quantity about 50 www.Vidyarthiplus.com www.vidyarthiplus.com 53 PR 2030 PURCHASING AND MATERIALS MANAGEMENT to 60%. They can be purchased in bulk to avail large discounts and less price to pay. This will also reduce the cost of ordering and purchasing. They can be purchased once or twice in a year. They are least-valued items. Advantages of ABC Analysis  The inventory control of different categories of items will be better if costlier items are not stored for large period, which reduces capital investment.  The quantities of various categories of items are economically ordered and stored as per need. It saves the cost of ordering and carrying the inventories.  The purchasing of various categories of items become easy and discounts are also obtained on large purchase of items of C category.  Better record keeping of different categories of items helps in good inventory control The ABC categories are based on value, usage and criticality of the requirement of items. The ABC is also referred as Always, Better, Control analysis. The graph of quantity of items used and their usage value cost-wise is shown in Fig. 10 below. The ABC items are also indicated

MATERIAL REQUIREMENT PLANNING: MRP refers to the basic calculations used to determine components required from end item requirements. It also refers to a broader information system that uses the dependence relationship to plan and control manufacturing operations. “Materials Requirement Planning (MRP) is a technique for determining the quantity and timing for the acquisition of dependent demand items needed to satisfy master production schedule requirements.”

OBJECTIVES OF MRP: 1. Inventory reduction: MRP determines how many components are required when they are required in order to meet the master schedule. It helps to procure the materials/ components as and when needed and thus avoid excessive build up of inventory. 2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and component quantities, timings when they are needed, availabilities and procurements and actions required to meet

www.Vidyarthiplus.com www.vidyarthiplus.com 54 PR 2030 PURCHASING AND MATERIALS MANAGEMENT delivery deadlines. MRP helps to avoid delays in production and priorities production activities by putting due dates on customer job order. 3. Realistic delivery commitments: By using MRP, production can give marketing timely information about likely delivery times to prospective customers. 4. Increased efficiency: MRP provides a close coordination among various work centres and hence help to achieve uninterrupted flow of materials through the production line. This increases the efficiency of production system.

MRP SYSTEM The inputs to the MRP system are: (1) A master production schedule, (2) An inventory status file and (3) Bill of materials (BOM). Using these three information sources, the MRP processing logic (computer programme) provides three kinds of information (output) for each product component: order release requirements, order rescheduling and planned orders.

1. MASTER PRODUCTION SCHEDULE (MPS) MPS is a series of time phased quantities for each item that a company produces, indicating how many are to be produced and when. MPS is initially developed from firm customer orders or from forecasts of demand before MRP system begins to operate. The MRP system whatever the master schedule demands and translates MPS end items into specific component requirements. Many systems make a simulated trial run to determine whether the proposed master can be satisfied.

2. INVENTORY STATUS FILE Every inventory item being planned must have an inventory status file which gives complete and up to date information on the on-hand quantities, gross requirements, scheduled receipts and planned order releases for an item. It also includes planning information such as lot sizes, lead times, safety stock levels and scrap allowances.

3. BILL OF MATERIALS (BOM) BOM identifies how each end product is manufactured, specifying all subcomponents items, their sequence of build up, their quantity in each finished unit and the work centres performing the build up sequence. This information is obtained from product design documents, workflow analysis and other standard manufacturing information.

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Types of Inventory systems The various types of inventory control systems used to order and replenish the inventories are (1) Two-bin system (2) Maximum-minimum system (3) Economic order quantity (EOQ) system (4) Fixed order quantity and variable cycle or Q system (5) Fixed cycle and variable quantity or P system (6) Replenishment system or S,s policy (7) Ordering with quantity discounts All these systems are discussed below.

(1) Two-bin System This is a simple system in which two bins are used to store and issue the materials. Initially both the bins are filled with the material is issued from the second bin. The order is placed when first bin is empty. The order will arrive at the time just before the second bin is empty. This process will be repeated. It is a deterministic system where rate of consumption is known and the time of ordering is also known. (2) Maximum-Minimum System In this system-maximum and minimum level of inventory stored are fixed. The order is placed when the inventory level touches a particular quantity. Re-ordering is done after a period of review. If maximum amount in the store is 500 units and 50 units is safety stock. The order is placed when inventory level reaches 50 units. The disadvantages of the system are (i) If the stock consumption fluctuates rapidly, the change in the maximum and minimum level is difficult. (ii) If periodic review cannot be done, the shortages or overstock may be there. (iii) The control is necessary to keep records of inventories and maximum and minimum levels which can be altered based on demand changes and rate of consumption. www.Vidyarthiplus.com www.vidyarthiplus.com 56 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(3) Economic Order Quantity (EOQ) System The economic order quantity is the amount of materials which is ordered or produced so that the cost of ordering and carrying in inventory should be minimum. This system is used to economise the cost of inventory control. The minimum cost is obtained when ordering and carrying cost are equal. In this system, inventory is zero when order is received. Order is placed such that all the materials ordered as EOQ is consumed. This method of inventory control is normally used to store valuable and essential items in the store. (4) Fixed Order Quantity and Variable Cycle System (Q System) When this system is used the quantity ordered every time is fixed and the number of cycle for which orders are placed and cycle time may vary. It is also called reorder point or Q system. The fixed order quantity (Q) depends on, price, usage rate and maximum and minimum quantity kept in inventory. The advantages of this system are (i) Every item can be purchased at most economic price and necessary amount. (ii) The items are purchased as per need and consumption rate. (iii) When the demand changes, rapidly the reorder point reduces or cycle time is reduced and number of orders placed are increased as the order quantity Q is fixed. What amount of order and when to order are two main problems in this system of inventory control to solve. Order quantity Q is decided in such a way so as to minimise the total cost of procurement (production), storage, handling, distribution and other changes of inventory. The safety stock is always present in this system. (5) Fixed Cycle and Variable Quantity (P) System This is also called Periodic Review System. In this time bound system, period of review is fixed as three, six or twelve months. In this system, period of review is fixed and quantity ordered change as per demand or rate of consumption. The period of review P is decided such that the order quantity is economical to purchase the items. (6) Replenishment System or S,s policy This is a major system of inventory control, which is called optional replenishment system of S,s policy. When the supplier puts the restriction on minimum order quantity, the variable order quantity is decided based on S,s policy i.e., maximum level of inventory is S and minimum safety stock is s. The replenishment level is in between S and s values. Order quantity is decided as.

Order quantity = Qr = Q1 – I, where Q1 is replenishment level and I is inventory on hand. This system has advantage of combined fixed order or reorder point systems. To decide the amount of order, Qr to be placed the accurate information of inventory levels and rate of consumption must be available before the orders are placed. (7) Ordering when Quantity are Available When the materials are purchased in bulk, the supplier offer purchase discount in price of the materials purchased, if the quantity purchased is more than a particular value. Different discounts are offered on www.Vidyarthiplus.com www.vidyarthiplus.com 57 PR 2030 PURCHASING AND MATERIALS MANAGEMENT different purchase quantities and frequency of purchase. This is called quantity discount. For this type of ordering, the inventory control model which is used is further discussed in various types of inventory models.

Deterministic Models of Inventory Control Only the deterministic models will be considered to solve inventory problems here because the probabilistic models have more variability factors and too complex to solve. The following assumptions are made to solve the deterministic models of inventory control. (1) Demand of materials is assumed to be fixed and completely predetermined. (2) Demand remains constant over a period of inventory analysis. (3) Production is followed by the economic lot size system and constant production quantity per cycle. The order is placed as per economic order quantity. (4) The ordered materials arrive instantly at infinite rate when inventory level reaches zero. (5) The cycle time and orders of materials are same over a period of time say one year. (6) All the costs associated with ordering the materials and inventory carrying remains constant during this period of one year. The various notations used in these models are given below D = Total demand R = Rate of demand K = Rate of production Ci = Holding or inventory carrying cost per unit quantity per unit time. Co = Ordering cost per order or set-up cost per set-up Cs = Shortage or stock out cost unit quantity short per unit time t = Ordering or scheduling time period (cycle time) which is not prescribed tp = Prescribed scheduling time period N = Number of orders placed x = Demand during prescribed period tp with probability F (x) y = Demand during lead time L with probability G (x) z = Order level or stock level q = Quantity already present in the beginning L = Lead time f(x) = Probability density function for demand x. EOQ = Economic order quantity EBQ = Economic batch quantity ELS = Economic lot size ETC = Economic total cost www.Vidyarthiplus.com www.vidyarthiplus.com 58 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Economic Order Quantity (EOQ) This EOQ model is used to find out the order quantity or lot size which economises the total cost of ordering and carrying the materials in the store. It is also called the Wilson Rule. In order to find out EOQ, the assumptions of deterministic elementary inventory model which are given above are considered to derive the values of EOQ and Economises Total Cost (ETC). The variations of stock in inventory is shown in the Figure 2 given below. The values of quantity of materiels in the store made them the vertical Y axis and the time of storing is shown on the horizontal Z axis for a unit period say, one year. In the first period of time, the quantity supplied is Q. Quantity in inventory is zero and over this period it is consumed when inventory is consumed quantity Q. Thus, this cycle repeats. This pattern of inventory variation resembles a saw tooth hence it is called as saw tooth pattern of the inventors control.

In order to find out the quantity Q ordered economically in a cycle time, the following things are assumed

Assumptions 1) The total demand D is known in a period inventory planning (one year). 2) The cost of ordering Co and carrying inventors Ci are constant during this period. 3) The ordering period or cycle time, t remains the same. 4) All the quantity ordered Q is consumed during period and inventors is zero when order is received. 5) Quantity Q is received instantaneously. 6) The lead time is zero and hence safety stock is also zero. 7) Order quantity Q is same in every cycle time, t. 8) Rate of consumption or demand R is constant.

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Price Discount in Inventory Control When large quantity of materials are purchased from the supplier they offer discounts on a purchase lots. But since the inventory carrying cost is also high for costly materials therefore purchase of large or bulk materials with price discounts may not be economical. This type of inventory control problems of order quantities with price discounts is discussed below. Economic Order Quantities with Price Discounts When bulk of materials are to be purchased with price discounts from the supplier, the EOQ model should be used with price-discount so that economic purchase will be done. When a large order size is offered, the discounts per unit price, the Heuristic method will be used to accomodate quantity discounts. Suppose that all the assumptions of simple EOQ model are satisfied, but that the per unit cost of the goods stocked as inventory depends on order quantity as follows.

If 0 Q < K1 then goods cost @ Rs. a0 per unit

K1 Q < K2 then goods cost @ Rs a1 per unit

K2 Q < K3 then goods cost @ Rs a2 per unit ......

Ki Q < Ki+1 then goods cost @ Rs ai per unit ...... Kn Q < Kn+1 then goods cost @ Rs an per unit Here Ki represents price break points and ordinarily a0 > a1 > a2. If the quantity discount factor is ignored then Qe = If this quantity Q falls within the range (Ki, Ki+1) then the total cost per unit time of the inventory system plus the cost of materials will be Tcm = √2CoCiD + aiD. It is clear that if the order is less than Q both the cost of inventory system and cost of materials would be higher. If we were to order more than Q it is possible that increase in inventory system cost would be higher. If we were to order more than Q it is possible that increase in inventory system cost would be compensated by the saving in the cost of materials. Hence the order size which gives lowest total cost of materials is selected. This will be more clear from the example given below. Ki + 1 is a candidate for the optimal order quantity, as are Ki + 2, Ki + 3 ...... and so on. The procedure involves comparing the total cost per unit time if Q is ordered to the total cost per unit time Ki + 1, Ki + 2, ...... or Kn in order Illustration with example : A supplier of cleaning products offers a supermarket the following deal. If the supermarket buys 29 cases or less, the cost is $25www.Vidyarthiplus.com per case. If they buy 30 or more cases, the cost will be $20 per www.vidyarthiplus.com 61 PR 2030 PURCHASING AND MATERIALS MANAGEMENT case. The supermarket‘s ordering cost is $20 per order and the carrying cost is 15 percent per year.The supermarket sells 50 cases per year. Procedure when analyzing the EOQ with discounts: 1. Calculate the EOQ for the lowest cost per unit. If the EOQ is above the price break, this is the most economical quantity. 2. If the EOQ in 1 above is below the price break, use the next lowest price to calculate the EOQ. Continue calculating EOQs until a feasible EOQ is found. 3. Calculate the total cost of the EOQ, if found, and the total cost of the higher price breaks. 4. The minimum of these total costs indicates the most economic order quantity.

AGGREGATE PLANNING: Aggregate planning is an intermediate term planning decision. It is the process of planning the quantity and timing of output over the intermediate time horizon (3 months to one year). Within this range, the physical facilities are assumed to –10 be fixed for the planning period. Therefore, fluctuations in demand must be met by varying labour and inventory schedule. Aggregate planning seeks the best combination to minimise costs. Aggregate Planning Strategies The variables of the production system are labour, materials and capital. More labour effort is required to generate higher volume of output. Hence, the employment and use of overtime (OT) are the two relevant variables. Materials help to regulate output. The alternatives available to the company are inventories, back ordering or subcontracting of items. These controllable variables constitute pure strategies by which fluctuations in demand and uncertainties in production activities can be accommodated by using the following steps:  Vary the size or the workforce: Output is controlled by hiring or laying off workers in proportion to changes in demand.  Vary the hours worked: Maintain the stable workforce, but permit idle time when there is a slack and permit overtime (OT) when demand is peak.  Vary inventory levels: Demand fluctuations can be met by large amount of inventory.  Subcontract: Upward shift in demand from low level. Constant production rates can be met by using subcontractors to provide extra capacity.

Aggregate Planning Guidelines The following are the guidelines for aggregate planning: . Determine corporate policy regarding controllable variables. . Use a good forecast as a basis for planning. . Plan in proper units of capacity. . Maintain the stable workforce.www.Vidyarthiplus.com www.vidyarthiplus.com 62 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

. Maintain needed control over inventories. . Maintain flexibility to change. . Respond to demand in a controlled manner. . Evaluate planning on a regular base

JUST-IN-TIME (JIT) : Just-In-Time (JIT) Manufacturing is a philosophy rather than a technique. By eliminating all waste and seeking continuous improvement, it aims at creating manufacturing system that is response to the market needs. The JIT philosophy starts from purchasing the raw materials and is also used in the production of components, waste elimination and reduction of cost at every stage of production using quality concept. The Principles of JIT 1. Inventory and materials handling costs are as important as direct labor cost. They do not add to the value of product. The inventory carrying costs are as high as 30% of inventory cost. High technology industries such as missiles, air planes, computers and telecommunication incur higher inventory costs than consumer products, metal processing and industrial hard wares. The Just in Time procurement of materials and reducing inventory level reduces this cost. 2. Material handling investment if reduced by effective manual handling which can preserve capital for more effective use which is possible by using JIT methods. 3. By installation of processing equipment with effective handling methods and upgrading materials handling systems with lesser cost reduces cost of production in JIT manufacturing. 4. The purpose of JIT is to eliminate waste which can be excess inventory, damaged materials, process defects, repetitive handling and waiting for materials avoiding long lead times and large in process inventory or stores. Objectives of Just in Time The objectives of JIT are to keep the processing time and cost to a minimum. This is possible by studying material supply and its production processing related problems and solving them. The main objective of using JIT is to minimize the cost of the product by improving productivity and quality. The factors, which can be considered for these improvements, are 1. Product design, 2. Use of better technology. 3. Minimizing use of special equipment. 4. Reducing lead-time of manufacturing and supply of materials. 5. Reducing batch size. 6. Use of pull system. 7. Simplifying set up

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Requirements of JIT The following factors are required to achieve the objectives of JIT. (i) Use of total quality control to achieve quality in production. (ii) Employee participation in all JIT activities to achieve the targets. (iii) Small lot size manufacturing to remove all waste and scrap. (iv) Principles of Industrial engineering are followed to achieve streamline flow of materials, operation and production. (v) Identification of problems of bottlenecks and solving them. Just in Time Methodology 1) One piece lot size is followed in Just in Time. 2) It follows Group technology or cellular manufacturing system. 3) It uses total quality control, eliminates waste and inventory. 4) It adopts total preventive maintenance. 5) JIT aims at zero inventories thereby minimizing inventory investment, reducing and shortening production lead-time and set up times. It reacts faster to demand changes. 6) It utilizes services of cross-trained workers along with working flexibility. 7) It utilizes Kanban cards for materials movements and production purposes. Work loading is uniform. 8) Decentralization in various departments of the manufacturing organization is used in JIT system. 9) Thus JIT methodology encourages employees in various JIT activities for increasing profit, improvements in working through cost reduction, inventory reduction (zero inventory) and quality control. Just in time production is when it is required, materials, parts, and components are supplied as and when required.

Drawbacks of JIT (1) The time required for introducing JIT system goes beyond the normal time requirements for implementation of the system. (2) Workers attitude and culture should be improved to implement this system. (3) Top Management must agree to implement the system but they will have to convince the employees about its benefits. (4) It is difficult to achieve zero defects and zero inventory. Support from supplier of materials is necessary.

Advantages of implementation of JIT System Using JIT system in industry claims the following advantages. (1) It increases the operational efficiency, quality and organizational effectiveness. (2) It increases awareness of problemswww.Vidyarthiplus.com and their costs. www.vidyarthiplus.com 64 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

(3) More profits are obtained by reducing lot sizes, less work in process inventories, less raw materials inventory and less indirect cost. (4) The quality goods are produced because of reduced defects, waste and scrap. (5) Participation of workers for improvement increases productivity and customer satisfaction is obtained by timely delivery of their demands. (6) Overall working of production systems are improved and higher productivity is obtained. The push system and pull system of parts handling are shown in Fig. 1 and Fig. 2 below.

UNIT 5 INVENTORY MANAGEMENT

In dictionary meaning of inventory is a ―detailed list of goods, furniture etc.‖ Many understand the word inventory, as a stock of goods, but the generally accepted meaning of the word ‗goods‘ in the accounting language, is the stock of finished goods only. In a manufacturing organization, however, in addition to the stock of finished goods, there will be stock of partly finished goods, raw materials and stores. The collective name of these entire items is ‗inventory‘. The term ‗inventory‘ refers to the stockpile of production a firm is offering for sale and the components that make up the production. Objectives of Inventory Management The primary objectives of inventory management are: (i) To minimize the possibility of disruption in the production schedule of a firm for want of raw material, stock and spares. (ii)To keep down capital investment in inventories. So it is essential to have necessary inventories. Excessive inventory is an idle resource of a concern. The concern should always avoid this situation. www.Vidyarthiplus.com www.vidyarthiplus.com 65 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

The investment in inventories should be just sufficient in the optimum level. The major dangers of excessive inventories are: (i) the unnecessary tie up of the firm‘s funds and loss of profit. (ii) excessive carrying cost, and (iii) the risk of liquidity. The excessive level of inventories consumes the funds of business, which cannot be used for any other purpose and thus involves an opportunity cost. The carrying cost, such as the cost of shortage, handling insurance, recording and inspection, are also increased in proportion to the volume of inventories. This cost will impair the concern profitability further. On the other hand, a low level of inventories may result in frequent interruptions in the production schedule resulting in under-utilization of capacity and lower sales. The aim of inventory management thus should be to avoid excessive inventory and inadequate inventory and to maintain adequate inventory for smooth running of the business operations. Efforts should be made to place orders at the right time with the right source to purchase the right quantity at the right price and quality. The effective inventory management should  Maintain sufficient stock of raw material in the period of short supply and anticipate price changes.  Ensure a continuous supply of material to production department facilitating uninterrupted production.  Minimize the carrying cost and time.  Maintain sufficient stock of finished goods for smooth sales operations.  Ensure that materials are available for use in production and production services as and when required.  Ensure that finished goods are available for delivery to customers to fulfil orders, smooth sales operation and efficient customer service.  Minimize investment in inventories and minimize the carrying cost and time.  Protect the inventory against deterioration, obsolescence and unauthorized use.  Maintain sufficient stock of raw material in period of short supply and anticipate price changes.  Control investment in inventories and keep it at an optimum level.

BASIC ECONOMIC ORDER QUANTITY (EOQ) MODEL: The size of an order that minimises the total inventory cost is known as the economic order quantity, (EOQ). The various notations used in these models are given below D = Total demand R = Rate of demand K = Rate of productionwww.Vidyarthiplus.com www.vidyarthiplus.com 66 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Ci = Holding or inventory carrying cost per unit quantity per unit time.

Co = Ordering cost per order or set-up cost per set-up

Cs = Shortage or stock out cost unit quantity short per unit time t = Ordering or scheduling time period (cycle time) which is not prescribed

tp = Prescribed scheduling time period N = Number of orders placed x = Demand during prescribed period tp with probability F (x) y = Demand during lead time L with probability G (x) z = Order level or stock level q = Quantity already present in the beginning L = Lead time f(x) = Probability density function for demand x. EOQ = Economic order quantity EBQ = Economic batch quantity ELS = Economic lot size ETC = Economic total cost

Economic Order Quantity (EOQ) This EOQ model is used to find out the order quantity or lot size which economises the total cost of ordering and carrying the materials in the store. It is also called the Wilson Rule. In order to find out EOQ, the assumptions of deterministic elementary inventory model which are given above are considered to derive the values of EOQ and Economises Total Cost (ETC). The variations of stock in inventory is shown in the Figure 2 given below. The values of quantity of materiels in the store made them the vertical Y axis and the time of storing is shown on the horizontal Z axis for a unit period say, one year. In the first period of time, the quantity supplied is Q. Quantity in inventory is zero and over this period it is consumed when inventory is consumed quantity Q. Thus, this cycle repeats. This pattern of inventory variation resembles a saw tooth hence it is called as saw tooth pattern of the inventors control.

In order to find out the quantity Q ordered economically in a cycle time, the following things are assumed www.Vidyarthiplus.com www.vidyarthiplus.com 67 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Assumptions 1) The total demand D is known in a period inventory planning (one year). 2) The cost of ordering Co and carrying inventors Ci are constant during this period. 3) The ordering period or cycle time, t remains the same. 4) All the quantity ordered Q is consumed during period and inventors is zero when order is received. 5) Quantity Q is received instantaneously. 6) The lead time is zero and hence safety stock is also zero. 7) Order quantity Q is same in every cycle time, t. 8) Rate of consumption or demand R is constant

EOQ – DISCOUNT MODEL: Price discounts are offered by suppliers to encourage large orders. Benefits for the purchaser from bigger orders include the reduction in unit price, lower shipping and handling costs and a reduction in ordering costs owing to fewer orders. These benefits have to be measured against the incremental increase in carrying costs. As the order size increase, more space must be provided for storage, the cost of holding the larger inventory level correspondingly increase. Another pertinent though difficult to quantify, consideration is the risk of obsolescence or functional depreciation larger inventories magnify the loss that would result if design or demand changes make the stored supplies less valuable. Quantity discounts are evaluated by first determining the EOQ without a discount. When Q is less than the minimum quantity at which the discount is allowed, the total annual stocking cost is calculated for the minimum order quantity. This cost is then compared to the annual stocking cost when Q is the ordering quantity. If the discounted price results in lower annual expense, the procedure is repeated using the minimum quantity from the next price break. The comparisons are continued until the quantity producing the lowest total annual stocking cost is identified. Then the savings allowed by the higher stock levels are rated against the risk of holding these levels. The risk is gauged by the stability of past demands, resale value and suspected market trends. FINITE PRODUCTION : Finite production rate model is an extension of the EOQ model. The following assumption of the EOQ model is not used in the finite production rate model All the quantities ordered are received at the same time (the assumption is suitable when the quantities are purchased) An assumption in the finite production rate model The quantity ordered is produced at an uniform rate, (the assumption is suitable when the quantities are produced) The finite production run model is also called the Economic Production Quantity (EPQ) model. www.Vidyarthiplus.com www.vidyarthiplus.com 68 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

As in the EOQ model, assume that the inventory at the beginning is zero. The production facility is set up to produce Q units. If it‘s optimal to produce Q units in the beginning, it‘s also optimal to produce Q units next time when the inventory level reaches zero, because no cost parameter changes in between two production runs. Therefore, like the EOQ model, the finite production rate model also has a constant order size and an inventory cycle. The length of the inventory cycle is the length of time over which the demand is Q . Thus, the length of cycle in years. Q T

In order to meet the demand (feasibility), the production rate, Q. Thus, for some time after the start of a new production run, the inventory level increases. The rate of increase is Q . The length of each production run is called the uptime and is denoted by Q. The uptime is the time required to produced order quantity, Q . So,

Q T 1 P

If Q the production must be stopped before the end of the cycle in order to avoid producing more than the order quantity, Q units. Thus, there is a idle time or downtime in each cycle. The downtime is denoted by . Q Q T T T 2 1 P Unlike the EOQ model, the maximum inventory in the finite production rate model is not Q because some items are used to meet the demand before the receipt of all of the order quantity. The maximum inventory is the inventory accumulated over the uptime. Since the inventory level increases at the rate of P , the maximum inventory,

Q H T1 P P Q 1 P P

Slope = P - H

Slope = - Inventory

T1 T2 Time T www.Vidyarthiplus.com www.vidyarthiplus.com 69 PR 2030 PURCHASING AND MATERIALS MANAGEMENT

Note that the downtime demand is met entirely from the maximum inventory. Hence, downtime can also be obtained as follows

H Q Q Q T 1 2 P P The formula for the optimal order quantity is shown below = annual demand P = the production rate in units/year Q = size of each production run

K = cost of setting up production h = annual holding cost per unit h´ = h(1- /P)

2K Optimal solution, Q* , Economic Production Quantity (EPQ) h'

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OR TECHNIQUES IN MATERIALS MANAGEMENT:

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