Organization For Materials Management ( 1 )

Every organization, big or small, depends on materials and services from other organizations to varying extents. These materials and services are obtained through exchange of money and the physical arrangement of it all is called Materials Management or even Material Management.

Various materials used as inputs, such as raw materials, consumables & spares, are required to be purchased and made available to the shops / users as & when needed to ensure uninterrupted production. Therefore, efficient management of input materials is of paramount importance in a business organization for maximizing materials productivity, which ultimately adds to the profitability of the organization

In many manufacturing organizations, the cost of materials alone happens to range from 40 % to 60 % of the total expenditure. Obviously, a better management of material is expected to ensure reduction in overall cost of operation and smoothness in supply of inputs. This requires well-coordinated approach towards various issues involving decision-making with respect to materials

Integrated Materials Management

All the materials related activities such as material planning & indenting, purchase systems & procedure, variety reduction through standardization & rationalization, reducing uncertainties in demand & supply, handling & transportation, inspection, proper storage & issue of materials to the internal customers, inventory management, vendor management & finally disposal of obsolete, surplus & scrap materials etc. taken together is termed as Integrated Materials Management

Materials management, thus, can be defined as a joint action of various materials activities directed towards a common goal and that is to achieve an integrated management approach to planning, acquiring processing and distributing production materials from the raw material state to the finished product state

Materials Management provides an integrated systems approach to the co-ordination of the materials activities and the control of total material costs. Obviously, the MM organization is derived from its fundamental objectives. Since Materials management function ranges from receiving the material requisition to placement of purchase orders and then on the other hand to receiving the material and making it available to the users, a commonly seen organization of materials management is divided into an integrated sections as:

Purchasing Stores Inspection Traffic

Once the whole Materials Management function has been divided into its different sub-functions as above, the sub-functions too are divided into their functions which are usually seen to be as :

1

Purchasing

Administrative: Purchasing administration involves all the tasks associated with the management process, with emphasis on the development of policies, procedures, controls and the mechanics for coordinating purchasing operations with those of other departments

Buying: It addresses to a wide gamut of activities such as reviewing requisitions, analyzing specifications, investigating vendors, interviewing sales people studying costs and prices and negotiating

Expediting: This is basically the order follow up activity involving various types of vendor relationship work.Reviewing Order status, providing clarifications on transportation, writing and emailing vendors etc

Special projects (Non routine): In order to facilitate smooth purchasing in a highly competitive business environment, purchasing authorities have to keep building the capacity to do better by taking up as special projects activities such as vendor development, vendor registration, value analysis, market studies, system studies etc

Routine: Purchasing process or procedure involving routine or every day activities such as dealing specific purchase file, placing orders, maintaining records of commodities, vendors etc.  

TRANSPORTATION AND LOGISTICS MANAGEMENT (2)

Transportation is the process of moving the goods from one physical location to another. As competition has intensified over the years, and companies are expanding their operation globally, transportation has become a vital function in the logistics process of organization. In the entire logistics process of ordering, transportation, storage and processing of goods, transportation is quantitively the largest function. It is a process involving space and time dimensions that enhance the value of the logistics process by delivering the goods at the right time and at right place. Transporters need to adopt the changing market needs if they want to stay ahead of the competition. Their focus should not only be on transporting goods, but also on meeting customer needs effectively. Some transporters focus on leveraging competitive advantage by providing warehousing facilities, logistics consulting and so on. Transporters offering such non-transporting facilities apart from their regular services can become strategic partners and eventually, a source of competitive advantage to companies. Efficient transporters must have a long term commitment and an inclination towards open communication and mutual sharing of information. They need to be cooperative with the firm and pursue total quality improvement on a continuous basis. Finally, efficient transporters should be inclined to share the risk and rewards, which come in the process of their relationship with the firm.

Logistics is the process of getting products and services where they required and when they are desired. Delivery of goods and services from those who produce them to those who want them as been taking place since the beginning of civilization.However, since the modern day customer expects products to be available at all times and with the maximum freshness,campanies need to ensure that their logistics process matches the highest standards.

2

Global companies operate in an intensely competitive environment and hence they try to offer customers the best of products and services with a competitive advantage. This situation has benefited the customers who have access to world-class quality products and services.

Although tool for efficient supply chain were available in the seventies, firms started increasingly adopting those tools in the nineties. Supply chain management gained imp. during the same period. Previously, firms used supply chain to cut cost rather than build them to leverage competitive advantage. But of late, for companies operating on a larger scale such as dell computers, and car manufacturers such as General motors and Ford Motors Company, supply chain management is the central of their business processes. Organizations need to stress on the imp. of continuous improvement in the supply chain efficiency to attain success in the market. Nokia is a good e.g. of a company which has adopted efficient supply chain measures like rapid response manufacturing, quick-ship logistics, and a global supply web that links its supplier and plants.

Modern logistics management is based on serving the customer in an efficient manner. Modern customer driven logistics management focuses on delivering products on time, with the least cost and without any damages. Companies like HLL, for instance, have developed a systematic logistics management process which checks the credibility of its transporters by scrutinizing the cargo at the delivery point in comparison with its condition at the time of dispatch, the time taken by the transporters to deliver the goods, the quality of trucks that are being used and also the past record of the transporter, and so on. Logistics management is the management (ie. the planning execution , and control) of all factors that affect the materials flow &the information about it ,seen from the perspective of customer requirements, for the purpose of achieving high delivery reliability, a high degree of delivery completeness &a short delivery time.

Logistics management function involves short term materials planning, the supply of raw material &other purchased goods ,internal transportation ,storage &physical distribution. it is some times also referred to as integrated business logistics.

WAREHOUSING (3)

A warehouse is typically viewed as a place to store inventory. However, in many logistical system designs, the role of the warehouse is more properly viewed as a switching facility as contrasted to a storage facility. The warehouse is where the supply chain holds or stores goods. Warehousing provides time and place utility for raw materials, industrial goods, and finished products, allowing firms to use customer service as a dynamic value-adding competitive tool.

There are two types of service functions that a warehouse performs. They are:-

The general warehouse : - where goods are stored for a long period and where the prime purpose is to protect goods until they are needed. There are minimum handling, movement and relationship to transportation.

The distribution warehouse: - it has a dynamic purpose of movement and mixing. Goods are received in large volume uniform lots, stored briefly and then broken down into small individual orders off different items required by the customer in the marketplace. This is wieldy used in distribution system

Warehousing provides certain benefits like, shipment consolidation, receives & consolidates materials, lowest possible transportation rate & reduced congestion at a customer's receiving dock.

3

The main objectives of efficient warehouse operations include:

Provide timely customer service. Keep track of items so they can be found readily & correctly. Minimize the total physical effort & thus the cost of moving goods into & out of

storage. Provide communication links with the customers.

Operating a warehouse includes certain costs like;

Capital cost: - cost of space and material handling equipment. Operating cost: - cost of labor and the measure of labor productivity is number of unit

that an operator can move in a day.

Warehouse activities include, receiving goods, identify goods, hold goods, pick goods, marshal goods, dispatch goods & operate an information system. Also five basic service benefits are achieved through warehousing like, spot stock, assortment, mixing, production support, & market presence.

Centralization or Decentralization is a matter of convenience. A very big company having a large number of product lines may have a main warehouse which can serve as a base, with decentralized warehouse for each division or unit of production, preferably located as near the unit as possible. Another possibility is that the main warehouse can be completely eliminated & supplies can be delivered directly to the sub warehouses. In a small company one warehouse would be adequate to serve all units. A large company marketing a variety of goods may have a central warehouse for finished goods at its factory location, besides a large number of stock points or depots in various cities .

Centralized VS Decentralized Warehousing:-

SLCentralized Decentralized

1. Decisions are made at a central location for the entire supply network.

Decisions are taken independently.

2. Centralized control leads to global optimization.

Leads to local optimization.

3. Allow use of coordinated strategies Each facility identifies its most effective strategy without considering the impact on the other facilities in the supply chain.

4. Minimize the total cost of the system subject to satisfying some service-level requirements.

More cost is Involved in this system.

5. More Internal Documentation may become necessary.

Less Internal Documentation needed as compared to centralized warehousing.

6. Stock Turn-over is increased & the probability of deterioration during storage is correspondingly reduced.

Stock Turn-over may not be increased & probability of deterioration during storage may be increased.

7. Fewer personnel will be required for managing.

More personnel will be required for managing.

8. Unnecessary duplication of records is avoided.

Unnecessary duplication of records takes place.

4

Scope of Materials Management (4)

Materials management is responsible for the coordination of planning, sourcing, purchasing, moving, storing, and controlling materials in an optimum manner so as to provide a pre-decided customer at a minimum cost. The scope of materials management is vast and can be broadly identified as follows:

Materials planning and control: - based on the sales forecast and production plans, the materials planning and control are done. This involves estimating the individual requirements of parts, preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoring the performance in relation to production and sales.

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

Stores and Inventory: - 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. Stores is also responsible for the physical verification of stocks and reconciling them with book figures.

Location and layout: - while selecting the location of warehouse for the storage of raw materials, the following are to be considered: cost of investment expenses incurred for supplying inputs, manufacturing and placing the product with the consumer, availability of suitable land, water, power, manpower, sources of raw materials & market, availability of facilities, etc. The layout of a warehouse should be suitable to the commodities that are being received, stored & issued. In short, the items, which are frequently handled, should be located in such a way as to minimize the distance to be transported.

Value Analysis: - is concerned with ascertaining whether the material purchased is worth for the money, for the required purpose & for the end use. It evaluates the materials & then eliminates those, which are irrelevant so that unnecessary cost can be reduced. Value analysis investigates whether the buyer is obtaining the most economical material or equipment suitable for the end product.

Material audit:- is performed to check the regularity of the material transaction i.e. purchasing, receiving, storing, issuing, etc & to ensure that they have had sanction of the competent authority. Thus material auditing helps to reduce the negative consequences.

Material handling:- is considered with moving the right quantity of materials- raw materials, machinery parts, WIP, & finished goods- at the right time in a given space. It involves with the art of movement, packing & sorting of materials mechanically or manually.

Standardization: is the orderly & the systematic formulation, adoption, application & review of industrial standard which leads to the simplification or variety reduction. This implies reducing unnecessary varieties and standardizing to the economical sizes, grades, shapes, colors or types of parts.

Vendor Development:- refers to the selection of vendors for the supply of right materials at the right time. Quotations from various suppliers are invited & the best one with reduced cost & increased quality is selected & purchased.

Disposal of Scrap & Surplus: - the materials which are not up to the mark & which are defective or in excessive are disposed of as scrap or for a meager value.

5

Material management at micro and macro levels (5)

Material management at micro level:

These processes are split in to a no. of independent functions and a functional organization is built up on the basis of related group of similar activities based on the principles of organization. Jobs are grouped in to carefully delineated activities grouped into departments and subdivided according to the necessity. It will be seen that in many organizations material management is not tied up to group activity or a specified structure, but is largely systems oriented, which takes in to account functional dependence with wide range of partial activity. Management of materials requires control through the flow cycle which often goes beyond the scope of production operation and stretch beyond company operation. An organization is an open system so it has also impact up on the external environment such as suppliers, customers, competitors and others, and community at the large. Thus material flow inside the organization provides a means to have close look at the micro level. Material management at macro level:

Material system: materials move from resources in the ground to the pool of available supply. This supply system consumes energy to extract or harvest materials and process them for use. The material system, however, is not only physical, it is also human, social and cultural. The total system: control of materials flow does not depend up on either the materials or the environment, i.e. the physical structure of the system. It rather lies with the human institution, viz. producers, consumers, technologists and government.

Supply: the supply of materials and energy is derived from the basic resources which are made available to the economy through socio-economic industrial systems. Adequacy of supply depends up on the discovery-geologically, territorially or scientifically-of economic resources and creation of socio-economic industrial system built on these resources, to prepare for the market products in the required form and desired purity.

CHALLENGES OF MATERIAL MANAGEMENT(6)

1. Scarce capital for inventing in material inventory.-now a days most of the companies are facing limited capital for investing material management. It been one of the most crucial challenge for the MM

2. Difficulty in forecasting demand accurately.-predicting the demand is one of the challenge of MM due intense competition and heavy demand

3. Increasing cost of land and storage space: last few decades the cost of increased, and so its one of the opposing factor.

4. Selection of appropriate vendors.-suppliers are the most important external factor which have a great impact over the MM.

5. Optimizing purchasing quantity of materials.-optimize amount of material should be purchased to support continuous production &par level should be always maintained.

6. Diversifying of product lines. when product lines are diversified the material entire production set up along with the raw material should be changed.

7. Optimizing time and quantity of demand for products.-8. Managing information.-

6

STANDARDISATION (7)STANDARDISATION (7)

Standardization is required not only for ensuring procurement of the right quality of incoming material, but also for cost reduction. It will be remembered that considerable publicity was given to the large scale cost reduction in material cost through standardization.

STANDARDISATION IN INDIA

Effective steps have been taken in a number of organizations in India for cost reduction through reduction in the number of stores items. The aim of standardization should be to have uniform standards for similar items, and the standards evolved should take cognizance of the indigenous availability of materials to the maximum extent possible. Realizing this importance, the Indian standards Institution (ISI) has promoted over 7000 standards covering raw materials, components and finished products. These are widely publicized and are readily available from the Indian Standards Institution.

“A standard is defined as a model or general agreement of a rule established by authority, consensus or custom, created and used by various levels of interest”. For instance, an individual may be the starting point of using the standard and then his department will use the same standard to suit its needs .The firm may similarly prepare, by consulting different departments, a standard for guiding the activities. The related industries in the industry group may also prepare industrial standards. At the national level, by consulting manufactures, scientists, users and government departments, national standards are evolved. Such national standards are presented and discussed to form international standards. The standards could cover a variety of industries, such as engineering, textile, chemical, pharmaceutical, agricultural as also education. The topics covered under standards can include purchase contacts, forms, sampling, testing, safety measures etc.

SIMPLIFICATION

The process of standardisation logically leads to simplification or variety reduction. This implies reducing unnecessary varieties and standardizing to the most economical sizes, grades, shapes, colours, types of parts and so on. In large organization handling 50000 items, there are several items under stock having very little variation in quality, dimension or functional effectiveness. Nevertheless these continue to be in stock for historical reasons. Practical experience indicates that often this plethora of variety is not even perceptible.

These items can be analyzed by their frequency of usage or movement analysis over the last few years. Frequency or movement analysis would bring out items, which are seldom used or not used at all. On the basis of this analysis, a company could set standards to replace these items. The setting up of a standard depends on the effect the dimension variation has on the performance of the product.

IMPORTANCE OF STANDARDISATION

Standardization enables the materials manager to achieve overall economy and ensures interchangeability of parts. Since more than one manufacturer can supply standard items, it will imply better availability, better price and better delivery. Standardization also implies routinising purchase efforts, less stock and hence less obsolete items. It also means less inspection efforts; as a matter of fact many organization do not check routine items bearing the ISI mark in a detailed manner and resort to inspection of only a small fraction of items. It also possible to enter into rate/running contact with standard items. At the suppliers end, manufacturing into economic lot sizes is nit a problem for standard items.

7

VALUE ANALYSIS (8)

Value Analysis is an important and powerful approach for improvement in the performance of products, systems or procedures and reduction in costs without jeopardize their function (i.e. Equivalent performance at a lower cost). “techniques of Value Analysis and Value Engineering ”as an organized creative approach which has for its purpose the efficient identification of unnecessary cost i.e. cost which provides neither quality, nor use, nor life nor appearance, nor customer features

Value – MeaningValue is easy to understand but difficult to define. It is easy to understand because people know what they value and what they don’t. Value is what the customer are demanding – the right combination of product quality, fair price and goods and services.

Value and Value EquationThe value equation offers one convenient way of approaching the task of defining

value for an identified customer and determining hoe the operations management function can affect the perceived value of the firm’s goods and services.The value equation is written as

PerformanceValue =

Cost Performance is described in terms of quality, speed and flexibility. These 3

components need to always carry equal weights. So,

Performance = w1* Quality + w2 * Speed + w3 * Flexibility

VALUE ANALYSIS (0R VALUE ENGINEERING)Value Analysis involves systematized techniques for reducing cost and improving the

performance of materials, components and manufacturing process. Value Analysis is defined as “an intensive appraisal of all the element, components and manufacture or construction, procurement, inspection, installation and maintenance of a product and its components including the applicable specifications and operational requirement in order to achieve the necessary performance, maintainability and reliability of the item at a minimum cost”.Some definitions of Value Analysis

Value Analysis is the investigation of the performance of a material or a component in terms of its function and its unit price to develop the most effective specification at the lowest ultimate cost. Value Analysis is an organized creative approach which has for its purpose, the efficient identification of unnecessary cost. (ie the cost which does not add to quality, use, life, appearance or other customer features)

Difference between Value Analysis and Value Engineering

The term Value Analysis and Value Engineering are often used interchangeably but they do not mean the same. While the concepts are similar, there is a basic difference between two. The Value Analysis is a technique which applied to existing items or products, usually after introducing them to the market place. It is an after the fact activity.

Value Engineering is the application of value analysis techniques during the product

design and development. Value Engineering techniques are applied during new product and development, whereas Value Analysis is emphasized as away of achieving continuous improvement. The only way to maintain customers and demonstrate market leadership is to offer improved product and services on a continuous basis

8

DEMAND ESTIMATION (9)

The demand has to be estimated first. This is the most important factor that has to be kept in mind. The reason for this is that the demand is what drives the companies to produce more finished products. The demand has to be kept in mind and should be a very important criterion in any organization. The reason for this is that the demand plays a major role in all the other factors of the company too and has a cascading effect.

Independent Demand Independent Demand Uncertainty in terms of requirements for items in manufacturing inventory exists only

for those items that will be delivered to external consumer. This type of item requirement is called on independent demand

Independent demand is unrelated to demand for other items in the manufacturing inventory

Independent demand must be forecast

Dependent demandDependent demand Demand for items that are subassemblies or components parts to be used in

production of finished goods Most manufacturing inventory items sub to dependent demand Once the Independent demand is known, the depended demand can be determined Dependent demand should not be forecast

Inventory control systems for Independent demand items

Two Inventory control systems used for Independent demand items are:

1. Continuous Review System (Q system)In this system a fixed quality of the material or items is ordered every time whenever the inventory on hand reach a certain level referred to as re-order level (ROL) or order point.

Re-order level (ROL)= Normal or average Demand rate x Normal average lead-time

2. Periodic Review System (P system)Under this system inventory levels are reviewed at fixed time intervals and orders are placed for enough quantity of material to bring the inventory level back to some predetermined level referred to as Desired inventory level (DIL)

Annual demand (units)Number of orders per year (N)=

EOQInventory control systems for Dependent demand items

Material Requirement Planning (MRP): Material Requirement Planning is a computer based information system designed to handle ordering and scheduling of dependent demand inventories. A production plan for a specified number of finished products In the form of master production schedule is translated into requirements of component parts and raw material working back from the due date to determine when to order and low much to order

Objectives of MRP1 To improve customer service by meeting delivery schedule promised and

shortening delivery lead times.2 To reduce the inventory costs by reducing inventory levels.3 To improve plant operating efficiency by better use of productive resources.

9

ABC ANALYSIS (10)

ABC Analysis is also referred to as Always Better Control. ABC analysis is a basic inventory control technique, which is often the starting point. It can be applied to almost all aspects of materials management such as purchasing, receiving, inspection, storekeeping and issue of materials from store, verification of bills, inventory control, value analysis etc. category A items are those high annual usage value items of which a manager would like to keep at a low level of inventory. These A items, according to the famous 80:20 principle, are 20% of the items which account for 80% of the blocked capital. Rest of the 20% items are known as B and C items, which are about 80% in number but their contribution is less significant say 20%. ABC analysis thus tends to segregate all items into three categories;

A, B, and C, on their annual usage value.

Benefits of ABC Analysis:

Level of control Gradual delivery of material\ Careful accounting Safety stock Quantity discount factor Layout stores Stock taking Value analysis projects

Limitations of ABC Analysis:

1) To be fully effective, it should be carried out with standardization and codification.2) Importance is given to an items based only on its annual consumption value and not

on its criticality for the production.3) It should be reviewed periodically so that changes in prices and consumption are taken

into account.4) It does not apply to dependent demand inventory, which is controlled by Material

Requirement Planning system.

V-E-D AnalysisV-E-D Analysis

V stands for vital, E for essential and D for desirable. This classification is usually applied for spare parts to be stocked for maintenance of machines and equipments based on the critically of the spare parts. The stocking policy is based on the critically of the items. The vital spare parts are those, which can cause stoppage of the plant, if not available. Usually such spare parts are known as Capital or insurance spares. The inventory policy is to keep at least one number of the vital spare irrespective of its value. Also, spare parts to be supplied by foreign manufactures are treated as Vital spare because of the long lead-time required for procurement. Essential spare parts are those whose non-availability may not adversely affect production. Such spare parts may be available from many sources within the country and the procurement lead-time may not be long. Hence, a low inventory of essential spare parts is held. The desirable spare parts are those, which, if not avail liable, can be manufactured by the maintenance department or may be procured from local suppliers and hence no stock is held usually.

By using this analysis for material we classify materials according to their criticality to the production i.e. how and to what extent the material M1 is going to effect the production if the material M1 is not available.  V- Vital, 

10

E- Essential, D- Desirable. 

Vital items are those items which are very critical for the operations and do    not permit any corrective time i.e. they cannot be procured off the shelf if they are not available.

Essential items are comparatively less vital and work without them cannot be managed for few days.

All remaining items are known as Desirable items.

VED Analysis can be defined as the analysis of maintenance spares in to

V Items – Items of vital importance,

E Items – Items of essential importance,

D Items – Items of desirable importance.

Vital importance in the way of indicating the fact that m/c can’t run without ‘V’ Item. Essential importance in the sense impart that m/c can run but without parameters as

such efficiency, noise reduction etc. Desirable importance in the way denotes m/c can run but factor of safety, industrial

formalities can’t be satisfied

F-S-N ANALYSIS

F – Fast Moving S- Slow Moving N- Non moving

Sometimes the terms FNS is also being used, where 

F – Fast Moving N- Normal Moving S- Slow Moving  

It stands for fast moving, Slow-moving and Non-moving items. The classification is based on past consumption pattern. Items which are usually drawn from stores frequently are classified as fast moving items, items which are drawn only once or twice a year are classified as slow-moving and items not at all drawn for the past two years are classified as non-moving items. F-S-N analysis is useful to control obsolesces of raw materials, components, tools and spare parts.

11

Material Auditing (11)Material Auditing (11)

Auditing means checking of books of accounts so that we can remove the errors and mistakes from books of accounts. It is differ from investigation, in other words auditing is normal work of checking the books of accounts. Because before faith on accounting reports it is very necessary to check these report from any professional accountant. A little mistake in accounting is very harmful for entire business. In auditing, auditor’s duty is not check the fraud but check rules and regulation of accounting and laws of company. Auditing is very important for safeguarding the interest of investors and shareholders. Because without auditing, there may some mistake exists in the books of accounts which is very dangerous for business.

MATERIAL AUDITING

Materials management system requires accurate records be maintained (manually or computerized) due to is importance from the operational view point

Recording of all receipts, issues and withdrawal of materials.Recording of all receipts, issues and withdrawal of materials.

The accuracy of the recording system requiresThe accuracy of the recording system requires : :

Proper-checking system to discover all discrepancies of quantity and value of materials. Proper-checking system to discover all discrepancies of quantity and value of materials. The activity of examining the accuracy of material records and existence of materials is The activity of examining the accuracy of material records and existence of materials is known as material audit.known as material audit.The information required under material audit are: Classification of materials.Location of materials.Prices of each materialDate of receipt of materials.

Method of Physical Verification

For examining the existence of materials, Physical Verification is carried out. Examining the existence of materials, Physical Verification is carried out. Need for physical verification arises because of the difference between the book balance and the physical balance.

Methods of physical verification Methods of physical verification Periodic Stock VerificationContinuous Stock Taking

Periodic Stock VerificationIn this method the stocks are verified once or twice in a year.Verification based on certain periodsThis require complete counting of materials to satisfy book balances are equal to actual balance. Continuous Stock TakingIn this method the stocks are verified all through out the year Each and every item is verified by a regularly assigned team of personnel specialized to do the job.As it is done through out the year in a continuous fashion, errors can be easily discovered and corrected.

12

PURCHASE CYCLE(12)

A purchase department buys many different types of materials and services, and the procedures used in completing a total transaction normally vary among the different types of purchases. However, a general cycle of activities in purchasing most operating materials and supplies is fairly standardized. The following steps constitute the typical purchasing cycle.

1. Recognition of the need

The need for a purchase originates in one of a firm’s operating departments or in its inventory control section. The purchasing department is usually notified of the need by means of (i) a standard purchase requisition issued by the user department or (ii) a material requirement planning [MRP] schedule issued by the inventory control diction or stores department or materials planning or control section.

2. Description of the need

Regardless of how the need is transmitted to the purchase department by the industry or user department, material requirements must be defined clearly and described in detail with part name, part number, coding, specifications, quantities required etc.

3. Supplier selection

As soon as the need has been established and precisely described, the buyer begins an investigation of the market to identify potential sources of supply. The buyer may refer to the approved supplier’s list or register maintained in the purchase department to select a few suppliers to whom enquiries are to be sent for quotations. A right supplier is one who delivers materials of the correct specifications on the stipulated delivery dates.

4. Determination of price and availability

This can be done in three ways: (i) for standard items, vendor’s catalogues and price list are available. For such items, the buyers need only check current listings to obtain the price (ii) negotiating with potential suppliers for establishing the price (iii) inviting tenders or quotations from potential suppliers.

5. Preparation and issue of purchase order

In most cases the purchase order becomes a legal contract document. Hence the buyer should take care in preparing and wording the purchase order. The purchase order may also include terms and conditions designed to give legal protection to the buyer on such matters as contract acceptance, delivery performance and correct termination, shipment rejections, patent rights, warranties.

6. Order acknowledgment by the supplier

The original copy of the purchase order which is sent to the supplier constitutes a legal “offer” to buy. The purpose of order acknowledgment is twofold: (i) the supplier can complete the order acknowledgment and return the same to the buyer, acknowledging acceptance of the order (ii) the supplier can indicate whether or not he or she is able to meet the desired delivery date.

7. Follow up and expediting13

Purchasing bears full responsibility for an order until the material is received and accepted. When there is a possibility that the supplier not stay on schedule, important orders with critical delivery dates should be actively followed up by the buyer. Follow up is usually done through a fax or telephone cell for critical orders is usually accomplished by mailing a preprinted enquiry to the supplier.

8. Receipt and inspection

When a supplier ships materials, a packing slip which itemizes and describes the contents of shipment is kept along with the items shipped. After consignment of materials received has been inspected for quantity and general condition of the material, the receiving clerk issues a receiving report. Copies of this report known as inspection cum receiving report [ICRR] will be sent to purchase department, stores department, supplier and “bills payable” section of accounts department for necessary action.

9. Checking the invoice and approval for payment

If the bill is priced correctly and if no rejection occurs in the quantity supplied, the bills are passed by the executive and sent to “bills payable” section of the accounts department for payment to the supplier.

10. Closing the purchase order

Closing the order entails a consolidation of all documents and correspondence relevant to the order, the completed order is then filed in the closed order file as part of historical record. The supplier may be paid for the partial supplies or for the accepted quantities which are less than the ordered quantities as per the terms of the purchase order. In case where the supplier refuses to supply the quantities or rejection replacements, the purchase order may be short closed to the extent of accepted quantities and payments made accordingly and the purchase order is amended to this effect.

SOURCE LOCATION(13)

1. Identify key sourcing requirements:

The requirements that are crucial for a purchase often differ widely from item to item, organization to organization or industry to industry while different requirements exist for each evaluation area, the minimum evaluation criteria include supplier quality, cost, delivery – performance, and technological capacity

2. Determine sourcing strategy:

There is no single sourcing strategy which can satisfy the requirements of all purchases. Because of this, purchasing strategy adopted for a particular item or service will influence the approach adopted for supplier evaluation and selection processA commodity sourcing strategy provides direction on the overall objectives to be achieved for the commodity such as the number of suppliers that will be used (multiple sourcing), the type of contract (long term or short term) and the type of suppliers to be evaluated.

Some of the strategy options available are: Single versus multiple supply sources Short term versus long term purchase contracts

14

Choosing suppliers who provide product design support versus those who lack design support capability

Developing a close working relationship versus traditional purchasing

The strategy option selected has great influences on the supplier selection and evaluation process 3. Identify potential supply sources:

Purchasers rely on various sources of information when identifying potential sources of supply. Several variables determine the degree to which a buyer must search for information about suppliers.

A major source of information comes from existing suppliers. Buyers often expect existing suppliers to satisfy a new purchase requirement. The advantage is that doing business with an already familiar supplier thereby saving time and resources required too evaluate a new supplier’s capabilities. The disadvantage of using existing suppliers to supply new items is that the purchasing manager may never know whether better suppliers are available without information about other sources of supply.

Selecting an existing supplier for a new purchase requirement may be recommended if a list of preferred suppliers is maintained. A preferred supplier status conveys immediate information about the supplier’s over all performance and competency.

Other sources of information are: Sales representative Information data bases Experience of purchasing personnel by which they gain knowledge about potential

suppliers Trade journals and trade directories Industrial trade shows or exhibitions Indirect information gathered from other suppliers Internal sources such as purchasing personnel of other units or divisions of the

company Internet sources

4. Limit suppliers in a pool:

Based on the information gathered, the purchaser may identify many potential supply sources from which to choose. Because the performance capabilities of suppliers vary widely and also because of limited resources available of the purchaser, an in depth visit to all potential suppliers or evaluation of all of them will not be possible. Hence, a preliminary evaluation of potential supplier is often used to narrow down the choice before conducting an in depth formal evaluation.

The various criteria used for making the preliminary evaluation are:1) Financial risk analysis2) Evaluation of current and previous supplier performance 3) Evaluation of information provided by suppliers

15

SUPPLIER EVALUATION(14)

Supplier evaluation is a term used in business and refers to the process of evaluating and approving potential suppliers by factual and measurable assessment. The purpose of supplier evaluation is to ensure a portfolio of best in class suppliers is available for use. [1] Supplier evaluation is also a process applied to current suppliers in order to measure and monitor their performance for the purposes of reducing costs, mitigating risk and driving continuous improvement.

PROCESS

Supplier evaluation is a continual process within purchasing departments and forms part of the pre-qualification step within the purchasing process, although in many organizations it includes the participation and input of other departments and stakeholders.. It often takes the form of either a questionnaire or interview, sometimes even a site visit, and includes appraisals of various aspects of the supplier's business including capacity, financials, quality assurance, organizational structure and processes and performance. Based on the information obtained via the evaluation, a supplier is scored and either approved or not approved as one from whom to procure materials or services. In many organizations, there is an approved supplier list (ASL) to which a qualified supplier is then added. If rejected the supplier is generally not made available to the assessing company's procurement team. Once approved, a supplier may be reevaluated on a periodic, often annual, basis. The ongoing process is defined as supplier performance management.

Benefits and Drawbacks

There are various benefits associated with an effective supplier evaluation process such as mitigation against poor supplier performance or performance failures. The benefits typically include sourcing from suppliers that provide high standards of product and service levels whilst offering sufficient capacity and business stability. Supplier evaluation can help customers and suppliers identify and remove hidden cost drivers in the supply chain. The process of evaluating performance can motivate suppliers to improve their performance.

Associated challenges with supplier evaluation include resource and cost commitments in establishing and maintaining a robust and effective system, challenges with specifying and gathering meaningful and relevant information, data integrity, scorecards that do not get at the root causes of supplier problems, and subjective or inconsistent scoring which may result in inaccurate assessment. Another challenge is making sure that evaluation of current suppliers goes beyond measurement to actual performance improvement by providing feedback to suppliers on their performance and working on continuous improvement opportunities. Thus, management commitment to and support of a supplier evaluation process is essential.

FOUR STAGES OF EVALUATION

There are four stages of evaluation of suppliers. In survey stage all possible sources are explored for their capabilities, based on preliminary information. The enquiry stage consist of a detailed analysis of the vendors performance with other consumers. In negotiation and selection stage, only those vendors who pass the enquiry stage, are called in for negotiation on all aspects and athe list of approved vendors is drawn up. Vendor rating normally refers to the experience stage when the supplier has started sending the material after trail orders. For this purpose , the parameters are quality, price, delivery, schedule and service..

16

SUPPLIER RATING

A Supplier rating (or vendor rating as it sometimes referred) is a business term used to describe the process of measuring an organization's supplier capabilities and performance.

Supplier rating often forms part of an organization's supplier relationship management program. Such systems can vary in the criteria that are assessed; this broadly falls into quantitative and qualitative types [1] can be used as when undertaking vendor rating, the process varies from one organization to another – common criteria often include:

1. Quality – for example number of not right first-time deliveries2. Delivery schedule adherence3. Cost/Price4. Capability5. Service

Results of each variable are then weighted into a final score – usually a percentage, allowing suppliers to be ranked.

Supplier rating is an ongoing activity, suppliers are often assessed continuously or periodically (i.e. assessing the last year's trading). Various criteria can be analyzed within supplier rating systems – a common approach is to utilize Cost Quality and Delivery measures and apply weighting against criteria in accordance with company requirements

Organizations then often band suppliers according to results which may commonly be used to highlight poor performing suppliers so that they can be removed from use. Supplier rating results may also trigger improvement programs on suppliers that score low. Trend analysis is often applied to supplier rating which allows organizations to monitor changes in supplier performance over time.. Both suppliers and buyers should utilize supplier ratings system to drive performance and improve the business relationship.

METHODOLOGY OF RATING

A large no. of methods, using quality, quantiy, price, delivery schedule and service factors has been developed for the purpose of rating of vendors. The weightage vary from item to item depending upon costy critically availability of the item and market conditions of demand and supply. Vendor rating becomes meaningless if there is only a single source or the item becomes

VENDOR DEVELOPMENT ( 15)

Vendor development is one of the popular techniques of strategic sourcing, which improves the value we receive from suppliers. Vendor Development can be defined as any activity that a Buying Firm undertakes to improve a Supplier's performance and capabilities to meet the Buying Firms' supply needs.

Buying Firms use a variety of activities to improve Supplier performance, which includes,

*Assessing Suppliers' operations* Providing incentives to improve performance* Instigating competition among Suppliers * Working directly with Suppliers either through training or other activities etc.,

17

Best Practices in Vendor development

Following are few of the Best Practices in Vendor development if adopted successfully would enable World Class Supply Chain Management (WCSCM).

* Creating dedicated supply developments teams…* Teaching a supplier on the tactics of self-development, after initial guidance from the supplier development team…* Focusing on underlying causes of long cycle times…* Involving suppliers in new product and process development at the buying firm…* Providing on-line training programs and off-line education programs to suppliers…* Conducting frequent improvement-focused seminars for suppliers…* Creating supplier support centers at their locations itself…* Loaning-out process engineers and quality managers to share their expertise with suppliers…* Setting 'stretch goals' to encourage radical change as well as continuous improvement schemes for suppliers…* Improving proper metrics for supplier development improvements…* Sharing the savings from supplier development activities with suppliers…* Last, but not the least, Improving the supplier's supply management system…

Need for vendor development Make or buy decisions in any manufacturing organization. The first step in process planning is to consider whether to make or buy some or all or to subcontract some or all of a service. A manufacturer might decide to purchase certain parts rather than make them. Sometimes all parts are purchased and the manufacturer simply performs assembly operations to produce the finished goods. In some cases, a firm might choose to perform part of the work itself and subcontract part of the operations to outside suppliers or vendors. The vendors are considered as the best intangible assets of any organization. Good suppliers are a vital link in the supply chain. Supplier inefficiencies such as delayed deliveries of parts or materials or missing or defective materials can affect the production schedule, increase inventory-carrying costs, and also cause late deliveries of end products to customers. Hence, both new and established vendors are subjected to critical evaluation periodically to review their plant capacities, financial condition, and performance etc. The materials manager must formulate a selective policy for vendor selection and choose only those suppliers who are suitable to the firms needs. Since the purchasing activity is a continuous process. It is not only enough if vendors are selected for meeting the immediate requirements of the firm, but also for the future requirements. LEVELS OF VENDOR ASSESSMENTVendor assessment may take place at our different levels of abstraction. They are : (i)product level , (2) process level (3) Quality assurance system level and (4)company level.Product level: At this level, the focus is on establishing and improving the vendors product quality, incoming inspection and quality. Incoming inspection are carried out to establish the degree of quality conformance of incoming materials.Process level: At this level, the production process is closely investigated rather than focusing on product inspection. This is because; the quality of the product depends on the vendors manufacturing process.Quality Assurance system: Quality assurance means checking the way in which quality inspection procedures are developed, maintained and improved.Company level: In this approach, not only quality aspects are focused, but also financial aspects are taken into consideration. The quality of the management of the vendor firm assessed.

18

Legal Aspects In Buying(16) The material manager commits a good deal of corporate finance when he place purchase order .It is imperative that he understands the legal aspects that are relevant to this profession. The Indian sale of Goods Act of 1930 and the Indian Contract Act of 1872 cover some of the important legal aspects. While a material manager not be well conversant with all branches of law, at least his profession demands with that he posses a working knowledge of some of the important laws, which are essential, namely (1) law of agency (2) law of contract, (3) law pertaining to sale of good, and (4) arbitration..

LAW OF AGENCYLAW OF AGENCY We live in the area of trans-nations in which business intercourse is growing heavier and heavier. As such the multiplicity of business transactions enjoins upon a businessman to depend up on the services of others. In legal parlances, normally such persons who provide services are called Agents. The law pertaining to the relationship between the agent and the principle is defined in the Law of Agency.

DEFENITION OF AGENT

An Agent is a person employed to act on behalf of another called principle, for the purpose of bringing the principle in to contractual relationship with a third person. A person who has a capacity to contract may enter in to a contract with another either by himself or through another person. When he adopts the latter course, he is said to be acting through an agent, and the person for whom such an act is done or who is so represented is called the principal contract of Agency may be made verbally or in writing. When it is in writing, it is in the form of power of Attorney.

RULES OF AGENCY Whatever a person competent to contract may do so by himself or through an agent. ”Qui facet per acetum facet per se”. This means ,’he who does through another ,does by himself or the acts of an Agent subject to certain conditions are the acts of the principle

ESSENTIALS OF RELATOINSHIP OF AGENCY The two essentials of relationships of Agency are Agreement between the principle and Agent to act on behalf of the principle.

AGENCY BY EXPRESS AGREEMENT :

A contract of Agency may be created by an express agreement. Normally, the authority given by the principle to his agent binds the principle by the act done with in the scope of his authority. The usual form of an written contract of Agency is the power of Attorney on a stamped paper.

AGENCY BY IMPLIED AGREEMENT:

Agency ids not necessarily contractual in nature. The existence of Agency may in certain cases be implied when it is to be inferred from the circumstanced of the case .For example,’A’ owns a shop in Hydria ,himself living in secunderabad .The shape is being looked after by ’B’ and during the course of business ,he buys ordinary goods from ‘c’ for the purpose of running the shop and pays for them out of ‘A’ s funds with his knowledge .Here ,’B’ has implied authority from ‘A’ to order goods from ‘C’ and make payment in the name of ‘A’ .

19

The implied Agency arises when the principle conducts himself, towards the agent or

the third parties, in such a manner as if the principle and conceded to the appointment to the Agent. Implied Agency includes Agency by estoppels, Agency by Holding out, And Agency by Necessity. A detailed study of such agencies is beyond the scope of this text. LAW OF CONTRACT

A contract has been defined as “an agreement enforceable by law”.

From the material manager’ point of view; the law of contract is an important branch of mercantile or commercial law, because all commercial transactions start from an agreement between two or more people. the object of the law of contract is to introduce definiteness inn commercial and other transactions . it may be said that the purpose of the law of contract is to ensure the realization of reasonable expectations of the parties who enter in to a contract. the law of contract may be defined as that branch of law which determines the circumstances in which a promise shall be legally binding on parties making it.. The Indian contract Act of 1872 lays down certain general rules regarding contracts. The Act is not exhaustive. There are other acts relating to particular types of contracts for ex: negotiable instruments act, transfer of property act etc. However, from the purchasing agents’ point of view, the law of contract is more important. CONTRACT OF SALE:

When an offer to sell or buy goods for a price is made , it becomes a contract of sale . however it is binding only when accepted by the buyer and his binding is intimated to the seller on the terms and conditions on which it is made. Also any change in terms and conditions is equivalent to the rejection of the original offer. In the other words it becomes a counter offer. on the other hand the enquiry requesting whether the tendered could modify his terms does not make the contract void

SPECIAL CONTRACTS Quiet often materials managers place contracts where a rate is agreed upon and the quantities to be supplied from time to time are left to be intimated by periodical releases. Here the buyer dose not commits himself to lift any minimum quantity. Such a contract deemed to be only a standing offer and its acceptance only means that the buyer recognizes this standing offer for the stated period. However once the buyer issues a release order the contract becomes binding for that quantity. The supplier may feel free to withdraw his standing offer with reference to future orders. This is not possible if the tender and its acceptance were intended by the buyer and the seller to be a contract involving on an obligation involving on both of them during that time period.

SALES BY DESCRIPTION:

It is not uncommon to find orders which have only a description of the item in question .by implication , it follows that items must follow the description .it pays in the long run to make certain that such purchase orders are complete and clear in their description .this could be done by mentioning the end use , furnishing drawings , tolerances ,finish, etc… referring to national or international specifications , and the tests which the item has to pass . There are cases when the supplier produces the item under the full knowledge as to how exactly it will be used .in such case there is an implied warranty in the sense that the buyer can claim damages when the item later proves to be unfit . there is a mistaken notion that there is an implied condition in the case of a contract for the sale of a specific item under its patent .there is actually no implied condition as to the fitness of the item under its patent . there is actually no implied condition as to the fitness of the item .for any specific use. Similarly statement regarding the quality of the product and performance appearing in commercial advertisements are not to be construed as an expressed or implied warranty.

20

ACCEPTANCE OF THE GOODS :

Acceptance by the buyer is complete only when he has intimated the seller of his acceptance, or when he fails to intimate the seller even after a reasonable time , during which he had opportunities to inspect the goods , or he does not act in relation to them which is inconsistence with the ownership of the seller . The buyer has another important right . Unless agreed upon , the buyer is under no obligation whatsoever to return the goods which he has rejected as they do not conform to contractual requirements .

CONDITIN AND WARANTY:A condition is a stipulation in contract of sale pertaining to goods which are the subject of the contract and this stipulation is essential to the main purpose of the contract, The breach of which will make the contract liable to be rejected .a warranty is also a stipulation in contract of sale pertaining to goods which are subject of contract but this stipulation is only of a collateral nature to the main purpose of the contract , the breach of which gives rise to a claim for damage but does not make the contract liable to be repudiated and hence the goods cannot be rejected,

Right of InspectionRight of Inspection

If the purchaser has not inspected the material earlier, he has the right to inspectIf the purchaser has not inspected the material earlier, he has the right to inspect them after these are received so as to ensure that they conform to the terms andthem after these are received so as to ensure that they conform to the terms and conditions of the sale such as description, quality, standards, performance, etc. asconditions of the sale such as description, quality, standards, performance, etc. as specified in the contract.specified in the contract.

DIFFERENT TYPES OF TAXES RELATING TO PURCHASE OF GOODS

Sales Tax In IndiaSales Tax In IndiaSales Tax in India is a form of tax that is imposed by the government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each state follows its own sales tax act and levies tax at various rates. Apart from sales tax, certain states also imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, sales tax acts as a major revenue-generator for the various State Governments.

Sales tax is an indirect form of tax, wherein it is the responsibility of the seller of the commodity to collect and recover the tax from the purchaser. Generally, sale of imported items and sales by way of export are not included in the range of commodities which requires payment of sales tax. Moreover, luxury items (like cosmetics) are levied heavier sales tax rates. Central Sales Tax (CST) Act that falls under the direction of the Central Government takes into account all the interstate sales of commodities.

Thus, sales tax is to be paid by every dealer on the sale of any commodity, made by him during inter-state trade or commerce, irrespective of the fact that no liability to pay tax on the sale of goods arises under the tax laws of the appropriate state. He is to pay sales tax to the sales tax authority of the state from which the movement of the commodities commences. However, from April 01, 2005, most of the states in India have supplemented sales tax with a new Value Added Tax (VAT).

21

The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India can be classified under the following tax slabs:

0% for essential commodities 1% on gold ingots and expensive stones 4% on industrial inputs, capital merchandise and commodities of mass consumption 12.5% on other items Variable rates (state-dependent) are applicable for petroleum products, tobacco, liquor

etc.

Excise DutyExcise DutyCentral excise duty is an indirect tax which is charged on such goods that are

manufactured in India and are meant for domestic consumption. The taxable fact is "manufacture" and the liability of central excise duty arises as soon as the goods are manufactured. The tax is on manufacturing, it is paid by a manufacturer, which is then passed on to the customer. The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985

Value Added TaxValue Added TaxVAT is the indirect tax on the consumption of the goods, paid by its original producers

upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit. Across the globe, VAT is payable on the goods and services, which are part of the national GDP. It means that tax is applicable at every stage of the value added of the goods.

Octroi

Octroi is the tax paid by the heavy vehicles like trucks carrying goods,octroi post are set on the ends of the city. It is not applicable to all state. Some state asks for this charge. It is state government income . It can be thought as some tax at state level.Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the municipal limits where the goods are to be ultimately sold, used or consumed. OCTROI is the tax charged by a corporation. C.S.T(Central Sales Tax) is from one state to another state.

Currently few states as Maharashtra has OCTROI. (It has been decided to abolish in selected cities leaving out A-class cities: It will remain in Mumbai, Nasik,etc / but later it has to go somehow). OCTROI is not a healthy way to collect tax. At one stop the government can collect or compensate the corporation-city.Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the municipal limits where the goods are to be ultimately sold, used or consumed. Generally, octroi is borne by the purchaser. Goods in transit are exempted from octroi.Certain items have been exempted from the payment of octroi. Further, special concessions, such as refund of octroi, are available under a special package scheme of incentives by different states in India and it is implied on every state in India.

SUBCONTRACTING(17)

22

This method is used to procure manufactured parts, components and sub-assemblies some properly chosen sub contractors. The decision to sub contract is based on factors such as capacity utilization, cost of manufacture, availability of technology for the sub contactor etc. Sub contracting is done for buying items which are unique to the buyer and not available as a standard item of any proprietary manufacturer. Sometimes the whole item or sub unit is sub contracted and sometimes a few operations are sub contracted and the raw materials and tools are made available to the sub contractor by the purchasing organization.

MAKE OR BUY DECISIONS(18)MAKE OR BUY DECISIONS(18)

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.

Purchasing often analysis whether a new or existing purchase requirements should be provided internally or sourced from external suppliers (i.e. in sourcing or outsourcing).make or buy decisions indicates where management is willing to commit the resources required to maintain production ability and also indicate the amount of vertical integration a firm is willing to pursue.

Purchasing has an important role in make or buy analysis. Regarding outsourcing, purchasing must identify qualified suppliers in the market places. In addition, purchasing has to carry out activities such as visiting potential supplies, negotiating outsourcing contracts and monitoring supplier performance. When a firm is considers which components or subsystems it shall make and which it should buy, it should analyze the issues at two levels:

1) STRATEGIC DECISIONS: the starting point of strategic analysis is to identify the major strengths of the firm and then build on them .the firms existing core competencies must be identified in terms of design skills, unique production skills and equipment, different types of people skills etc.

In considering what to make and what to buy, the decisions should cultivate and exploit the firms core competencies .the items that should be made in house are those that require capabilities that are closely linked with the core competencies and are mutually reinforcing as opposed to those that can be separated .firms which follow the concept of ‘lean manufacturing increasingly buy more and make less’. Some firms outsource sub systems and component parts unless they fall into one of the following three categories:

I. An item that is critical to the success of the product.II. An item that requires specialized design and manufacturing skills or equipment.

III. An item that fits well within the firm’s core competencies or within those the firms must develop to fulfill future plans.

2) TACTICAL DECISIONS: some of the factors that necessitate make or buy analysis at the tactical level are:

I. Unsatisfactory supplier performance in the case of some outsourced items,

II. Change sales demands,III. Restricted manufacturing capacityIV. Modification of an existing product

23

Factors influencing make or buy decisionsAt the tactical level, two factors which stand out above all other factors when considering make or buy are:1)cost and 2)availability of production capacity. The following considerations influence firms to make or buy items used in their finished products or their operations.

CONSIDERATION WHICH FAVORS’ MAKING:I. Cost (less expensive to make the item)

II. Desire to integrate plant operationsIII. Productive use of excessive plant capacityIV. Need to exert direct control over production and /or qualityV. Design secrecy required

VI. Unreliable suppliersVII. Desire to maintain a stable work force in periods of declining sales

Consideration, which favors buying1.suppliers research and specialized know how2.cost consideration (less expensive to buy)3.small volume requirement4.limited production facilities5.desire to maintain a stable workforce in periods of rising sales6.desire to maintain a multiple source policy7.indirect managerial control consideration8.procurement and inventory considerations

FACTORS THAT ARE TO BE ANALYSED CAREFULLY IN ARRIVING AT MAKE OR BUY DECISIONS INCLUDE THEN FOLLOWING:

1.Quality requirements If the supplier constantly fails to meet quality requirement, then the firm may decide to make the item. Firstly it is essential to find out whether such exacting quality requirements are necessary at all. It may mean specialized procedures, yooling, skilled labor and rigid inspection standards. Another important aspect is whether the buyer should be able to make the item to such quality standards when established vendors are unable to do so.

2.Quantity requirementsWhen the quantum is small, such jigs and fixtures, it may be worthwhile to make them especially if the existing facilities and the little amount of subcontracting is adequate for such manufacturers. It is not a paying proposition for the supplier to accept such small jobs.

3. Cost aspectsAdvantages and disadvantages will have to be quantified and a cost analysis has to be done. if existing capacity can be used then fixed costs do not normally enter the analysis. However, when fresh capacity is to be added, additional fixed costs will have to be taken into account. In utilizing the existing capacity for making an item, care should be taken to see that the projected sales requirements of the finished products are not affected for want of capacity.Factors such as the cost of transportation of raw materials, finished items, economies of scale and the cost of capital must be given a thorough analysis in arriving at a make or buy decisions.

24

BID EVALUATION CRITERIA(19)

Usually any purchase order is subject to certain terms and conditions, which should be explicitly explained for major purchase. Ideally the seller returns the buyers’ acknowledgement copy of the purchase order duly signed indicating his acceptance. While the buyer insists on adhering to his terms and conditions, some sellers send the material subject to the terms stipulated on the invoice, which may not tally with those specified by the buyer.

PURPOSE OF BID EVALUATION

The main purpose of bid evaluation is to determine the lowest evaluated substantially responsive bid among the bids submitted before the bid closing time on the date specified in the bidding documents. The lowest evaluated substantially responsive bid may or may not necessarily be the lowest price bid. In order to determine accurately the lowest evaluated substantially responsive bid in accordance with the terms and conditions of the bidding documents, a logical systematic evaluation procedure designed to cover all aspects of the evaluation process should be followed.

Bid evaluation is an important prerequisite before purchase order placing. The analysis of the investment and return on major equipment has slightly different ingredient from regularly purchased items. The technical engineer in collaboration with the buyer should evaluate the bid on all technical, non-technical and commercial aspects. This is done in a phased fashion and the following are the eleven phases for major bid evaluation, before placing the purchasing order.

a) Pre-select the vendor

Check old vendors as well as search for new and prospective vendors.

Go for checking if any vendor facilities are available

b) Prepare detailed enquiry :-

Prepare a detail enquiry about the vendors pre-selected prior to receiving bid so that you may not go for wrong vendor.

c) Receive bids:-

After a detail enquiry go for receiving bid from the vendors selected

Opened in the presence of Nominated person

Earlier bids kept separately-confidential

d) Make preliminary evaluations :-

After receiving the bid go for preliminary evaluation regarding the vendors.

Quoted cost + Extra

Promised delivery date

Meetings – unacceptable or in complete bid

25

e) Make technical evaluation

Based on enquiry specification

Concentration on additional features such as:-

- Efficiency - Avoidance of break down - Superior quality of materials - Easiness of operation - After sales services etc

f) Make commercial evaluation

Additional information on maintenance schedules Operating manuals, shop assembly Packing , Field service Fright to specified delivery point Insurance , payment terms Contractual terms, delivery date

Sometimes technical and commercial evaluations are done simultaneously

After the commercial evaluation the bids are ranked based on the cost effectiveness.

g) Conduct pre-award meeting:-

Then a meeting is conducted with vendors and clarification regarding technical and commercial aspect is done.

h) Conditions bid by considering intangible and service factors

Based on above conditioning

More engineering follow up, extensive expediting, inspection standards, resources of vendor, quality conformance

Technical expertise, future service

i) Select prospective vendors

After considering all these factors select the most prospective vendors. Explain the pros and cons to the vendors.

j) Conduct pre-committee meeting:-

A meeting is conducted with the vendor about the order and a complete understanding about the points is given to the vendor.

k) Award the order to the bidder:-

After discussing all the factors award the order to the lowest responsible bidder and review by following up the vendor.

BUYGRID ANALYTICAL FRAMEWORK (21)

26

Organizational buying activities depend upon the level of experience and information that firms have in purchasing certain products and services. While making routine purchases, buyers have no need for information because of the past experience with the purchasing situation.In a new purchasing situation, information needs may be extensive and detailed due to the firm’s lack of experience with the product, service or suppliers.

Buygrid analytical framework is a framework which views organizational buying decisions as a problem solving activity. It is useful in analyzing the purchasing decision process of various buying situation. It provides a frame of reference where purchasing situation is designed to be general enough to apply to all purchases. Buygrid analytical framework incorporates 3 types of buying situations and 8 phases in buying decision process.

The 3 types of buying situations are:

1. New Task

In the new task buying situation,the need is considerably different from past experience.In the new task purchasing situation, decision makers and influencers engage in an extensive problem solving activity.They must obtain a variety of information to explore aitrenative solutions before a purchase can be made.It is the most complex buy class.

2. Modified Rebuy

The modified rebuy is defined as a purchasing situation where some degree of change has occured either in product or supplier.Organizational decision makers enter into a modified rebuy situation when they feel that benefits such as quality improvements or cost reductions may be derived from comparing alternatives.The modified rebuy situation also occur when the buying firm is displeased with the performance of present suppliers.

3. Straight Rebuy

The most common buying situation in purchasing is straight rebuy.The straight rebuy is defined as a repeat purchase of the same item from the same supplier,where the major responsibility for purchase is likely to remain the purchasing department.Buyers have well developed choice criteria that have made them to select a particular supplier.It describes the buying situation where the purchasing department recorders on a routine basis.

EIGHT PHASES IN BUYING DECISION PROCESS

1. Anticipation or recognition of a problem(need)

The purchasing decision process is sparked off by the recognition of a problem,need or potential opportunity.Such recognition may originate within the buying organization,especialy when products become outmoded,equipment break down or existing materials are unsatisfactory in quality or availability.It may also originate outside the buying organization with a marketer who recognizes and reveals opportunities for potential performance improvement.

2. Determination of the characteristics and quality of the needed item

Once a problem has cropped up, organizational members must determine specifically how to resolve the problem i..e. problem and solution alternatives must be narrowed down and precisely analyzed. Thus the firm will seek answers to questions like what type of material, quantity required, specification etc is needed?

3. Description of the characteristics and quantity of the needed item

27

This is often a critical phase for the buyer as well as the supplier. It is during this phase that those influencers who prepare or affect specifications enter the purchasing process.At this phase, buying influencers begin to look outside the firm for supplier and product information and for assistance in developing product specifications.

4. Search for and qualification of potential sources

Suppliers are evaluated by considering the following criteria:

Price quotation, quality of materials, rejection rate, etc.

5) Acquisition and analysis of proposals When qualified suppliers have been identified, request for specific proposals will be made. Buyers merely check a catalogue or contact suppliers to obtain upto date information about prices and deliveries. A lot of time may be spent in exchanging proposals. In such purchase situation, the need for information is extensive and a great deal of time is given to analyzing proposals and comparing products, services and costs.

6. Evaluation of proposals and selection of suppliers

Various proposals of competing suppliers are weighed and analyzed. If a firm is facing a make or buy decision, proposals are compared to the cost of producing the needed item within the buying firm. If the buying firm decides it can produce the needed item more economically, the buying process terminates.

7. Selection of an order routine

Order routines are established by forwarding purchase orders to the vendors and status reports to the using department and by determining the levels of inventory that will be needed over various time period.

8. Performance feedback and evaluation

The final phase in the purchasing process consists of a formal or informal review and feedback regarding product performance,as well as vendor performance.This phase involved a determination by the user department as to whether the purchased item solved the original problem.

DECISIONS UNDER DIFFERENT BUYING SITUATIONSStages of the buying process

New Task Modified Rebuy Straight Rebuy

Problem recognition Yes Maybe No

Need description Yes Maybe No

Product information Yes Yes Yes

Suppliers search Yes Maybe No

Analysis of proposal Yes Maybe No

Suppliers selection Yes Maybe No

Order routine specification

Yes Maybe No

Performance review. Yes Yes Yes

What is e-Purchasing? (22)

28

E-Purchasing is usually the main component of an e-procurement capability. It automates and extends manual buying processes, from the creation of the requisition through to Payment of suppliers. The term e-purchasing encompasses back office ordering systems, e-marketplaces and Supplier websites, as defined within the Technical Solutions strand of the NePP project. It is Important to consider the differing impact of these solutions as both the type and magnitude of the solution implemented will determine the attainable benefits from e purchasing. E Purchasing is a well-established solution and is gaining an increasing presence in local government, although many authorities are still in the process of rolling out their solution. E-Purchasing is often combined with the use of procurement cards, with the latter used to process low value, high volume transactions. The use of e-purchasing solutions is arguably essential to the implementation of recognized procurement good practice Use of e-purchasing solutions also promotes adoption of best practice performance management processes and a clearer picture of the prices that the authority actually pays for Goods and services.

Why should one be interested?There is increasing evidence that e-purchasing solutions can deliver significant benefits to an Authority:

1. Savings in the cost of goods and services of up to 4.5% of total non-pay expenditure;2. savings in process costs of up to £40 per transaction;3. Valuable intangible benefits such as enhanced user satisfaction, better management

Information and a greater focus of resources on procurement strategy rather than transaction processing.

The level of benefit achieved will depend upon the comparison between the order-to-pay process prior to implementation of e-purchasing and procurement cards with the process after their implementation. To provide indicative process efficiencies for an individual authority and for local government overall, we have made assumptions around the average Number of transactions processed by an authority and the average timesaving per transaction. E-Purchasing can, therefore, play a key role in helping an authority to make best use of the resources available to it – releasing money and time to be invested in service delivery or key technology initiatives.

What are the challenges?The key challenges to driving out the benefits from e-purchasing are:• Authorities will need to invest money and time to both identify their opportunity from epurchasing and to deliver the expected benefits;• Full benefits will be delivered over a 3-5 year period, allowing time for the e-purchasing solution to be rolled out and existing contracts to expire. Sustained commitment over the medium term is, therefore, essential;• A significant element of the e-purchasing benefits arise from good procurement practice but technology plays a key role in enforcing compliance. E Purchasing, therefore, needs to embrace both strategic sourcing (rationalizing the supplier base and aggregating demand across the authority) as well as technology;• Process efficiencies will comprise of opportunities for budget savings where a role is reallocated or removed and opportunities to undertake different tasks from increased capacity. Authorities should seek to convert an element of the capacity benefit into Budget savings through modernization of the organization’s processes;• A choice of technology solutions is available - back office ordering systems, emarket places, and supplier websites. In addition, there is a range of sophistication across back office ordering systems. Authorities will, therefore, need to assess what is the right solution, or combination of solutions, for them taking careful account of their existing systems;• Delivering e-purchasing benefit is about changing current practices – adopting corporate suppliers and procurement processes. Change management is, therefore, critical to theSuccess of e-purchasing;

29

• E-Purchasing lends itself to collaborative arrangements – combining the purchasing power of organizations is likely to enhance the benefits from a reduction in the cost of goods/services• E-Purchasing will present management choices in how benefits are recovered – budget cuts, increasing service levels or creating a fund for performance improvement initiatives.Authorities will, therefore, need to define their strategy whatever strategy is selected, a robust benefits tracking mechanism is essential

The implications for e-purchasing

Online auctions and exchanges have played an important role in the growth of e-purchasing within businesses of all sizes and types.

E-procurementThere are two parts to the e-purchasing cycle - the more established of which e-procurement is. This has been developed in recent years to deal with the process element of electronic purchasing.

E-procurement is the use of the internet to operate the transactional aspects of requisitioning, authorizing, ordering, receipting, and payment processes for the required products or services. A number of e-marketplaces offer transaction services that automate many aspects of the procurement cycle for both the buyer and the seller.

E-procurement covers the following areas of the buying process:

requisition against order authorization order receipt payment

E-sourcing

The other element of the e-purchasing cycle is e-sourcing.

E-sourcing is the use of the internet to make decisions and form strategies regarding how and where services or products are obtained. E-marketplaces can play an important role in this activity, since the price and availability of products from multiple suppliers can be checked from a single point.

E-sourcing covers the elements of the buying process which are at the discretion of specialist buyers, including:

knowledge specification request for quotation/e-tender/e-auction evaluation and negotiation agreeing contractual terms

One of the attractions of e-marketplaces in terms of product sourcing is that not only do they provide detailed product information from existing suppliers; they also give access to many new potential partners and suppliers. Furthermore, the use of reverse auctions and online exchanges enables procurement officers to obtain better prices as they encourage competitive bidding between suppliers.

FOB, CIF and FOR (23)

30

Free On Board - FOBA trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfills its obligations to deliver when the goods have passed over the ship's rail. When used in trade terms, the word "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier. A shipping term which indicates that the supplier pays the shipping costs (and usually also the insurance costs) from the point of manufacture to a specified destination, at which point the buyer takes responsibility.

CIF –( Cost, Insurance, Freight)CIF –( Cost, Insurance, Freight)A trade term requiring the seller to arrange for the carriage of goods by sea to a port of destination, and provide the buyer with the documents necessary to obtain the goods from the carrier.Term of sale signifying that the price invoiced or quoted by a seller includes insurance and all other charges up to the named port of destination. In comparison, carriage and insurance paid to (CIP) terms include insurance and all charges up to a named place in the country of destination (usually the buyer's warehouse). A sale in which the contract price includes the cost of the good, the cost of transportation, and the cost of insurance.

FOR- (Free On Rail)Pricing term indicating that the seller will put the goods on a railroad car (called 'truck' in the US) at a named loading point without any

PROCEDURE FOR IMPORT(24)

Category 1: Actual user- industrial import items- raw material, components and spares

For all scheduled industries [(DGTD units) Director General of Technical Development] licenses are issued by the chief controller of imports and exports (CCI & E) UDYOG BHAVAN, NEW DELHI

These units should make applications for import license in FORM “C” to CCI and E through the director general of technical development except for import of spare parts.

Application should be sent to assistant director (import cell) DGTD UDYOG BHAVAN NEW DELHI indicating on Envelope – import application.

Each unit is allotted a ‘code number” by the DGTD which is to be quoted in the application.

DGTD will normally acknowledge applications and point out deficiencies, if any. These deficiencies will have to be rectified within a prescribed time limit.

(DGTD borne units belong to priority or non priority sector for which separate procedures are laid out) Existing DGTD in the priority sector are required to submit separate application for the

import of: -i. Raw materials and components, ii. Spare parts.

An application, in triplicate, for license / release order should cover all the requirements of an industrial units including components and raw materials other than items covered under part 1 stores categories (for which separate application is required). For industries covered under Industries Development Act (IDA) application may include part 1-stores items. (Viz. the items of iron and steel etc). 7 copies of the list of items sought to be imported should accompany application. In cases where the Actual User (AU) desires to have more than one license, he should furnish a set of 7 copies in each case.

Director General of Technical Development (DGTD) will consider if goods applied for are essential and if these are indigenously available or not, import policy and stock in

31

hand, the consumption and production, and other relevant factors before vetting these applications.

Import license / release order for raw materials and components for priority industries are provided on the basis of fast consumption and no one need apply if he is not in a position to show evidence of consumption. Applications are made on a six monthly basis. Application in prescribed form from wide appendix 14 of the handbook of rules and procedures (ITC) should also accompany a statement indicating c-i-f value of imported raw material and components consumed by him, actual production and utilized value of license in hand. A chartered accountant should certify this statement.

License can be granted for a value larger than the consumption for a raw material and components in case of machine building industry. But information to this effect and full justification shall have to be furnished in the proforma given in appendix 72 of the red book (vol 1)

INTERNATIONAL PURCHASING(20 and 25)INTERNATIONAL PURCHASING(20 and 25)

Purchasing products and services of foreign origin can be highly challenging. The key to buying overseas is the availability of a product specification, market access, formulating a negotiating position to obtain the product at right price and being distributed ideally in the logistics environment. International purchasing is a very high profile international business. The elements that drive international business include technology, marketing, cyber space opportunities, logistics, finance, innovation, and social/economic well-being and wealth creation. International purchasing is accelerated today with the internet- with an emphasis on purchasing value-added products to satisfy the consumer/industrial needs found in the competitive market. Importers worldwide are now focusing their attention on developing a global strategy in their search for competitive, quality products at lower prices. This requires professional techniques and methodology of buying overseas. Hence all those involved in international purchasing should be completely professional. They should have adequate knowledge or experience of overseas buying and the essential and strategic elements coupled with the international environment in which the goods are purchased. The international purchaser should have the following qualification:

Knowledge of various stages of buying overseas, the selection process, the negotiation, product specifications/standards and the final distribution and payment arrangements.

Knowledge of the risk areas and the international environment of international trade. Knowledge of competitive environment and the benefits to the importer of

product/component sourcing overseas in a competitive global situation. Knowledge of future trends, including logistics and the need to buy overseas and gain

a value added benefit for the importer’s company product and profile Knowledge of overseas supplier market research, supplier selection, overseas culture

and environment, buying strategy and planning, quality control and quality standards, logistics and distribution, negotiation of contract, import finance and documentation and customs.

REASONS FOR INTERNATIONAL PURCHASINGREASONS FOR INTERNATIONAL PURCHASINGThe main reasons for importing are:

To obtain raw materials, components or finished goods, which are not available in the buyer’s, country and which are needed for the buyer’s business

To obtain goods and/or materials from a source which is the most economical or which is of the highest quality/standard for a given price.

ADVANTAGES OF INTERNATIONAL PURCHASEADVANTAGES OF INTERNATIONAL PURCHASE1) Lower prices: This may be due to lower labor cost, better quality control and more efficient production technology of the foreign supplier firm as compared to the domestic supplier

32

2) Product availability: The goods or materials may not be available in the buyer’s country.3) Quality: A key reason for international sourcing is to obtain goods and materials of required level of quality when quality is a critical factor.4) Timeliness: A major reason for international sourcing of goods and services is the dependability of the supplier in meeting the delivery schedule requirement of the buyer.5) Product’s added value: An importer can improve his firm’s competitiveness by improving his product’s added value through design, quality standards, durability, efficiency, technology and the like.6) Product and process technologies: International sources in some industries are more advanced technologically than the domestic industries. Outsourcing products enables the importer to use high technology goods and materials. It also permits immediate availability and no lead-time in product development and production.7) Broadening the supply base: Professional buyers want to develop and maintain an adequate supply base for the materials required. Hence they may develop international sources in order to have competitive supply base.8) Low capital investment: The start-up capital for a new business is much lower for a company relying on imported products and materials rather than committing heavy investment to in-house manufacture.

PROBLEMS ASSOCIATED WITH INTERNATIONAL PURCHASEPROBLEMS ASSOCIATED WITH INTERNATIONAL PURCHASE Impact on standard of living: The biggest risk in buying goods and services of foreign

origin is its long-term impact on the standard of living of the buyer’s country. If a country relies on international sourcing, neglecting domestic sources, the country will lose its status as an industrial power.

Culture and communications: Cultural differences between the buyer and the seller are the biggest obstacles to the development of mutually profitable business relations with international resources. The nature, customs and ethics of individuals and business organization from two different cultures can raise a number of obstacles to successful business relations. Languages pose a significant barrier to effective international business relations. Differences in culture, language or terminologies used in business transactions may result in miscommunication and cause problems.

Payment terms and conditions: Buyer’s prefer to pay after receipt and inspection of goods. But in many countries, sellers may ask for advance payments to be made prior to the shipment of goods to the buyer. Another problem could be the fluctuations in the exchange rate from time to time.

Long lead times: International purchases usually involve longer lead times than domestic purchases because of variable shipment schedules, unpredictable time requirement for customer clearance, strike by dock workers and shipping companies, cyclone or storms at sea, etc.

Additional inventories: Because of the longer procurement lead times involved in international purchasing, it is necessary to carry higher inventory as compared to purchasing from domestic sources.

Quality: International sources are frequently preferred to domestic sources because many of them can provide consistently high level of quality. But quality problems do exist because of differences in quality standards, measurement systems used, manufacturing tolerances used and the like.

Social and labor issues: In some countries labor unions and politicians may oppose import of foreign goods from countries in which labor laws are weak or flouted.

Higher cost of carrying out business: The communication problems, need for translators due to language differences, distance involved in making site visits- all add to the cost of doing business with international suppliers.

ROLE OF INTERNATIONAL PURCHASING IN THE SUPPLY CHAINInternational purchasing is the process of obtaining a product/good or service, which is available in a market or markets, which can be accessed by crossing international boundaries.

33

International sourcing is helpful to manage a company competitively and operate successfully in a global market. International purchasing enhances the value added benefit of the product or service to the customers/buyers. International purchasing involves many disciplines such as logistics, marketing, product evaluation, international distribution, negotiation, linguistic skills, supplier audits, design, standards, transport carriers, insurance and customs.Major activities involved in international purchasing function and its methodology are:

i. Identifying through market research, in-house discussion and other sources, the product/service specification and standards together with the volume and the quality required.

ii. Researching the most suitable suppliers through trade directories, trade associations, trade exhibitions and the Internet.

iii. Formulating a plan to negotiate with the preferred suppler organizations which cover the product specification and complying with international/national standards, prices, availability, terms of sale, international payment arrangements, name of carrier, insurance, export/import documents and delivery dates.

iv. Activating the contract within the buyer’s supply chain network relative to the date, involving delivery, quantity, financing arrangements with the buyer’s bank and processing import and customs documents as per the contract of sale.

v. Managing the supply chain- a logistics operation according to the delivery date, involving collection of goods from the supplier’s premises to seaport, airport clearance through customs at the importer’s country’s airport/seaport premises and transporting the goods to the importer’s premises.

vi. Keeping track of the cargo throughout its transit using on-line computer access.vii. Taking delivery of the goods and carrying out production evaluation, if any-transit

delays, damage claims, payment arrangements including currency, import customs clearance, etc.

viii. Developing a strategy for continuously reviewing the product for any subsequent orders or necessary modifications, for regular suppliers, etc.

DOCUMENTS USED IN INTERNATIONAL PURCAHSINGDOCUMENTS USED IN INTERNATIONAL PURCAHSING1) Bill of lading: This document accompanies bills of exchange drawn under letters of credit. It is a proof of dispatch of goods by the supplier (exporter) and gives the title of goods o the buyer (importer) and enables the importer to claim the goods on arrival at the destination. The bill of lading is signed by the master of the ship, which carries the goods to the importer’s country (destination). An ocean bill of lading covers the transportation of goods through shipping carriers whereas airway bills are generally used by the aircraft carriers.A bill of lading serves the following purposes:

a) As a contract for shipment of merchandise.b) As a receipt for a merchandise.c) As a document of title to the merchandise.d) As a document of freight charges ande) As a guide to the carrier’s staff in handling a shipment.

2) Invoices: These are documents, which accompany bills of exchange drawn under letters of credit. The types of invoices are a) commercial invoice, (b) customs invoice and (c) proforma invoice. a) The commercial invoice describes the merchandise, indicates the price and other details of transaction involved, such as the name and address of the buyer and seller, the shipment vessel, port of discharge, shipment, export and import permits, contract and invoice number, etc. Also the financial terms of the sale are mentioned. The number of packages, the goods contained in the packages and their prices are indicated in detail. b) The customs invoice is a special document prepared by the seller on a prescribed form. It is used to clear merchandise through the customs of the importer’s country. c) The proforma invoice is a document used mainly for banking purposes. It is an abbreviated invoice sent in advance of shipment to enable the buying firm to obtain an import

34

permit or an exchange permit or both. It gives approximate weight and value of shipment that is to be made.3) Packing list: It serves to indicate the exact nature, quantity and quality of the contents of each package in a shipment. It helps the importer to to identify the goods and check them against the order placed by the importer. It also helps in clearance of goods through customs.4) Certificate of origin: Certain commodities require a document certifying the country from which the goods originated as distinct from the country from which they were immediately exported.5) Inspection certificate: It is document normally prepared by an independent agency other than the exporter to certify the condition, quality or quantity of goods being shipped as per the requirements of the importer.6) Letter of credit: It is an arrangement by which the importer is obliged to pay the exporter through the undertaking given by the importer’s bank to the exporter’s bank. The importer’s bank guarantees payment to the exporter through the exporter’s bank.

INTERNATIONAL PURCHASING PROCEDURE1. Locating the foreign source of supply.2. Determining the supply channels.3. Qualifying potential international suppliers.4. Preparing for direct relations.5. Initial meeting.6. Deciding about currency and payment issues.7. Arranging for commercial and transport documents8. Customs clearance

CONCEPT OF OPERATING CYCLE: - CONCEPT OF OPERATING CYCLE: - (NO.26)(NO.26)

The working capital management is concerned with the management of current assets and the administration of current liabilities. The amount of fund needed varies with the type of industry, trade off between liquidity, profitability and risk, but should be at the lowest level without impairing day-to-day operations. In business organizations the material cycles begins with the purchase of inventories, which are stored and converted into finished products for being sold. Complementing this flow, cash flows out when purchases are made and when inventories are stored and converted in the form of price for materials, with the interest charges. When the materials flow out in the form of goods, cash flows in as sales revenue. Thus the cycle begins with cash outflows and ends with cash inflows.

DEFINITION: - “The average time between purchasing or acquiring inventory and receiving cash proceeds from its sales”. It is the length of the time for a company to acquire materials, produce the products, sell the products, and collect the proceeds from the customers.

TYPES OF OPERATING CYCLE: -

The duration of the operating cycle depends upon the nature of business, manufacturing process, types of the products, purchase policies, inventory policies, conversion process, sales policies, transportation bottlenecks etc. The level of current assets usually financed by loans from the banks needed for a business depends upon the length of the operating cycle as longer this cycle, the higher will be company’s requirements of the components of working capital.

Short term operating cycle: - it is the one in which the time between purchasing inventory and recovering the investment in brief. The company recovers its investments and or realizes profits quickly.

Long term operating cycle: - cash may be tied up in inventory and or receivables for an extended period of time before the business is able to recover its initial investments.

35

Investments with a long term operating cycle can be sound, as long as the organization has sufficient access to, capital to meet its short-term obligations.

FLOW OF OPERATING CYCLE: -

   Working capital is required because of the time gap between the sales and their actual realization of cash. This time gap is technically termed as “operating cycle” of the business. In the case of manufacturing company the operating cycle is the length of the time necessary to complete the following cycle of events:

1. Conversion of cash into raw material 2. Conversion of raw material into work-in-progress 3. Conversion of working progress into finished goods 4. Conversion of finished goods into accounts receivable 5. Conversion of accounts receivable into cash

Average time period between buying inventory and receiving cash proceeds from the eventual sales. Adding the number of days inventory is held and the collection period for accounts receivables determine it.

Operating cycle-time between purchasing the inventory and collecting the cash. Inventory period- times required to purchase and sell the inventory. Accounts receivable period- time to collect on credit sales

OPERATING CYCLE= INVENTORYPERIOD + ACCOUNTS RECEIVABLE PERIOD

CASH CYCLE: -

Cash cycle-Time period for which we need to finance our inventory. It is a difference between when we receive cash from the sales and when we have to pay for the inventory.

Accounts payable periods- time between purchase of inventory and payment for the inventory.

CASH CYCLE=OPERATING CYCLE-ACCOUNTS PAYABLE PERIODS

36

CASH

FINISHED GOODS

DEBTORS

SALES

RAWMATERIALL

WORK IN PROGRESS

The average time it takes for a retailer or manufacture ‘ inventory to turn into cash. If a manufacture turns its inventory six times per year (every two months) and allows customers to pay in 30 days, its operating cycle is approximately three months.

EXAMPLE- If a business purchase raw material on 1st January and it takes one month to convert its raw materials into finished goods. On 1st February goods are ready for sales i.e. stocked at warehouse .on 1st march goods are sold and on 1st April payments are received. Now this payment will be used for fresh raw materials the operating cycle is 3 months…the time taken to convert its working capital into revenue.

EXAMPLE INFORMATION: -

INVENTORY-Beginning= RM 5000End=RM 6000

ACCOUNTS RECEIVABLESBeginning=RM 4000End=RM 5000

Solution: INVENTORY PERIOD: - Average inventory=(5000+6000)/2=5500 Inventory turn over=12000/5500=2.18 times Inventory period=365/2=167 days

RECEIVABLES PERIOD: - Average receivables=(4000+5000)/2=4500 Receivables turn over=30000/4500=6.67 times Receivables period=365/6.67=55 days OPERATING CYCLE=167+55=222 DAYS.

ORGANISATION OF INVENTORY (27)

Internally, almost everyone in the organization is interested in the inventory, while suppliers, bankers, carriers, insurers and customers are the external agencies interested in the company’s inventory. The finance manager wants the locking of funds or working capital commitment to be minimum, while the use customer complains about the non-availability of the item. The banker is interested, in the inventory as the company’s inventory has been mortgaged too the commercial bank. The supplier is interested in supplying more items, while the transporter desires a full wagon load. Government departments like imports, sales tax, excise and customs are interested in the accuracy of figures to collect taxes.

Under the integrated materials management, raw materials inventory is under the control of materials manager. There are organizations where this inventory is combined under the function of production planning and control function. The machinery spare parts stored in the warehouses are usually controlled by maintenance executives and semi-finished work-in-progress is controlled by production executives. The marketing executive controls inventory of finished goods in warehouses and in retail distribution channel. Since one component of inventory is related to another, it is essential to coordinate these functions for the smooth functioning of the total inventory system. Evaluation can be done, initially by the executives controlling the inventory and later by the top management team.

Following are the ways by which organisation of inventory can be effectively done:

Determining as to what should be the levels of stock. Controlling and deciding up on the quantities of each item that is to be ordered

37

The purchase department must be free to suggest to the inventory controller to change the quantity of any material decide to be purchased, if there is some financial advantage in doing so.

The inventory control and the purchase department should discus such suggestions keeping in view the financial implications of the order in question.

The inventory control must take the ultimate decision bearing in mind all the factors involved.

MATERIAL REQUIREMENTS PLANNING (MRP)(28)

Material Requirements Planning is a computer based information system designed to handle ordering & scheduling of dependent-demand inventories (raw materials, sub-assemblies, parts, components). A production plan for a specified number of finished products (“Master Production Schedule”) is prepared to determine the the requirements of the components & raw materials needed for their production. The details regarding when to order & how much to order are determined using lead time & other information ( regarding how the product is built). Hence, requirements of end items( finished goods) generate the requirements for lower level components which are broken down by planning periods (e.g. weeks) so that ordering, fabrication & assembly can be scheduled for timely completion of end items. MRP is a philosophy as well as a technique & also an approach to production scheduling & inventory control.

OBJECTIVES OF MRPOBJECTIVES OF MRP

The objectives of MRP in materials management are: To improve customer service by meeting delivery schedules as promised & shortening

delivery lead times. To reduce inventory costs by reducing inventory levels. To improve plant operating efficiency by better use of productive resourcces To plan the ordering of raw materials & components To provide effective inventory control To make a comparison of between the expected date of availability with the need date

of each item

OPERATIONS OF MRP SYSTEMOPERATIONS OF MRP SYSTEM

The operations of MRP system includes the operation between the MRP inputs & MRP outputs. The components of MRP inputs & MRP outputs are as follows:

MRP System Inputs

MRP System includes the following:

o Master Production Schedule (MPS): it specifies what end products are to be produced & when. The planning horizon should cover the lead times of all components that must be purchased or manufactured to meet the end product requirements.

o Bill of Materials File or Product Structure File: this file provides the information regarding all the materials, parts & sub- assemblies that go into the end product. The Bill of Materials has a series of levels, eacg of which represents astage in the manufacture of the end product. The highest level (or the zero level) of the BOM represents the end product. The BOM files identifies each component by a unique

38

part number & facilitates processing by exploding the end product requirements into component requirements.

o Inventory Status file: this file gives complete & upto date file on the on-hand quantities, gross requirements, scheduled receipts & planned order releases for the item. It also includes other information such as lot sizes, lead times, safety stock levels & scrap allowances, etc.

a) Gross requirements: total needs from all resourcesb) Net requirements: are requirements after allowing for available inventory &

schedule receipt. c) Schedule receipts: are quantities already on order from a vendor or in-house

shop.d) Planned order release: indicates the quantity & date to initiate the purchase or

manufacture of the materials that will be received on schedule after the lead time offset.

MRP System Outputs

Two primary outputs are: Planned order schedule: which is a plan of the quantity of each material to be ordered

in each time period. The order may be a purchase order on the suppliers or production orders for parts & sub assemblies on production departments

Changes in planned orders i.e. modification of previous planned orders.

The secondary outputs are: Exception reports which list items requiring management attention to control Performance reports regarding how well the system is operating e.g. inventory

turnovers, percentage of delivery promises kept & stock out incidences Planning reports such as inventory forecasts, purchase commitment reports, etc.

MANUFACTURING RESOURCE PLANNING (29)

“Manufacturing Resource Planning (MRP II) is defined as a method for the effective planning of all resources of a manufacturing company. It addresses operational planning in units, financial planning in dollars, and has a simulation capability to answer "what-if" questions and extension of closed-loop MRP”.

It is a combination of both Materials Requirement Planning (MRP) with Capacity Requirement Planning (CRP) which includes data base accuracy, computer resources and people skills.

The vision for MRP and MRPII was to centralize and integrate business information in a way that would facilitate decision making for production line managers and increase the efficiency of the production line overall.

MRP and MRPII: General Concepts

Material Requirements Planning (MRP) and Manufacturing Resource Planning (MRPII) are both incremental information integration business process strategies that are implemented using hardware and modular software applications linked to a central database that stores and delivers business data and information.

MRP is concerned primarily with manufacturing materials while MRPII is concerned with the coordination of the entire manufacturing production, including materials, finance, and human

39

relations. The goal of MRPII is to provide consistent data to all players in the manufacturing process as the product moves through the production line.

Benefits

MRP II systems can provide:

Better control of inventories Improved scheduling Productive relationships with suppliers

For Design / Engineering:

Improved design control Better quality and quality control

For Financial and Costing:

Reduced working capital for inventory Improved cash flow through quicker deliveries Accurate inventory records

Using an MRP an organization can identify the necessary raw materials and schedule manufacturing operations within distinct timeframes in order to meet specific commitments.

Building Blocks

Basic modules Ancillary modules Related modules Master production

scheduling (MPS) Item master data

(technical data) Bill of Materials

(BOM) Production

resources data Inventories and

order Capacity

requirement planning

Standard costing Distribution

resource planning

Lot traceability Contract

management Sales analysis and

forecasting Business planning Engineering change

General ledger Accounts payable Accounts receivable CAD/CAM Warehouse

management

Project management

Production planning (30)

40

The function of a manufacturing enterprise responsible for the efficient planning, scheduling, and coordination of all production activities. The planning phase involves forecasting demand and translating the demand forecast into a production plan that optimizes the company's objective, which is usually to maximize profit while in some way optimizing customer satisfaction. These twin objectives are not always synonymous. During the scheduling phase the production plan is translated into a detailed, usually day-by-day, schedule of products to be made. During the coordination phase actual product output is compared with scheduled product output, and this information is used to adjust production plans and production schedules. Production planning implies formulation, co-ordination and determination of activities in a manufacturing system necessary for the accomplishment of desired objectives whereas production control is the process of maintaining a balance between various activities evolved during production planning providing most effective and efficient utilization of resources

Objectives of production planning 1.determining the nature and magnitude of various input factors to manufacture the desired output 2.to co-ordinate labour, machines and equipment in the most effective and economic manner3.establishing targets and checking these against performance4.ensuring smooth flow of material by eliminating bottlenecks, if any , in production5. utilization of under employed resources6.to manufacture the desired output of right quality and quality at night time

Importance of production planning

1. reduces cost of production by minimizing wastage of material and economic utilization of resources

2. leads to lower investment by means of efficient and balanced utilization of resources

3. promotes employee morale by avoiding all sorts of bottlenecks4. enhances customer satisfaction and confidence

Factors determining an efficient production planning system

1. future rate of sales, production and inventory levels etc2. input requirements like raw materials , spare parts for machine and

equipment, capacity of plant and present load etc3. estimated output desired nature of operations , sequence of these operations

and duration of each operation

GANTT CHART(31)

A Gantt chart is a type of bar chart that illustrates a project schedule. Gantt charts illustrate the start and finish dates of the terminal elements and summary elements of a project. Terminal elements and summary elements comprise the work breakdown structure of the project. Some Gantt charts also show the dependency (i.e. precedence network) relationships between activities. Gantt charts can be used to show current schedule status using percent-complete shadings.

Although now regarded as a common charting technique, Gantt charts were considered revolutionary when they were introduced. In recognition of Henry Gantt’s contributions, the Henry Laurence Gantt Medal is awarded for distinguished achievement in management and in

41

community service. This chart is used also in Information Technology to represent data that have been collected.

The first known tool of this type was reportedly developed in 1896 by Karol Adamiecki, who called it a harmonogram. Adamiecki did not publish his chart until 1931, however, and then only in Polish. The chart is commonly known after Henry Gantt (1861–1919), who designed his chart around the years 1910–1915.

In the 1980s, personal computers allowed for widespread creation of complex and elaborate Gantt charts. The first desktop applications were intended mainly for project managers and project schedulers. With the advent of the internet and increased collaboration over networks at the end of the 1990s, Gantt charts became a common feature of web-based applications, including collaborative groupware.

Advantages and limitationsAdvantages and limitations

Gantt charts have the following advantages:

They provide an excellent presentation tool for illustrating groups of milestones and demonstrating individual resources scheduled to time,

They can be used in status reporting to show how much of the plan has been completed by displaying the progress of an activity in the same or a parallel bar, or using colour,

Many executives prefer this presentation format.

Gantt charts have the following disadvantages:

Estimates must be completed before the chart can be drawn, A Gantt chart does not effectively address the dependencies between jobs (although

constraints can be added as vertical lines), Dependencies are hard to verify, It is difficult to show two sets of dates when using techniques such as earliest start

date and latest start, It is difficult to show slack and critical path without additional notation, Changes to the schedule require a redrawing of the chart, Several scheduling possibilities cannot be shown in the same chart, Resource assignments are not easy to illustrate, The Gantt chart does not highlight WBS elements with the highest risk of failure or

delay.

Gantt charts have become a common technique for representing the phases and activities of a project Work Breakdown Structure (WBS), so they can be understood by a wide audience.

A common error made by those who equate Gantt chart design with project design is that they attempt to define the project work breakdown structure at the same time that they define schedule activities. This practice makes it very difficult to follow the 100% Rule. Instead the WBS should be fully defined to follow the 100% Rule, then the project schedule can be designed.

Although a Gantt chart is useful and valuable for small projects that fit on a single sheet or screen, they can become quite unwieldy for projects with more than about 30 activities. Larger Gantt charts may not be suitable for most computer displays. A related criticism is that Gantt

42

charts communicate relatively little information per unit area of display. That is, projects are often considerably more complex than can be communicated effectively with a Gantt chart.

Gantt charts only represent part of the triple constraints (cost, time and scope) of projects, because they focus primarily on schedule management. Moreover, Gantt charts do not represent the size of a project or the relative size of work elements, therefore the magnitude of a behind-schedule condition is easily mis-communicated. If two projects are the same number of days behind schedule, the larger project has a larger impact on resource utilization, yet the Gantt does not represent this difference.

Although project management software can show schedule dependencies as lines between activities, displaying a large number of dependencies may result in a cluttered or unreadable chart.

Because the horizontal bars of a Gantt chart have a fixed height, they can misrepresent the time-phased workload (resource requirements) of a project, which may cause confusion especially in large projects. In the example shown in this article, Activities E and G appear to be the same size, but in reality they may be orders of magnitude different. A related criticism is that all activities of a Gantt chart show planned workload as constant. In practice, many activities (especially summary elements) have front-loaded or back-loaded work plans, so a Gantt chart with percent-complete shading may actually mis-communicate the true schedule performance status.

PLANNING N SCHEDULING

Use a Gantt chart to plan how long a project should take. 

A Gantt chart lays out the order in which the tasks need to be carried out.

Early Gantt charts did not show dependencies between tasks but modern Gantt chart software provides this capability. 

MONITERING A PROJECT

A Gantt chart lets you see immediately what should have been achieved at any point in time. A Gantt chart lets you see how remedial action may bring the project back on course. Most Gantt charts include "milestones" which are technically not available on Gantt charts.  However, for representing deadlines and other significant events, it is very useful to include this feature on a Gantt chart.

 New Feature: Grouping and Automatic WBS Numbering

In version 2.0 (the professional version) of the Gantt Chart template, I added automatic Work Breakdown Structure (WBS) numbering and included default grouping. See my article on Grouping and Outlining in Excel for an explanation of how to use Excel's "Group and Outline" feature for expanding or contracting groups of items.

43

Figure 1. Grouping and WBS numbering in the Gantt Chart template.New Feature: Enter Working Days, Duration, or End Date

In the professional version of the Gantt Chart Template, template rows have been included that give you different ways of entering the dates and durations for the tasks. You can even use different methods within the same Gantt chart as shown in the image below (the inputs have green backgrounds).

Figure 2. Various ways to enter task dates and durations. Duration: The default method where you enter the number of calendar days for a task. Working Days: Perhaps a more useful way to create a project plan. The End Date is

calculated based on the working days, excluding weekends and the holidays that you decide to list.

End Date: Entering the end date can be useful when you know a deadline and are forced to complete a task by that date.

Also notice that in the professional version, the Start and End dates are formatted to show the weekday. This helps you avoid starting or ending on a weekend, without having to consult a calendar.

Concept of project inventory (32)

A project is an organization unit, established for the attainment of a goal like the launching of a new factory or the development of a product on time, with in the stipulated resource constraints. The material cost or cash out flow of any project is over 80% of the project cost. The purchase, follow up and storage of project material is usually delegated to the down line people by the purchase manager. In order to ensure that the project is on stream by the scheduled date, the project material is ordered sufficiently in advance. Lack of coordination and improper and inept monitoring of project activities result in cost overrun and time run up. When the project is properly scheduled and the lead times are estimated in advance, the project inventory should be zero.

44

Features of project material

The purchase decision of project material is normally taken by top line based on techno economic analysis

In view of the high cost of project material, adequate planning, sourcing , follow up and negotiations have to be done

Suitable bid evaluation should be developed. Legal aspects like contract, performance etc should be thoroughly considered. Availability of funds, credit facilities are usually studied by the finance department while

choosing the supplier. Currency fluctuation in an important aspect Make-buy-lease criteria should be explored Life cycle costing, tax life, penalty etc are reviewed critically before placing the order Payment terms should be finalized at the time of contracting Agreement on inspection procedures at different stages is another important aspect Overstimulation of requirements, which results in project surplus materials and

obsolete items in stores, should be avoided. The ideal project inventory should be zero. Planning and monitoring techniques like the network analysis as well as PERT/CPM

techniques should be applied to the project materials. Since projects are located in far flunk areas without adequate communication facilities,

efforts should be made to improve the communication from the site to the different suppliers.

The aim of any project is to commission the project in time so that the product cost of the project is the least. The material subsystem should strive towards the overall project goal.

Network analysis

Management of any project involves planning, coordination, control and monitoring of a no. of activities with limited resources of materials, machine, money, means and time. Network analysis provides a dynamic planning and scheduling system which is capable of meeting any subsequent change.

PERT/CPM

The most important network analysis techniques are:PERT-Program Evaluation Review TechniqueCPM-Critical Path MethodCPA- Critical Path Analysis

The special project office of the American Navy introduced PERT. At about the same time , he Du Pont initiated a similar technique known as the critical path method in order to reduce the time and cost of new products. PERT relies on probability theory to get three time estimate for forecasting any activity of the project and it is particularly suited to Indian conditions. The CPM on the other hand relies only on one time estimate and is known as deterministic model.Inspite of the minor difference in the terminology used both are useful in completing the project in the context of given resources.

Aspects of PERT

PERT aims at answering the following questions When will the project be completed?

45

What are the main activities of the project? Which are the jobs in the project are critical? Where should management concentrate its efforts out of the numerous items , at any

specific point of time? Etc

Steps involved in developing a PERT diagram include the following: The project is split in to small independent jobs. The order of precedence is determined The activity sequence is represented diagrammatically.

Preservation of material in stores(33)Preservation of material in stores(33)

Preservation of materials includes deterioration of materials and stores hygiene. Preservation means the keeping of the materials in a fresh and serviceable condition deterioration of materials. Some of the main reasons for deterioration are

1. Some times inherent nature of the material is such that it deteriorates in course of time 2. Another course is inadequate storage condition 3. A third cause of deterioration is damage arising from accident or bad handling

The subject of preservation, materials are divided in to two categories

Organic substance (cotton, silks, wool, leather, rubber, timber, foodstuffs) Processed materials (metal items, electrical equipment, chemical stores,

drugs)

Stores hygiene

Some of the aspects of stores hygiene are as follows

1. Cleanliness of store rooms act as deterrent to insects and other pests who thrive in accumulated debris and racks in floors and walls. Dust and dirt should be removed regularly and larger cracks should be filled with pitch or cement

2. Ventilation; air must be allowed to circulate freely throughout the storage area, the only exception being in respect of rubber articles where ventilation has to be restricted to a slow natural circulation of the air. Free aeration helps in keeping the stored materials and store rooms dry and prevent accumulation of heat with in the stacks, bundles and stores. Thus it helps to reduce the chance of combustion of materials

3. Segregation of infested materials; items damaged by biological agencies should be segregated as soon as the damaged is noticed and given suitable treatment

4. Disinfestations of godowns; store rooms in which materials infested by microorganisms have been kept should periodically be disinfested as shown below.a) The rooms should be emptied of all infested material and cleaned thoroughlyb) The wall should be white washed c) The floor should be washed with phenyle or creosote liquid

5.Dunnage and top cover; the term dunnage is applied to any material or structure placed between the ground and material or storage equipment with the following objectives

a) Providing a firm and stable base for stacking b) Preventing moisture from the ground

c) Preventing white ants and other insects from crawling from the ground in to stack on their gnawing rampage

Storage Equipment (34)

46

Storage equipment used for holding or buffering materials over a period of time. The major types of storage equipment are:

The most common reason for storing a product allows the other elements of production to operate more efficiently on a per-unit basis because the fixed costs associated with utilizing the element can be spread over more products; e.g., storing up to a truckload of product in a facility reduces the per-unit costs of shipping; and buffering or storage of WIP enables batch production which reduces the per-unit setup costs.

Other potential reasons for storage include: time bridging—allows product to be available when it is needed (e.g., storing spare machine parts at the facility); processing—for some products (e.g., wine), storage can be considered as a processing operation because the product undergoes a required change during storage; and securing—e.g., nuclear waste storage.

1. Block Stacking (No Equipment)

Bulk storage using block stacking can result in the minimum cost of storage since cube utilization is high and no storage medium is required, but material accessibility is low since only the top of the front stack is accessible and loads at bottom of a stack must not require support

Storage racks are used when support and/or material accessibility is required

2. Selective Pallet Rack

Most popular type of storage rack

Pallets are supported between load-supporting beams

Special attachments and decking can be used to make the racks capable of supporting other types of unit loads besides pallets (e.g., coils, drums, skids)

Selective racks can be used for the following types of storage:

Standard—single-deep storage using a counterbalanced lift truck

Narrow-Aisle—storage using a narrow-aisle lift truck

Deep-Reach—greater than single-deep storage (typically double-deep storage)

47

3. Drive-Through Rack

Loads are supported by rails attached to the upright beams

Lift trucks are driven between the uprights beams

Requires similar-width loads

Open at both ends, allowing access from both

ends (FIFO)

Same as drive-through rack, except closed at one end, allowing entry from only one end (LIFO)

5. Flow-Through Rack

48

Loads are supported on an incline to enable gravity-based movement of the loads within the rack (via, e.g., a gravity roller conveyor)

Loaded at the higher end and unloaded at the lower end

(FIFO)

6. Push-Back Rack

Same as push-back rack, except loaded and unloaded at the lower end and closed at the higher end (LIFO)

7. Sliding Rack

49

Only one mobile aisle is used to access several rows of racks

Location of the aisle is changed by sliding the rows of racks along guide rails in the floor

Typically found in library stacks

8. Cantilever Rack

Loads are supported by cantilever "arms"

Used to store long loads (e.g., bar stock, pipes, lumber)

Similar to pallet racks, except the front upright beams and the front supporting beams are eliminated

50

9. Stacking Frame

Interlocking units that enable stacking of a load so that crushing does not occur

Can be disassembled and stored compactly when not in used

Pallet frames can be used to enable multilevel block stacking

11. Storage Carousel

Carousel consists of a set of vertically or horizontally revolving storage baskets or bins

Materials (and the storage medium) move to the operator, "part-to-man," for end-of-aisle picking

Each level of the carousel can rotate independently in a clockwise or counter-clockwise direction

Control ranges from manually activated push buttons to automated computer controlled systems

Provides an alternative to typical "man-to-part" AS/RS, where the S/R machine moves to the part

51

Similar to a trolley conveyor with

12. Automatic Storage/Retrieval Systems (AS/RS)

Consists of an integrated computer-controlled system that combines the storage medium, transport mechanism, and controls with various levels of automation for fast and accurate random storage of products and materials. Storage/retrieval (S/R) machine in an AS/RS operates in narrow aisle, serving rack slots on both sides of aisle; can travel in horizontal (along the aisle) and vertical (up and down a rack) directions at same time

Advantages: fewer material handlers, better material control (including security), and more efficient use of storage space

Disadvantages: high capital and maintenance costs, and difficult to modify

12(a) Unit Load AS/RS

Used to store/retrieve loads that are palletized or unitized and weigh over 500 lbs.

Stacking heights up to 130 ft. high, with most ranging from 60 to 85 ft. high; 5 to 6 ft. wide aisles; single- or double-deep storage racks

52

12(b) Miniload AS/RS

Used to store/retrieve small parts and tools that can be stored in a storage bin or drawer

End-of-aisle order picking and replenishment

Stacking heights range from 12 to 20 ft.; bin capacities range from 200 to 750 lbs.

Termed a "microload AS/RS" when used in assembly, kitting, and testing operations to deliver small containers of parts to individual workstations, where workstations are typically located on the sides of a pair of racks and the S/R machine operates between the racks to move containers to openings in the racks

(storage lanes) located next to each station

Used for in-aisle picking; operator picks from shelves, bins, or drawers within the storage structure

Manual or automatic control

S/R machine is similar to an order picker or turret truck and can sometimes operate as an industrial truck when outside an aisle, except the S/R is guided along a rail when operating in an aisle

12(d) Deep-Lane AS/RS

53

Similar to unit load AS/RS, except loads can be stored to greater depths in the storage rack

A rack-entry vehicle is used to carry loads into the racks from the S/R machine, and is controlled by the S/R machine

Termed an "automated item retrieval system" when used to automatically retrieve individual items or cases, with replenishment (storage) taking place manually from the rear of a flow-through storage lane and items are pushed

forward with a rear-mounted pusher bar for automatic picking from the front of the storage lane

13. Split-Case Order Picking System

Unlike an AS/RS, a split-case order picking system enables fully automated picking of individual items

Two general categories of split-case order picking system are robotic based systems and magazine/dispenser based systems

Robotic based systems are similar in construction to robotic pick and place palletizers

Magazine/dispenser based systems are similar to vending machines, but larger in scale

"A-Frame" dispenser system (pictured) is popular within pharmaceutical distribution centers; items are dispensed onto a belt conveyor that carries them into a container

54

14. Mezzanine

Inexpensive means of providing additional storage or office space

Makes use of clear space over activities not requiring much headroom (e.g., restrooms, block storage, etc.)

At least 14 ft. of clear space is needed for a mezzanine

|

MATERIAL HANDLING SYSTEM AND MATERIALS MANAGEMENT(35)

MATERIAL HANDLING:

Defined as the art and science of moving, packing and storing of substances in any form.

Creation of time and place utility Movement and storage of material at the lowest possible cost through the use of

proper methods and equipments. Lifting, shifting and placing of materials which effect a saving in money, time and

place Art and science of conveying, elevating, positioning, transporting, packaging and

storing of materials

IMPORTANCE OF MATERIAL HANDLING:

Efficient material handling is important to manufacturing operations. Materials sent by vendors must be unloaded, moved through inspections and production operations to stores and finally to the shipping department.

Material handling analysis is a subset of plant layout. Method study, plant layout and material handling are all part of the design of a production facility

Material handling system and plant layout enhance effectiveness of each other. Efficient operation of appropriate material handling methods reduces costs and

enables maximum capabilities to be derived from a given production facility

55

MATERIAL HANDLING PRINCIPLES

Eliminate handling If not, make handling distance as short as possible

Keep moving If not, reduce the time spent at terminal points of a route as short as possible

Use simple patterns of material flow The simplest path is a straight line, if not, avoid back tracking, crossovers

Carry pay loads both ways If not, minimize time spent on transport empty by changing speed in return route

Carry full loads If not, decrease carrying capacity by lowering the speed

Use gravity If not use, use a cheaper power source

NEED FOR MATERIAL HANDLING SYSTEM

The need to design a material handling system arises when:

1. A new product is being planned for manufacture 2. Change in the existing product design requiring a corresponding change in the layout 3. Obsolescence of facilities 4. Frequent accidents 5. Adoption of new safety standards  

SCOPE OF MATERIAL HANDLING

The scope of material handling activity in any industry depends on the type and size of industry, the product manufactured, the value of the product, the value of the activity being performed, and the relative importance of material handling activity to the other activities. However, it should be emphasized that a sizable portion of total material handling activity is not in manufacturing but in the fields of distribution, service industries, agriculture, and construction. It is very important that both the beginning student and material-handling engineer be aware of the material handling applications in the following areas:

1. Industrial material handling 2. Transportation industries 3. Warehousing 4. Extractive industries 5. Process industries

ORGANISATION OF MATERIAL HANDLING: Material handling is a job that directly affects each area in a plant, and as such

requires a carefully planned organizational structure. The structure varies with industry, type of manufacturing process, the product

manufactured, its bulk and its value In small firms, it may be one of the functions assigned to the plant engineer,

purchasing manager or production manager. In big firms, a separate department itself is developed to study procedures and devise

better handling techniques. When thus organized, they form part of industrial engineering division.

56

EXAMPLE OF MATERIALS MANAGEMENT IN SHIPYARD INDUSTRY:Material management in the shipyard industry has aroused considerable interest in

recent years. It has been emphasized that the effective handling, storage, and flow of materials determine the successful operation of a warehouse. Group technology also plays an important role in material management for grouping and coding. It has been reported that proper grouping and coding of materials not only reduce labour and material handling, but also reduce time and the shifting of parts to different places. The various aspects of material management, including material handling, inventory management; planning and scheduling, procurement and receiving, monitoring and tracking, controlling etc are highlighted. Several new techniques and trends have been reported for a more efficient and cost-effective material management. These new techniques have great potential for implementation in the shipbuilding industries and need to be explored in relation to greater competition in the global market.

SAFETY STOCK (36)

Safety stock is a term used by inventory specialists to describe a level of extra stock that is maintained below the cycle stock to buffer against stockouts. Safety stock (also called buffer stock) exists to counter uncertainties in supply and demand. Safety stock is defined as extra units of inventory carried as protection against possible stockouts (shortfall in raw material or packaging). By having an adequate amount of safety stock on hand, a company can meet a sales demand which exceeds the demand they forecasted without altering their production plan.It is held when an organization cannot accurately predict demand and/or lead time for the product. It serves as an insurance against stockouts.

With a new product, safety stock can be utilized as a strategic tool until the company can judge how accurate their forecast is after the first few years, especially when used with a material requirements planning worksheet. The less accurate the forecast, the more safety stock is required. With a material requirements planning (MRP) worksheet a company can judge how much they will need to produce to meet their forecasted sales demand without relying on safety stock. However, a common strategy is to try and reduce the level of safety stock to help keep inventory costs low once the product demand becomes more predictable. This can be extremely important for companies with a smaller financial cushion or those trying to run on lean manufacturing, which is aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramatically affect their business. Too much safety stock can result in high holding costs of inventory. In addition, products which are stored for too long a time can spoil, expire, or break during the warehousing process. Too little safety stock can result in lost sales and, thus, a higher rate of customer turnover. As a result, finding the right balance between too much and too little safety stock is essential.

Reasons for safety stock

Safety stocks enable organizations to satisfy customer demand in the event of these possibilities:

Supplier may deliver their product late or not at all The warehouse may be on strike A number of items at the warehouse may be of poor quality and replacements are still

on order A competitor may be sold out on a product, which is increasing the demand for your

products Random demand (in reality, random events occur) Machinery breakdown

57

Unexpected increase in demand

Reducing safety stockSafety stock is used as a buffer to protect organizations from stockouts caused by inaccurate planning or poor schedule adherence by suppliers. As such, its cost (in both material and management) is often seen as a drain on financial resources which results in reduction initiatives. In addition, time sensitive goods such as food, drink, and other perishable items could spoil and go to waste if held as safety stock for too long. Various methods exist to reduce safety stock, these include better use of technology, increased collaboration with suppliers, and more accurate forecasting. In a lean supply environment, lead times are reduced which can help minimize safety stock levels thus reducing the likelihood and impact of stockouts. Due to the cost of safety stock, many organizations opt for a service level led safety stock calculation; for example, a 95% service level could result in stockouts, but is at a level which is satisfactory to the company. The lower the service level, the lower the requirement for safety stock.

An Enterprise Resource Planning system (ERP system) can also help an organization reduce its level of safety stock. Most ERP systems provide a type of Production Planning module. An ERP module such as this can help a company develop highly accurate and dynamic sales forecasts and sales and operations plans. By creating more accurate and dynamic forecasts, a company reduces their chance of producing insufficient inventory for a given period and, thus, should be able to reduce the amount of safety stock which they require.In addition, ERP systems use established formulas to help calculate appropriate levels of safety stock based on the previously developed production plans. While an ERP system aids an organization in estimating a reasonable amount of safety stock, the ERP module must be set up to plan requirements effectively.

Calculating safety stock

A commonly used approach is that Safety stock should be decided based on the following factors:

Demand: the amount of items consumed by customers, on average, per unit time.Lead time: the delay between the time the reorder point (inventory level which initiates an order) is reached and renewed availability.Service level: the desired probability that a chosen level of safety stock will not lead to stock-out. Naturally, when the desired service level is increased, the required safety stock increases as well.Forecast error: an estimate of how far actual demand may be from forecasted demand. Expressed as the standard deviation of demand.

SAFETY LEAD-TIME

This is the time gap between placement of an order and the time of actual supply. It is not necessarily identical to delivery time. It is composed of three components, namely;Lead time = Servicing time+ Delivery time + Receiving timeServicing timeServicing timeIt is the time taken for placing an order. It includes time for obtaining quotations, time for negotiating price, time for visiting/potential suppliers and time for “letting’’ contracts.Delivery time It is the time taken by the supplier to comply certain order.

58

Receiving TimeReceiving TimeThis includes time for uncrating goods, time for inspection of goods, time for movement of goods to store, and time for entering goods in stocks.What is a Control Chart? (37)

A control chart is a statistical tool used to distinguish between variation in a process resulting from common causes and variation resulting from special causes.

Every process has variation. Some variation may be the result of causes which are not normally present in the process. This could be special cause variation. Some variation is simply the result of numerous, ever-present differences in the process. This is common cause variation. Control Charts differentiate between these two types of variation. A control chart always has a central line for the average, an upper line for the upper control limit and a lower line for the lower control limit. These lines are determined from historical data.

Why should teams use Control Charts? Control Charts help you monitor the behavior of your process to determine whether it is stable.Your team will benefit from using a Control Chart when you want to

Monitor process variation over time. Differentiate between special cause and common cause variation. Assess the effectiveness of changes to improve a process. Communicate how a process performed during a specific period.

Characteristics of control charts

If a single quality characteristic has been measured or computed from a sample, the control chart shows the value of the quality characteristic versus the sample number or versus time. In general, the chart contains a center line that represents the mean value for the in-control process. Two other horizontal lines, called the upper control limit (UCL) and the lower control limit (LCL), are also shown on the chart. These control limits are chosen so that almost all of the data points will fall within these limits as long as the process remains in-control. The figure below illustrates this

59

What are the types of Control Charts? There are two main categories of Control Charts, those that display attribute data, and those that display variables data.

Attribute Data: This category of Control Chart displays data that result fromcounting the number of occurrences or items in a single category of similaritems or occurrences. These “count” data may be expressed as pass/fail,yes/no, or presence/absence of a defect. Variables Data: This category of Control Chart displays values resultingfrom the measurement of a continuous variable. Examples of variables dataare elapsed time, temperature, and radiation dose. While these two categories encompass a number of different types of Control Charts , there are three types that will work for the majority of the data analysisCases

X-Bar and R Chart Individual X and Moving Range Chart for Variables Data Individual X and Moving Range Chart for Attribute Data

Other six type of control charts are X-Bar and S Chart

Median X and R Chart c Chart u Chart p Chart np Chart

QUALITY CONTROL(38)Quality :

60

Quality refers to the sum of the attributes or properties that describe a product. These are generally expressed in terms of specific product characteristics such as length, width, colour, specific gravity and the like. To be meaningful in an industrial sense, theses characteristic s must be quantitatively expressed in terms, that can be objectively measured or observed. Why quality:

The need for quality needs no special emphasis. One benefit of quality is increased productivity. Better quality means reduced costs for repairs, instruction, scrap, rework and product warranties. Increased productivity results in better profits and builds customer loyalty. Quality also results in sustained profits.

Quality control: Those activities which assure that quality creation is performed in such a manner that,

the resulting product will in fact perform its intended function. When used in this sense, quality control can be divided into two fundamental endeavours: Assurance that the product characteristics selected will achieve the intended result and assurance that, items produced contain the specified characteristics.

Quality control is frequently used to refer to a specific organisation within in the industrial enterprise which is assigned responsibility for many of the activities necessary to achieve quality objectives.Quality control techniques:

Various techniques of quality control have been developed. More prominent of them are Just-In-Time, quality at the source, inspection and statistical quality control.1.Just-In-Time:

Just in time has different interpretations. For some , it is buying materials on time, for some others , it means planning and controlling production on the shop floor and for our purpose just in time is viewed as a technique of quality control. JIT helps achieve quality, because, it is a philosophy, that seeks to constantly improve production processes and methods.

2.Quality at the source:Where workers are made responsible to produce parts of perfect quality, before they

are passed on to the next operation , the concept of quality at the source emerges. The worker is put in the driver’s seat in controlling product quality.3.Inspection:

the act of determining conformance or non-conformance of the expected performance is the function of inspection. In other words, by inspection, a manager seeks to determine acceptability or non-acceptability of the parts, products or services. The basis for inspection is usually a specification , which is called inspection standard. Inspection is made by comparing the quality of the product to the standard.4.Statistical quality control:

statistical control is the application of statistical techniques to accept or reject products already produced, or to control the process and, therefore, product quality while the part is being made. While the latter is called process control, the former is named acceptance sampling.Acceptance sampling:

Acceptance sampling is based on the premise, that a sample represents the whole lot from which the former is drawn. In this method, samples are taken out and carefully inspected to detect defects. On the basis of number defects found, the lot is accepted or rejected. If defects are few, lot is accepted. It is rejected when defects are more. Thus acceptance sampling is used to take a decision regarding acceptance or rejection of a lot without having to examine the entire lot, thereby providing economy of inspection.

61