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Smita Khandelwal
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Excerpts of the Course
MaterialsThe Profit Centre
Organization of Material Function
Cost Reduction by Codification
Music -3D view of Materials Management
Financial Aspects in Materials Management
Inventory Management & EOQ P&Q Systems of Inventory
Warehousing Management
Stock Valuation & Verification
Disposal of obsolete & Scrap Items
Purchasing Cycle
Right Modes of Transport
Vendor Rating
Negotiations
International Buying
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Unit No. 1
MaterialsThe Profit Centre
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Materials Management as Profit Centre
Organizational Expenses
-Sales & Marketing- HRD
- Finance & Taxation
- Business Overheads
- Operations
Every Rupee saved adds to P&L Accounts
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1:- The Profit Centre
Is Material Management is about Negotiation & Buying?
BOM
Enquiries & Quotation
Comparative Analysis, Commercial Negotiations & terms agreement.
Release of PO, Delivery Schedule and Follow-up
Logistics and StorageBilling & Payment
Forecasting of materials
Vendor Management & Evaluation
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Material Management - Objective
5 Rs of Materials Management
1. Right Quality2. Right Quantity
3. Right Time
4. Right Source
5. Right Price
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SUPPLY BASE OPTIMSATION OR RIGHT SIZING
TQM OF SUPPLIERS
GLOBAL SOURCING
LONG TERM SUPPLIER RELATIONSHIP
EARLY SUPPLIER DESIGN INVOLVEMENT
SUPPLIER DEVELOPMENT
TOTAL COST OF OWNERSHIP
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TYPES OF PURCHASING STRATEGIES
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NEGOTIATIONS..
YOURSELFbalance between confidence & diffidence
EMOTIONConflict Handling-assertiveness
PEOPLEPractical-Speculative, Objective-Speculative
RELATIONSHIPSBuildworkingrelationships
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NEGOTIATIONS..
RITUALknow the rules of the game
CULTUREDo homework on the culture
TRUTHBe truthful & check for truth in your opponent
CREATIVE BARGAININGIntroduce more variables, communicate creativity
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NEGOTIATIONS..
PLANNINGIts all about information
TARGETSRephrase your objective
RAISING THE GAMERaise the level of abstraction to suit you.
TIME-TABLINGSlow down things to give you breathing space
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Unit No. 2
Organization of Materials Function
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2 :- Organization of Materials Function
-To have uninterrupted & Effective Flow of materials with lowest cost e.g.
Small shopkeeper & Department Stores- Location of Purchasing depends on type of
- Industry (Food Industry, Shelf Life)- Variety (Cosmetics, Merchandizing)- Volume (Mass production)
- Purchase function: Stores, inventory, planning, cost reduction,
Transportation, value engineering.- Purchase is not function of
-Finance (Min inventory, Max Cash Flow)- Production (Max Inventory, Min Cash Flow)- Administration (Waste of Inventory & Cash Flow)
- First Source of outside supplier hence public relations, corporate image.
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Purchase Enquires
Source identification and quote by tenders Negotiations & PO Follow-up with supplier, transport Stores, Quality inspection and documentation Receipt, Acceptance of correct material, rejection of incorrect material. Payment of supplier bills
Purchasers at Corporate Situation are been seen as Corporate Image &Public relation officer for organization.
PURCHASER PROCESSES
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o Economy of Saleso
Volume Negotiationo One Point contact with allo Resource Utilization
o Delay in Procuremento Inferior Quality
o Restoring emergency procuremento Team understanding technical specso In process inventory due to compiled quantityo Improper Planning / Cancellations, rejections
Centralized Procurement
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o Better Commitmento
Knowledge of needso Short communication timeo Better liaison & Performance Controlo Speedy Execution & Short inventoryo Lesser Economy of Scale
o Resource wasteo No Volume / Bulk discounto Higher Logistical Cost
DELEGATION OF POWER Material & User Department
Manpower Planning
De- Centralized Procurement
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Unit No. 3
Cost Reduction by Codification
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3 :- Cost Reduction by Codification
Representation item by number, alphabet, group digit, subgroup, type,
dimension, stores & bin location, sometimes suppliers name.
Number : Supplier country, Area CodeAlphabet : Item Starting alphabetGroup digit : Production, Administrative, Packaging, FinanceSubgroup : Metal, Wood, Paper
Type : Raw Material, Stationary, consumables, Tools, sparesDimension : Size, CapacityStores & Bin Location : Material, Administrative, Rack location, Tray / BinSuppliers Name :ESSAR, NAVNEET, CAMLIN, FEVICOL, BOSCH
Pin Code / Pan Card / Mobile No
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While deciding codes:o logical, simple & easy ruleso Uniqueo similar group & easy retrievalo flexibility to add new items
Why codification?o Easy recognitiono Small nameso Logical groupingo No duplicationo Less itemso Bulk ordering with staggered deliveryo Less lead time and More Working Capitalo Simplification, Standardization & Computerizationo Stock Transfer
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Coding System
The Brisch System:
Conceived by E G Brisch & J Gombinski. Block of numerals separated bydecimals.First Block: Major Classification e.g. Raw Material, Fasteners etcSecond Block: Secondary Classification by types & kindsThird Block: Dimensions or other distinguish features.
XX XX XXXMAIN SUB CLASS MINOR VERIFICATIONFASTENERS TYPE OF SCREW (BSW, CSK) Material (Size , 1, L)
The KODAK System:Developed by Eastman Kodak Co. of USA. Its a 10 digit numerical code. ThreeGroup of digits separated by hyphens. E.g.(XXXX - XX - XXXX) (XX - XXXX - XXXX) (XXX - XXXX - XXX)
Main Sub Type Dimensions MinorClass Class & Kind & Characteristics Variants
S CSS 0020 / S 200 S 34
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PSHCSSM10020 / SPR200ASR34
PSHCSSM10020
P : Production DepartmentS : Steel itemH : HardwareCSS : CS ScrewM10020 : M100 x 20
SPR200ASR34S : Stationary DepartmentP : Paper productR : Long Register200 : 200 PagesAS : Administration Stores
R : Rack No34 : Shelf no.
Way AheadInternational Codification
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Unit No. 4
3D View of Materials Management
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Inventory Control: Selective Treatment - Pareto Principle
CLASSIFICATION Criterion Employed Purposes
ABC Analysis Usage Value =Consumption x Price
To Decide stocking policies, improve store keeping, degree of control
HML Analysis Unit Price To access storage & security requirement, Control consumption , Frequencyof stock, buying & control policies, power of cash purchase.
VED Analysis Criticality of Item(Prodn Loss)
Spares Inventory Control
SDE Analysis Procurement Difficulties Method of buying, responsibility of buyers
GOLF Analysis Nature of Suppliers Allocation of Procurement Responsibility
SOS Analysis Seasonability of Item Procurement strategies
MNG Analysis Stock Turnover Rate Disposal of surplus material, identification of non existing item to save space
FSN Analysis Inventory Turnover Ratio Disposal of Surplus & obsolete stock.
XYZ Analysis Value of Stocks on hand Which items to control to bring down current inventory
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Unit No. 5
Financial Aspects of MaterialsManagement
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HOLDING Cost
- Stock Out Cost: Cost of being out of stock i.e. loss due to non availability ofan item in stock.
SOC depends on nature of item or bought out parts
SOC = Premium Price Paid for Item = Market PriceVendor Price
SOC in case of FG is profit loss on lost sales
SOC in case of spares = Downtime (Hrs) x M/c Hour Rate (INR)
SETUP Cost: Change Over Time to switch from ONE ACTICITY TO ANOTHER
Setup Cost can be reduced by
Traditional Method : Time & Motion StudySMED : Single Minute Exchange of Dies
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Item Cost:
Cost corresponds to price paid for the goods themselves.
Penalty Cost:
Cost paid for each demand item which cannot be served directly frominventory.
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ACQUISITION Cost:
Cost incurred apart from the Cost of Raw Material viz.- Cost of Procurement- Freight & Logistics
- Follow-up & Travel Charges- Operational Overheads- Meetings, Postage, Advertisement- Other capital cost & its Depreciation
Settlement of Bills:
Payment deliveries from Finance for the receipt of material from vendor.Clearing the Bills, Raising payment advice, Payment follow-up andcommunication with Vendor.Late payments would result in non appreciated relations & increase sourceprices as the interest would be additional multiple due to late payment.
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Accounting:
Receipt & Quality approved entry of Material & being a major cost incurredaspects refers to
- Pricing Issues
- Evaluation & Verification of Stocks- Credit Reversal of Taxes, Duties, Excise & other components
For A/c various terminologies are used for better evaluation viz.-FIFO (First In First Out)- LIFO (Last In First Out)
- Weighted Average
Two year end Stock value is to be include in Balance Sheet.
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AUDITS:To verify and check whether the integrity & effectiveness of transactions areconsistent with organizational Objectives, Procedures, Strategies, Policies &manual.
-Management Audit- Internal Audit- External Audit- Cost Audit- Social Audit- Proprietary Audit
- Accountant General Audit
DISCOUNTS
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DISCOUNTS
Trade Discount
Quantity Discount
Off Season Discount
Cash Discount
Standard Package Discount
OEM Discounts
Turnover Discounts
Shi i
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Shipping Terms :-
Ex Works @ Sellers Premises
FOB (Station of Dispatch) @ Sellers Station
FOR (Freight on Road) @ Buyers Station
Buyers Works @ Door Delivery
At Site @ Delivery at Site / Stores
Works Contracts @ Ready for Use
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Unit No. 6
Inventory Management & EOQ
Inventory Control:-
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Inventory Control:-
-Finished Goods inventory Reduction :- Pull Production- HeijunkaLearning Production
- WIP Inventory Management :- Small Batch Size- Setup Reduction- Cellular Layout / Flow Management
- Buffer Stock Management:- Lesser Defects- Absenteeism- Breakdowns
- Fundamental Problems:
- Small Lot Purchase- Supplier Proximity- Vendor Managed Inventory- Kanban- JIT
Motivation for holding Inventories:-
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Motivation for holding Inventories:-
-Economy of Scale-Uncertainty of Demand- Smoothing Demand Over Time
- Flexibility in Planning
Motivation for not holding Inventories:-
-Capital-Depreciation
- Flow Time
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EOQ : ECONOMIC ORDER QUANTITY
Annual Total Cost
Annual Procurement Cost
Annual Inventory Carrying Cost
AICC = Annual inventory x ICC in fractionAPC = No of Order per year x Procurement Cost Per orderAnnual Total Cost = AICC + APC
EOQ q = 2xSxCpCu x i
S: ConsumptionCp: Cost of ProcurementCu: Cost Per Uniti: ICC
Assumptions for EOQ and valid on:-
-Price / unit is independent of Order Quantity- Item can be procured within zero time lag- Items are consumed at known constant rate- Items can be procured free from any restrictions- Item has fairly long shelf l ife, no obsolescence- ICC & APC are common to all items and they are known.
But referred above EOQ may require modification due to business constraints viz.-Follow-up Difficulties
- Supplier Minimum quantity condition- Lead Time- Seasonal availability- Shelf Life- Packing Size- Space Restrictions
SOLUTION: - STAGGERED DELIVERIES
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E.G.
Consumption / Month = 75 Nos.Cost per unit = 25/-
Cost of Procurement = 36/-Inventory Carrying Cost per month = 1.5%
Soln:-
Annual Consumption = 75 x 12 = 900 units
Annual ICC = 1.5% x 12 = 0.18
qo = 2 x S x Cp = 2 x 900 x 36 = 120 Nos.Cu X i 25 x 0.18
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Unit No. 7
P & Q Systems of Inventory
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Decisions for When to order & How much to Order ?????
Inventory Controls :- When inventory level hits a predefined value, an order offixed size is then launched. These areFixed Quantity ( Q system of Procurement)Periodic Review (P System of Procurement)
Order Quantity (Q)
Fixed Variable
Review Time Continuous X
Periodic X X
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SAFETY STOCK & SERVICE LEVELS
Safety Stock:
We may run out of stock because of a re-supply delay or higher than anticipatedusage. If we can predict demand then we merely place EOQ orders on time. Thus weneed to assure a minimum level of inventory, quantity of which replicates wrt Lead
Time, Consumption pattern and buffer Stock.
The figure shows the predictable, timely re-ordered stock movements.
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Service Levels:
We risk a stock-out with unpredictable demand, usage and re-supply so introducing a
safety or buffer stock reduces the risks of variable demand/lead time. However, the
level of material consumption would vary due to constraints / bottlenecks of other
resources viz. non availability of manpower, power outrage which affects the Planning.
S l ti f R l i h t S t
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Replenishment System
When to Order
As per Stock As per Time
How Much to Order
Fixed Quantity Variable Quantity
Review SystemOptional
Replenishment
Reorder LevelSystem / Two Bin
System
Review System /Compulsory
Replenishment
Selection of Replenishment System
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Unit No. 8
Warehousing Management
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Unit No. 9
Stock Valuation & Verification
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Need for Valuation:
For converting physical quantities into monetary figures for judging the performance of
organization as inventory forms the single largest assets in industrial process.
Stores Manager has physical custody for raw materials, capital goods, consumables,
spares, furniture etc and is responsible for safe upkeep. Since process of valuation
enables organization to measure its performance, a picture can be portrait on
methods of valuation adopted e.g. gross profit is obtained by deducting the cost of
material consumed from net sales and in bad year, a higher gross profit can beindicated by adopting a lower value for cost of materials consumed.
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Methods of Evaluation:
FIFO: FIRST IN FIRST OUT (material issued in chronological order)
LIFO: LAST IN FIRST OUT (material receipt last are issued first)
Date Receipt Issue StockQty Rate Value Qty Rate Value Qty Rate Value
5th Jan - - - - - - - - -
6th Jan 200 1.00 200 - - - 200 1.00 200
10th Jan 300 1.20 360 - - - 300 1.20 360
12th Jan - - - 100 1.00 100 100 1.00 100
14th Jan - - - 100 1.00 100 300 1.20 360
16th Jan - - - 150 1.20 180 150 1.20 180
Date Receipt Issue Stock
Qty Rate Value Qty Rate Value Qty Rate Value
5th Jan - - - - - - - - -
6th Jan 200 1.00 200 - - - 200 1.00 200
10th Jan 300 1.20 360 - - - 300 1.20 360
12th Jan - - - 100 1.20 120 100 1.20 120
14th Jan - - - 200 1.20 240 200 1.00 200
16th Jan - - - 150 1.00 150 50 1.00 50
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Average Price: The issues are valued on simple average price. Method is very accurate
due to approximation. As prices are not weighted by quantities purchased, the
Average prices obtained do not give a proper presentation facts. Since the valuation is
not at cost, the closing stock value will differ from actual value, giving rise to profit/loss
due to system adoption.
Weighted Average: Issues of production are split into equal batches from each
shipment at stock. Being realistic methods the price levels and stabilizing cost figures.
The total unit cost is arrived with weighted average is computed to production and a
new price is computed on purchases of extra material purchased.
Standard Cost: Forecasted unit price for specific period of one year or more is used to
evaluate the issue. Actual price being different from standard cost helps in evaluating
the performance of purchasing.
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Replacement Cost: Relevant in inflation in built economy, the purchases are valued on
price paid, issue price is based on replacement price i.e. price on replacing them on
date of issue. Value of stock on hand would be difference between the sum of
purchase price and sum of replacement prices.
Stock Verification: Reconciliation of stock, review of stock and book stock which differs
in almost all organizations. Magnitude of this will increase with more transactions as
mistakes may be committed in more no. of transactions. Issues with indents, improper
receipts, pilferage, obsolescence, deterioration & damage due to different causes of
improper storage, evaporation, spillage etc.
Process of Verification: Inventory Count, Physical counts, weighing, against book of
accounts. These are usually done on Quarterly, half yearly or yearly basis to have
balance between physical count of material wrt book of accounts.
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Unit No. 10
Disposal of Obsolete & Scrap Items
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Management of SOS: Holding SOS results in non moving stock & cost. These includes
ICC (30%), maintaining records, security cost, preservation, capital loss & opportunity
cost, Manpower, space.
Category of SOS: Obsolete stock are not damaged but not required & have economic
value. Items like spare parts, foods & drugs, change in product designs, technological
innovation, cannibalization, inaccurate forecasts, wrong purchases, wrong
codification, poor maintenance, stores handling. All SOS being non moving cannot be
obsolete being coverage from insurance.
These items either have no immediate use nor are reasons of above mentioned errors.
Dormant/slow moving stocks are those categories whose usage is infrequent.
Reason for Obsolescence:
Sudden Development of High Tech
New tech
Automation
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Rationalization
Design Change
Product Change
Diversification
Cannibalization
In few cases standard design & non standard varieties elimination .
Control of SOS: Stock records & item movement is one of the effective method for SOS.
FSN type of Inventory Classification is adhered to identify & control of SOS. Scrap is
residue from Manufacturing process, which cant be used in organization. Usually scrap
is categorized in Ferrous Scrap, Metal Scrap, Waste.
Disposal: Disposal of SOS is effective vide
Inviting Offers
Annual Scrap Contract
Public Auction
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Unit No. 11
Purchasing Cycle
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Indent Status: Material request with technical details, quantity, codes, time.
PO should contain:
Order No
Date
Serial No
Full Name & Address of Supplier
Consignees Name & Address
Terms & Conditions of purchase (Price, Payment mode, Delivery date / schedule)
Goods Description in all aspects
Quantity, Code
Supplier Quote reference
Packaging & Transport instructions
Inspection Procedures, Warranty, Insurance & Cancellation Provisions
Authorized Signatures, Acknowledgement,
Penalty/bonus.
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Raising of PO
Chasing & Follow-up
Transportation
Incoming Inspection
Bill Settlement
Documentation
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Unit No. 12
Right Mode of Transport
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Transport Cost: Accounting to 15-20% of the cost of material purchased. At time cost of
transportation is more then the cost of raw material due to
- Vendor located in remote place
- Critical item requiring special transportation
- Cheaper items to be imported with higher duties & taxes.
As buyer we need to seek constant improvements in transportation to cut down
transportation cost achieving greater speed and better quality of service in the light of
technological advances in transportation, handling, purchasing, and logistical
management.
It is possible to reduce the cost of transportation by appropriate choice of mode of
transport, route selection, rate verification, auditing, application of linear programming
techniques for optimum transportation costs.
Choice of Mode of Transport: Depends upon type of material, rate charges, distance,
volume, safety, loading & handling charges, taxes etc.
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Railways: More economical for longer distance and heavy volumes.
Road Transport: Carry assignments of smaller weightsat a lesser cost. Since other mode
cant reach everywhere, RT is only mode to be relied upon for linkages of source.
Water Transport: WT is generally resorted in case of imports & is cheaper mode of
transport but takes longer time.
Air Transport: AT is one of the most costliest transport mode but the fastest. Perishable or
smaller shelf life items are been shipped. Buyer needs to make setoff to the cost of
transport wrt the opportunity cost.
Containerization: Depot-Depot. Door-Door with cheaper handling charges. Reduce
rates compare to AT, Lesser CIF-Taxes-Duties.
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Few Dos & Dont in Transportation:
- Shouldnt permit vendor to ship the material
- Inspect Freight bills carefully
- Double check supplier packaging
- Shouldnt allow vendor to use premium transportation when not necessary
- Clear identification for freight rate purposes
- Dont offer damaged consignments.
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Unit No. 13
Vendor Rating
V d b t i t ibl t t i ti d th b th &
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Vendors are best intangible assests to any organization and thus both new &
established vendors are coming for critical review of their plant capacities, financial
capabilities, performance in todays scenario.
Evaluating Potential Suppliers:
- Step is to evaluate each prospective supplier individually.
- The type of evaluation required to determine supplier capability varies with the
nature, criticality, complexity, and dollar value of the purchase to be made.
- The evaluation also varies with the supply managers or sourcing teams knowledge
of the firms being considered for the order.
- Complex, high-dollar-value, and perhaps critical, purchases, additional evaluation
steps are necessary.
- For complex, high-dollar-value, and perhaps critical, purchases can include surveys,
financial condition analysis, third party evaluators, evaluation conferences, plant
visits, and selected capability analyses.
Supplier Surveys
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- Supplier Surveys
- Financial Condition Analysis
- Third Party Evaluators
- Evaluation Conference- Facility Visits
- Quality Capability Analysis
- Capacity Capability Analysis
VENDOR
Raw Material
Special Process
Surface Protection
Quality System
Supplier Audit
Supplier assessment and orientation
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Supplier assessment and orientation
Supplier selfevaluation
Quality system survey
Design validation Manufacturing validation
Production part approval process
Source approval testing
Demonstration of total quality capability
Audit of supplier quantity system
Achieve ship to use status
Implement quality maintenance activities
Pre-certification review
Certification
IBM Quality Rating System: Uses quality costs as basis for rating suppliers
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IBM Quality Rating System: Uses quality costs as basis for rating suppliers.
VQR = Desired Cost of Inspection x 100
Actual Cost of Inspection
Bell Quality Rating System: Vide Lot Quality Index assessment is done on lots received
against lots rejected, by disposition & category.
LQI = X/L
Where, L is Total No. of lots received during period.
X is (L1x1.00)+(L2x2.10)+(L3x2.90)
L1 is lots received and accepted
L2 is lots rejected by sampling but labeled
L3 is lots rejected and disposition and needs rework
Weights were determined at company after study of complexity & No. of operations.
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Unit No. 14
Negotiations
Objective of Negotiation Process
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Objective of Negotiation Process
Price Factor
Strategy & Tactics
Qualities of NegotiatorWhat to Negotiate
Process of Negotiation
Theory of Bargaining
Precautions of Negotiation
Negotiations
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NegotiationsIs an art by which a buyer & seller, usually face to face, tends to resolve differences to reach at theprecise terms of contract.
Purpose of Negotiations- Delivery.
- Packaging, Parking and transportation.- Insurance- Bonus penalty clauses,- Frequency of reporting progress.
NEGOTIATIONS TECHNIQUE CAN BE BEST LEARNT FROM LABOUR UNIONS:UNION OFFICIALS:-
- NEVER ENTER A NEGOTIATION WITHOUT BEING FULLY PREPARED.- NEGOTIATE ONLY WITH MGMTS REPRESENTATIVE HAVING LEGAL POWER TO CONLCUDE CONTRACT.- PUT THEIR INITIAL DEMANDS VERY HIGH.- CLASSIFY THEIR DEMAND INTO HIGH IMPORTANT AND NOT IMPORTANT & MAKE MGMTCONCEDE TO THEIR VITAL DEMAND IN EXCHANGE FOR CONCESSION OF LEAST IMPORTANT.- DETERMINE WELL IN ADVANCE WHAT CONCESSIONS THEY CAN MAKE AND WHICH CONCESSIONS outof this are of vital importance to the management.- They hold back vital concessions and make only minor concessions.
Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get.
Crucial elements in Negotiations:
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Crucial elements in Negotiations: Information: The more u know about the other party and its needs. The more u are in control. Time: the more the other side is under time constraint, the more you are in driving seat. Power: The more power and authority u posses, the more commanding position u get.
Principles of Negotiations:
Prior knowledge of opponents bargaining strengths helps buyer to plan his appropriate tactics.1. Sellers Strengthsi. Sellers need for the order.ii. Sellers confidence in securing the order.iii. Time available for negotiations.iv. Criticality of items involved.v. General market condition.
vi. Monopolistic status.vii. Knowledge of cost elements.2. Good initial planning can increase your chance of success.3. Talk to the right person.4. A buyer also has some selling to do.5. A good offence is the best defense.6. Time constraints in negotiations, as in other activities, are subject to 80-20 rule.7. Diversions at the appropriate time era essential for keeping control and avoiding bad judgment.
8. Hard won concessions, regardless of its value to the buyer, provide greater satisfaction to thereceiver (the seller) of the concession.9. Tact and diplomacy is necessary to make supplier do face saving.10. Negotiations should not end up with an unhappy supplier.11. Commitments once made must be kept.12. Critical review of ones own performance after the negotiations usually helps in sharpeningnegotiations skills.
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Unit No. 15
International Buying
Why Imports
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Why Imports
Cost, Options, Quality, Benefits from Govt for Imports, International markets.
Import Policy: Import Trade Control
Classification of Importers:
Actual Users (Industrial)
Actual Users (Non-Industrial)
Registered Exporters
Registered Importers
Licensing
EXIM policies, Registration, Documentation, Duties & Taxation, Logistical Policies
Letter of Credit
Bill of Lading
Customs ClearanceWay Ahead in International Buying
International buying for cost, better options, quality, association with 3PL/4PL, Economy
of purchases with multiple options and branding.
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Case Study for ABC Analysis
ABC Analysis
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ABC Analysis
Identify the SKUs that we need should spent time on. Prioritize SKUs by their value to firm
Create logical grouping
Adjust as needed
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Annual Value = Price x Demand
A Class Items with
80% Stock Value & 20% SKUs
B Class Items with15% Stock Value & 30% SKUs
c Class Items with5% Stock Value & 50% SKUs
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Case Study Buyer Seller Relationship
Arctic India Ltd
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Mr. Mullick is a Materials Manager with Arctic India Ltd, a medium sized engineering firm engaged in
manufacture of domestic appliances. Over the last few years, Mr. Mullick had developed very intimate
relations with his suppliers. On the day of marriage of his sister one of his supplier presented to him a
costly gift, a Television set. The policy regarding the gifts in the company reads, Gifts beyond Rs. 200shouldntbe accepted.
His plea with the supplier that cant accept the gist makes the supplier snub him Is Malti only your
sister. She is my sister as well & I am giving the gift to my sister Mr. Mullick is confused. if he doesnt
accept the gift, the supplier will create a scene & if he accepts there is of course going to be problem.
Analyze the situation & suggest best course of action for Mr. Mullick to follow.Mr. Mullick if cant refuse the gift, he should accept the gift however should inform to concerned
authority in the organization about the gifts.
Is the policy on gifts properly framed?
No, Policy should further be extended to acceptance of gifts provided information/approval from
concerned person in organization. What course of action on part of Mr. Mullick would have prevented this?
Mr. Mullick should have emphasized supplier & make him understand the relationship shared
among them due to business relationship & cannot be shared at personal touch. If the gift is on
conclusion of personal relation should have been referred earlier with Mr. Mullick & organization.
A manufacturer of a hand grinder requires a special roller bearing at the rate of 300 no's
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per year. Each bearing cost the company Rs. 36, the procurement cost & Inventory
carrying cost have been calculated at Rs. 30 & 20% respectively.
Calculate the EOQ of bearing
Data:
Total Consumption S = 300
Unit Cost Cu= 36/-
Cost of Procurement Cp= 30/-
ICC i = 20%
An Education Institute Library has 120 Operations Management books of different Authors with their
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no's of readers whose details are
Operations Management 20
Production Management 15
Supply Chain Management 14Inventory Control 11
Purchasing & Material Management 16
Total Quality Management 4
Enterprise Resource Management 5
Logistics Management 12Theory of Constraints 8
Information Technology in Operations 6
Retail Management 7
Operations Research 2
The librarian needs your help to identify the categories of book with respect to the readers and needsto know the location of storing the books to can have ease to issue the books to readers without much
time delay.
The librarian needs your helps to categories the books using Inventory Control Model and design the
storage plan to avoid any time delay.
Since the issuing of books are based on readers Inventory tool which can be used is
i ( i f )
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HML Analysis (Analysis to access Storage, Frequency of Stock)
The Librarian needs to use HML Analysis to identify the frequency the stock wrt to readers and designs
storage plan accordingly.
The HML Analysis can be carried out based on the nos of reader for the books in descending orderwhich would be
Operations Management 20
Purchasing & Material Management 16
Production Management 15
Supply Chain Management 14Logistics Management 12
Inventory Control 11
Theory of Constraints 8
Retail Management 7
Information Technology in Operations 6Enterprise Resource Management 5
Total Quality Management 4
Operations Research 2
Now applying 80-20 Pareto Rule, the requested books groups would be High Group 80%, Medium
G 15% d L G 5% Th l l ti th b k i t t
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Group 15% and Low Group 5%. Thus, calculating the books in percentage category
Operations Management 20
Purchasing & Material Management 16
Production Management 15Supply Chain Management 14
Logistics Management 12
Inventory Control 11
Theory of Constraints 8
Retail Management 7Information Technology in Operations 6
Enterprise Resource Management 5
Total Quality Management 4
Operations Research 2
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Layout of Library
Operation Books Storage
HI
G
H
MEDI
UM
LO
W
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SESSION IX
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Inventory Control in JIT Age
Good Companies practicing JIT view inventories as road block to World Class Mfg.
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Inventories:-
Hide Problem (Production, Material Shortage)
Consume Resources (Other process, Pending Work)
Cause Various Waster (Rejection, Depreciation)
To Reduce the inventory
o Finished Goods in Inventory Reduction
o Pull Production
o HeijunkaLearning Production
o WIP Inventory Reduction
o Small Batch Size
o Setup Time Reduction
o Cellular Layout
o Pull Production & Kanban System
o Reduce Buffer by solving chronic problems of defects, Absenteeism, Breakdown
o Attacking fundamental problems of Small Lot Purchasing, Supplier Proximity, VMI, Kanban, Local
Vendor
Small Lot Size: Lot Size refers to quantity of an item purchased / produced / shipped at a time.
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Purchased : Purchase or Order Qty
Produced : Production or Process Batch
Shipped : Delivered Quantity
Transported : Transfer Batch
Lot Option Size: Lot for Lot Quantity (LFL)
Period Order Quantity (POQ)
Economic Order Quantity (EOQ)
Economic Manufacturing Quantity (EMQ)
JIT recommends small lot size, an ideal lot size is one piece flow or make one & move one
Advantages Disadvantages
Low Inventory Investment Frequent Machine Setups
Quick Problem Identification Loss of Production Capacity
Quality Improvement Setup Losses
Lower Manufacturing time Greater Skill of labor
Shorter Delivery & Waste Elimination
Less / Zero Overtime
Less Space and Obsolescence
Setup Time Improvement
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Stores Management
Stores Management involves receiving movement, storage and issue of items, raw material required
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for production, maintenance and operation of plant and finished goods until their dispatch to
customers
Store is the custodian of all materials and responsibilities of
Receiving
Storage
Preservation
Issue
Accounting
Stores is required for
Time lag between receipt & consumption if materials / parts
Economy of buying
Business constraints
Forward buying
Prevention of loss of sales
Economy in manufacturing
Reduction in operations waiting time
Scientific Stores Management:
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Identification of stores
Receipt of materials
Inspection of materials
Storage
Identification & Location of stock
Security of stores
Stock control
Issues & dispatch
Stock records
Stores accounting
Stock verification
Surplus stock management
Administrative control
Co-ordination & co-operation with interfacing departments
SYSTEMS OF STORAGE
CLOSED STORE SYSTEM OPEN STORE SYSTEM
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CLOSED STORE SYSTEM OPEN STORE SYSTEM
Material physically stored in closed area Material stored closed to point of use
Direct access to store personnel only Direct access of workmen
Material movement in/out of store when
accompanied by authorized documents
No authorized document needed as materials
can be picked up by operations
Expensive item liable to pilferage No chance of pilferage
Light material easy to issue Material are too heavy or bulky
Delicate, perishable items can be stores Production supervisors responsibility
Stores personnel responsibility No perpetual records
Perpetual records
TYPE OF STORES
RECEIVING STORES Incoming material, Rejection
MAIN STORES Stocking, Inventory
FG STORES FG Goods
SPECIAL STORES Bonded, Special materials
SCRAP YARD Scrap, waste, Residue
Security of stores includes specific measures against:
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Prevention of Theft (By Outsiders)
Prevention of Pilferage (By Employees)
Prevention of Malpractices (By Stores personnel)
Prevention of Fire
Prevention of Rodents & Termite Measures
Prevention of Theft
High Compound Wall
Minimum No. of Window, Glass Shutters & Open Ventilators
Fittings of windows & skylights with bars and wire mesh
Security guards at strategic points
Outsiders not to be permitted to enter store beyond serving counters
Patrolling to look after store by watchman during OFF hours
Expensive items to be kept locked in steel almirah
Insurance against burglary
Vehicle should bring only companies items should be allowed
Vehicle should be weighed @ incoming & outgoing
Prevention of Pilferage:
t f l th i d l
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Entry of only authorized personnel
Personnel items not allowed to be carried inside store
Items liable for pilferage to be mono grammed with Co.'s name or marked for identification
Fresh material against return of old ones
Surprise check / audits
Immediate enquiry incase of malpractices
Prompt disciplinary actions
Adequate publicity of punishment for pilferage
Daily security check of storage with personnel
Prevention of Malpractices:
Through checks of outgoing vehicles
Gate passes to take material out of company
Indemnity bonds or bank security from store employees
Rotation or change of duties
Recruitment of store personnel from different communities
Prevention of Fire:
D & St i f fi i t t t i l
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Doors & Staircase of fire resistant materials
No smoking in stores
Adequate earthing
Prevention of leakage of inflammable oil / grease / fluids
Small combustible materials to be stored in covered metal bins
Large quantity to be stored in small lots in more location with gaps
Telephones at strategic locations with ready access to telephones
Material storage inside store to be planned keeping fire hazard in mind
Appropriate provision of fire fighting equipment & Fire insurance cover
Smoke detectors
Fire drills & Regular inspection by local fire brigade officers
Segregation of Risk Materials
Fire doors & emergency exits to be kept absolutely clear
Prevention of Malpractices:
Fumigation of Stores
Rat Traps
Regular spray pesticides and fungicides
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SESSION X
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Q & A
Q Which of the following is not one of the Rs of Materials Management
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Q. Which of the following is not one of the R s of Materials ManagementA. Right SourceB. Right QuantityC. Right Place
D. Right Price
Q. Which of the below is not a Purchasing FunctionA. Quotation EnquiryB. Cost ComparisonC. Technical DataD. Negotiations
Q. What is the disadvantage of Centralized ProcurementA. One Point contact to allB. Restoring Emergency ProcurementC. Volume NegotiationsD. Economy of Scale.
Q. Delegation of Power (Authority) is important in which type of ProcurementA. CentralizedB. De-CentralizedC. Both of the aboveD. None of the above
Q. Representation of Components by their part nos is referred as
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p p y pA. IdentificationB. CodificationC. DemarcationD. None of the Above
Q. Which of the below are standard codification system used worldwideA. JITB. Brisch SystemC. IBM SystemD. Toyota Process Control
Q. Which of the following Statements for ABC Analysis is not trueA. Used to decide stocking policiesB. Used to improve Store KeepingC. Offers Degree of ControlD. Evaluates on material consumption
Q. Which of the following Statements for HML Analysis is not trueA. Used to plan access StorageB. Helps in identifying in Security requirementsC. Used based on Frequency of StockD. Used for disposal of Surplus & Obsolete inventory
Q Stock Out cost is
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Q. Stock Out cost isA. Cost of material in stockB. Loss of opportunity cost with material not in stockC. Cost of Procurement
D. None of the above
Q. Setup Cost isA. Change over time from one activity to anotherB. Machine DowntimeC. Production time LossD. A, B and C
Q. Of the following which is true in case of penalty costA. Delay in Material DeliveryB. Rejection of MaterialC. Early ShipmentD. None of the above
Q. How many years stock value is to be included in Balance SheetA. One YearB. Six MonthsC. Two YearsD. Not to be included
Q. Finished Goods Inventory Reduction can be done with
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Q. Finished Goods Inventory Reduction can be done withA. Pull ProductionB. Push ProductionC. Lean Production
D. A & C Only
Q. Buffer Stock Management is practiced to addressA. Emergency StockB. Reduce Setup CostC. KanbanD. Lesser Defects
Q. Procurement vide EOQ is not practiced forA. Minimum Cost of ProcurementB. Optimized Quantity of ProcurementC. Minimum Inventory Stock CostD. Annual Inventory Consumption
Q. Which of the following assumptions are not made calculating EOQA. Unit Price is independent of Order QuantityB. Unit Price is constantC. Supplier agrees to Minimum Order QuantityD. ICC & APC are common
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Q. One of the Principles relevant while designing the warehouse isA D i C it i
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A. Design CriteriaB. Inventory StockC. Safety StockD. None of the above
Q. Material Handling in a warehouse is analyzed based onA. Procurement Scale of EconomiesB. Production Scale of EconomiesC. Movement Scale of EconomiesD. None of the above
Q. StockValuation doesnt helps inA. Performance of OrganizationB. Gross Profit AnalysisC. Increasing the Profit MarginD. Inventory Management
Q. Which of the mentioned method uses forecasted pricing for stock valuationA. Weighted AverageB. Standard CostC. Average PriceD. Replacement Cost
Q. Holding of Surplus and Obsolete Stock doesnt results inA Non Moving Stock
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A. Non Moving StockB. Inventory Carrying CostC. Capital lossD. Production Cost
Q. Which among the below is not a reason for ObsolescenceA. New TechnologyB. Bulk PurchaseC. RationalizationD. Diversification
Q. Scrap generated from manufacturing process is not categorized inA. Metal ScrapB. WasteC. Recycle ScrapD. Ferrous Scrap
Q. A Purchase Order is not valid unless it doesnt haveA. Warranty ClauseB. Cancellation ProvisionC. Authorized SignaturesD. Serial No
Q. Transportation Cost cannot be reduce byA S l ti Ri ht d f T t ti
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A. Selecting Right mode of TransportationB. Reducing the Cost of ProcurementC. Better Route SelectionD. Rate Verification
Q. Road as a mode of transportation is generally used forA. Smaller VolumesB. For Heavy VolumesC. ImportsD. For Longer Distance
Q. As a Purchaser we shouldA. Allow Premium Transport ModeB. Inspect Freight BillsC. Permit vendor to Ship materialD. Negotiate for Transportation
Q. The mode of transportation isnt selected based onA. Material TypeB. Vendor TypeC. Criticality of MaterialD. Cost of Transportation
Q. Methodology not used for Supplier Survey
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A. Supplier SurveysB. Third party EvaluatorsC. Profile Evaluation
D. Facility Visits
Q. Among the following tools which is used for Vendor ratingA. IBM Quality SystemB. BRISCH SystemC. Toyota Quality SystemD. GE Supplier Chain System
Q. Which of the following are crucial elements in NegotiationsA. InformationB. TimeC. PowerD. All of the Above
Q. Classification of Importers is not done based onA. Actual UsersB. Customs UsersC. Registered ExportersD. Registered Importers
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In case of any queries / doubts you can contact atJaro Education
Or
[email protected] / [email protected]
Wishing you all the very best for your future Endeavour in life.
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