Académique Documents
Professionnel Documents
Culture Documents
Pages
1.
2.
3.
4.
5.
Inventory Control
6.
Work-in-Process Inventory
7.
8.
Purchasing
9.
Materials Handlings
10. Store-Keeping
2.
Materials Management
4+0
2
Total Investment
= 43000 Crores
Annual Output
= 55000 Crores
towards materials cost, large savings will result if MM tools and techniques are
used to cut down this cost-than whatever attempts are made to save on other
items of expenditure like wages and salaries and overheads.
Materials Management
Fig. 1.2
Causes
* Bulk Purchases to avail discounts.
* Seasonal availability of materials.
* Purchases during periods of low
market
prices.
* Full Wagon load to economies on
freight.
* Full Lorry load to economies on
freight.
* In anticipation of price rise at a rate
higher than bank interest.
* Scarce commodity (Not always
available).
* Long lead times.
* Wide variation in lead time.
* Quota item (Quantity and time of
delivery not within control).
* High stock-out cost.
(iii) Semi-Finished
Stores
Materials management
* Bottle-neck operation
* Seasonal demand.
* Lack of co-ordination between
Marketing & PPC deptts.
2. PURCHASING:-
3. INVENTORY CONTROL:-
4. STORE-KEEPING:-
5. ACCOUNTING:-
Benefits of MM
The health of an organization is measured by calculating its Rate of
Return (ROR) on investment:
3.
8
Materials Management
of ship hitting rocks in the sea and can even sleep while the ship sails smoothly.
Managing with low inventory is like driving ship in shallow waters. The driver
has to be very active all the time so as to steer ship to safe waters and avoid
smash with rocks. As the water level goes down in the sea, more and more
rocks appear calling for more and more vigilance of the driver. See Figure 1.4
below:
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C: cycle time
A: available time per day
Q: planned production quantity of the product
(2) Minimum number of processes :-
Nmin: minimum number of processes needed for the desired line output
T
[]
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Materials Management
(3) Line balancing:Line balancing is to assign work elements to processes of the assembly so that performance times
are equalized as much as possible. The elements must be assigned in compliance with the
precedence relationship. Attempt should be made to minimize balancing delay.
PRECEDENCE RELATIONSHIP
Example:
13
It is important to note that a product might have a longer operation time than the predetermined cycle
time. This is due to the fact that the line balancing on the mixed-model line is made under the
condition that the operation time of each process, which was weighted by each quantity of mixed
models, should not exceed the cycle time.
As a result, if products with relatively longer operation times are successively introduced into the
line, the products will cause a delay in completing the product and may cause line stoppage.
Therefore, the assembly line model-mix sequence must be determined to minimize the risk of
stopping the conveyor.
(6) Determination of the length of the operations range of each process. . 'The length of the operations
range of each process must be determined with some allowance for avoiding the work conjestion above
mentioned.
14
Materials Management
The systems of single model assembly and mixed model assembly are shown in Figure 2.1 below:
1(1) Singe-model assembly ! inc
Fig. 2.1
Production & Inventory Control in Lot Production System
Some key points
(1) To determine proper lot sizes.
(2, To determine proper quantities of work- in-process. (3) To make setup times as short as possible.
The EOQ formula
An economic ordering quantity formula is used which calculates the EOQ in one step. One form of
this formula is:
(8)
A : the annual usage, in Rs.
S : the setup or ordering cost, in Rs.
I : the inventory carrying cost, as a decimal fraction per Rs. of average inventory
When lot sizes of each item in lot production system are determined according to the EOQ formula, it
frequently happens that under the given capacity the resultant production schedules is infeasible for reasons
of interference among the items.
15
[]: maximum integer not greater than the accurate figure in it.
Production & Inventory Control in Job Shop Production System
Key points
(1) To grasp accurate work loads to each process for a planning period.
(2) To minimize due date tardiness.
(3) To shorten shop time.
Preparation of master schedule
(1) Estimate shop time of each operation in each job
(2) Arrange the operations in accordance with the routing.
(3) Adjust starting time of each operation for the schedule of each operation not to mutually overlap in
time in each process, pursuing minimization of the total elapsed time.
16
Materials Management
Loading
(1) Assignment of operations:Operations are assigned to each process according to the master schedules. In overloaded planning
periods, some of the operations must be shifted to "left" or "right" to level the workload.
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Materials Management
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Materials Management
20
Production Smoothing
A system of forecasting demand for next 3 months, preparation of master production schedule and
monthly production planning with a provision to adopt monthly demand changes. Simultaneously, a
system of 10 day advance booking of firm orders from dealers, co-ordinating with sub-contractors,
balancing shop production, preparation of daily despatch schedules and provision to incorporate last
minute changes in daily demand should be well prepared. A frame work of production smoothing is shown
in figure 3.4.
KANBAN System
A Kanban is a hand sized signboard contained in polypack that is the key control tool for JIT
production. Kanbans are of two types i.e. "Production Instruction Kanban" and "Pick-Up or Withdrawal
Kanban". Production Instruction Kanban indicates how many and what kind of parts have been passed
from one place on the production line to the next place. It is a green signal to begin processing exactly the
same type and number of items that were passed along. Pick-up Kanban is of two types. One called
'Interprocess Kanban' used within the plant for picking up needed parts from earlier process jobsite to the
next process jobsite. Other type is 'supplier Kanban' used for picking up needed items from outside
suppliers and is used the same way as inter-process pick up Kanbans. Steps involved in using the two
Kanbans and their flows as well as the flow of physical units of product are explained in figure 3.5. It may
be seen that the number of withdrawal Kanbans lying in post at "1" indicate the units consumed in
subsequent process assembly line and therefore creation of the demand for equal number of units to be
provided by preceding process machinery line. These Kanbans authorise picking up units from the
machinery line store and are returned to assembly line along with physical units (see '3'). Depending upon
the shortfall in the machinery line store, production ordering Kanbans
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in desired quantity are placed in the post (see '2'), carried to production ordering Kanban post (see '5').
Production ordering Kanban authorise production in the machinery line and are sent to store again
alongwith machined parts. Kanbans are the pre-printed forms containing product specifications, quantities
and frequency of issue during a day. Kanbans are normally replaced every month depending upon next
month production schedule. There is no need
eliminates lot of paper work. At the same time it coordinates activities of whole plant as well as with the
suppliers and establish a close circuit.
Visual Control
This is a method by which managers and supervisors can tell at a glance if production activities are
proceeding normally or not. Light signals (Red & Yellow) are placed on various machines and storage
points. If any problem arises, the operator switches on light signal.
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Materials Management
23
'Yellow' means there is a problem which operator himself is trying to solve. 'Red' means he needs help of
the supervisor. Seeing red light, supervisor rush to the workplace. Similarly, a system of replenishment of
stocks is used. A material calling ANDON for the later replenishment system is illustrated in Figure 3.6.
When an empty box is found in the production shop, the worker pushes a switch (see' 1') thereby putting
on main light in the- central store and a glow lamp (see '2') in the control pannel indicating the kind of
material required-Seeking the lamps, material carrier transports filled boxes to the line (see '5') and submits
Supplier Kanban (detached from material box) to the Post Office of material Kanbans (see '6'). During the
evening, all supplier Kanbans are classified supplier wise and handed over to respective truck drivers (see
'7;) along with empty boxes. The drivers draw the materials from supplier as per the number of Kanbans
and deliver to the factory during night (see
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Materials Management
'8'). The materials are therefore replenished to the central stores every day morning before production
starts. From the system it may be observed that inventory is kept only for 1-2 days stocks, with almost
no paper work, no noice and chaos and no congestion.
The results of the introduction of JIT systems in Japan as per the survey conducted in 1986 are
summarised below:
It is a management planning and control technique. Its initial processing function is to work
backward from planned quantities and completion dates for end items on a master production schedule to
determine what and when individual parts should be ordered.
While any company that wants to do a better job of controlling material priorities and capacity can
employ MRP, companies that manufacture complex assemblies are ideal for MRP. Thus while MRP can be
effective in pharmaceutical, food, textile and chemical companies which are not 'assembly' operations, the
technique can be extremely powerful in automotive, electronic and other assembly oriented companies.
Item Forecasts
Item forecasts are needed for determining order points, material plans, order quantities and schedules.
They are best made using simple statistical techniques based on their own demand history. The technique
called "exponential smoothing" an application of the "weighted average" concept provides a routine
method for updating forecasts regularly as shown in table below:
First Week
Weight
Old forecast
Sales
=
=
100 x 0.5
70 x 0.5
New forecast
Weight
=
=
=
50 x 0.9
35 x 0.1
=
=
85
90
7
97
Second Week
Old forecast
Sales
New forecast
97
x 0.9
x 0.1
105
87
11
98
General formula
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Materials Management
Principles of MRP
Material requirements planning evolved from an approach to inventory management in which the
following two principles are combined:
(1) Calculation (versus forecast) of component item demand, i.e., dependent demand.
(2) Time phasing, i.e., segmenting inventory status data by times
Because of its focus on timing, an MRP system can generate outputs that serve as valid inputs to
other systems in the area of manufacturing logistics, such as purchasing systems, shop scheduling
systems, dispatching systems, shop floor control systems, and capacity requirements planning systems.
MRP in Manufacturing Planning and Control
Figure 4.1 is a general model of a manufacturing planning and control (MPC) system. Several
supporting activities are shown for the front end, engine, and back end of the system. The front end
section of the MPC system produces the master production schedule (MPS). The back end, or execution,
systems deal with detailed scheduling of the factory and with managing materials coming from vendor
plants.
Material requirements planning is the central system in the engine portion of Fig. 4.1. It has the
primary purpose of taking a period-by-period (time-phased) set of master production schedule
requirements and producing a resultant time-phased set of component/raw material requirements.
In addition to master production schedule input, MRP has two other basic inputs. A bill of material
shows, for each part number, what other part numbers are required as direct components. The second
basic input to MRP is inventory status. To know how many are on hand, how many of those are already
allocated to existing needs, and how many have already been ordered.
The Basic MRP Record
At the heart of the MPC system is a universal representation of the status and plants for any single
item (part number), whether raw material, component part, or finished good. This universal representation
is the MRP time-phased record. Figure 4.2 provides an illustration, displaying the following information:
(l)Time bucket
The top row in Fig. 4.2 indicates periods. The period is also called a time bucket. The most widely
used time bucket or period is one week. A
27
timing convention for developing the MRP record is that the current time is the beginning of the first
period. The number of periods in the record is called the planning horizon.
The planning horizon indicates the number of future periods for which plans are made.
(2) Gross requirements
The second row, Gross Requirements, is a statement of the anticipated future usage of or demand for
the item during the period. The
Materials Management
28
gross requirements are time phased, which means they are stated on a unique period-by-period basis rather
than aggregated or averaged.
(3) Scheduled receipt
The Scheduled Receipt row describes the status of any open orders (work-in process or existing
replenishment orders) for the Item due in at the beginning of the period. This row shows the quantities that
have already been ordered.
Period
Gross requirements
Lot size = 50
40
10
44
50
4
54
44
10
Scheduled receipts
Projected available balance
44
50
Fig. 4.2.
29
means that some action is needed now to avoid a future problem. The action is to release the order, which
converts it to a scheduled receipt.
Bill of Materials
Figure 4.3 shows a snow shovel, which is end item part number 1605.
The product structure diagram and the indented bill of materials (BOM) are shown in Fig. 4.4
Gross to Net Explosion
Explosion is the process of translating product requirements into component part requirements,
taking existing inventories and scheduled receipts into account.
The gross to net explosion process means that, as explosion takes place, only the component part
requirements (net) of any inventory are considered as exemplified in Fig. 4.5. In this way, only the
necessary requirements ate linked through the system.
Leadtime Off Setting
In addition to precedent relationships, the determination of when to schedule each component part also
depends upon how long it takes to
Materials Management
30
31
Produce the part, i.e., the lead time. There are two alternatives in scheduling approaches. One is the front
schedule logic, i.e., scheduling as early as possible. Another is the back schedule logic, i.e., scheduling as
late as possible.
Back scheduling has several obvious advantages. In MRP, the timing of the planned order release is
arrived at by offsetting for lead time. MRP achieves the benefits of the back scheduling approach and can
perform the gross to net explosion.
Technical Issues
Processing frequency
Since conditions change and new information is received, the MRP records must be brought up-todate so that plans can be adjusted to reflect these changes. This means processing the MRP records anew,
incorporating the current information. Two issues are involved in the processing decision; how frequently
should the records be processed, and whether all the records should be processed at the same time.
(1) Regeneration
When all of the records are processed in one computer run, it is called regeneration. This signifies
that all part number records are completely reconstructed each time the records are processed.
(2) Net change
An alternative is net change processing, which means that only those records which are affected by
the new or changed information and net change is the frequency of processing.
Lot sizing
In the snow shovel example of Fig. 4.6 we illustrated a fixed lot size and lot-for-lot procedure.
Several other approaches to lot sizing are widely recognized.
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Materials Management
33
Low-level coding
If Fig. 4.6 the time-phased record is processed for either of common parts before all their gross
requirements have been accumulated, the computations will all have to be redone. The way this problem
is handled is to assign low-level code numbers to each part in the product structure or the indented BOM.
Pegging
Pegging relates all the gross requirements for a part of all the planned order releases that created
the requirements. The pegging records contain the specific part number or number of the sources of all
gross requirements. The pegging information can be used to trade the impact of a material problem all the
way up to the order it would affect.
Service parts
Service part demand must be included in the MRP record if the material requirements are not to be
understated. The service part demand is typically based on a forecast and is added directly into the gross
requirements for the part.
Inventory Control
Selective Controls
Basic Terms
Inventory: The term refers to the stock at hand at a given time (a tangible asset which can be seen,
weighed or counted). It refers to the material held in an idle or incomplete state awaiting future sale or use.
In the most general sense, inventory is an idle resource.
Item: An element, mixture, compound, component, sub-assembly, finished good, production
equipment or any other one piece tangible asset which forms inventory in an organisation.
Inventory Policy: A definitive statement regarding the philosophy of inventory management, a
policy stating when to procure and how much to procure, usually to ensure that the sum of all costs
associated with the inventory process will be minimized.
Inventory Control: A functional activity the objective of which is to minimize the total costs of
maintaining inventories and of acquiring them in order to render the stipulated level of service.
Inventory Classification
Raw Materials: Basic materials for processing/conversion into finished goods e.g. Pig Iron, M.S.
Rods, PVC Resin.
Bought-out Components: Items not manufactured/fabricated by the organisation but used with or
without further processing and/or packing the finished product; e.g. Rubber parts by an Engg. Co., Tin
Cans by a Vanaspati Mill.
Work-in-Process:
Partly
manufactured/processed
inventories
awaiting
further
manufacturing/processing between two operations and are in the process of being fabricated or assembled
into finished products, including materials lying with sub-contractors and materials lying in shop floor for
further processing or assembly.
Inventory Control
35
Finished Goods: The complete units and the assemblies carried in stock ready for delivery to
customers or for transfer to other plants or for own use. e.g. A bicycle, a Football, A Lathe Machine.
MRO: Maintenance, Repair and operating supplies. The group include spare parts and consumables
which are required for use in the process but do not form a part of the finished product. e.g. lubricants, Vbelt, Electrodes, pencil, soap, etc.
Inventory Analyses
Altogether the company deals with stock of thousands of items raising a serious problem of how one
can keep control or track of all these items and also, whether it is necessary to have the same extent of
control on each and every item or not. Different types of analysis each having its own specific advantages
and purpose, help in bringing a practical solution to control inventory. The most important of all such
analyses is the ABC analysis. The others are:
VED
SDE
FSN
HML
XYZ
Definitions and application of these analyses are tabulated as in the following pages.
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Inventory Control
Inventory Control
37
While formulating inventory policy for an item a combination of various analyses is useful. For
example, liberal safety stock may be kept for an item which falls into 'C', 'V' and 'S' categories and vice
versa for an 'A', 'D' ai1d 'E' item.
ABC Analysis
ABC is said to connote 'Always Better Control'. The basis of analysing the Annual Consumption
Cost (or usage cost) goes after the principles ' 'VITAL FEW TRIVIAL MANY", and the criterion used
here is the money spent and not the quantity consumed. The figure given below brings out clearly the
concept of ABC analysis.
The general picture of ABC - analysis will show the following pattern :-
In many cases, the figures bring out that the A items are still fewer in number representing the bulk
of the money. To cite an example :-
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Materials Management
Class of items
Item %
75
25
20
67
It may be of interest to note that this ABC analysis i.e. the vital few; trivial many, principle is
observed in most of the business problems such as number of dealers and volume of business; different
items of expenditure of revenue and the amount involved, nature of customer complaints and number of
complaints etc. etc. The controls necessary on A, B & C items are obvious "Thick on the best, thin on the
rest". One of the Departmental stores modified this to state "Thick on the best to hell with the rest".
Control on A Items
The annual consumption cost being very high for these few items, any small percentage savings
bring out large benefits such as reduction in expenditure, release of locked up capital etc. Normally, these
items are to be under the direct control of the purchasing manager himself. All endeavours should be to
reduce the safety stocks, low cost of purchasing, control on consumption and waste. The measures to be
taken on 'A' items can be briefly put down as follows :(i) Annual contract for supplies with as frequent staggered deliveries as is economical.
(ii) Minimum safety stock or even fluctuating safety stocks by maintaining better vendor/vendee
relationships, speculation of market conditions, supply conditions, etc.
(iii) More frequent review of stock position and consumption patterns.
(iv) Precise quality specifications or materials standard evolved.
(v) Value Analysis to find cheaper substitutes, better source of supply and to reduce the overall costs.
(vi) Waste control measures to reduce the scrap, rejection, rework and sub standards.
(vii) Continuous developmental work or research carried out wherever possible.
(viii) Possibility of adopting 'cock-system' when the materials are stored and supplied at the factory
site by the supplier at his own cost.
Inventory Control
39
Control on C-Items
The other extreme where a large number of items constituting a small percentage of costs, needs very
simplified procedures and the objectives being to reduce the purchase costs as well as handling and
distribution costs. The following measures are suggested :i) Maintain sumptuous stocks (Avoid the proverb, "For the sake of a horse-shoe nail, the battle was
lost' ').
ii) Purchasing costs minimized through single tender system, blanket contract, travel orders, clubbing
of similar items into one purchase order, purchasing annual requirements, blank cheque ordering
procedure etc.
iii) Inventory carrying costs & Paper work reduced by bulk issues, writing off the values (control
through perpetual inventory) of stocks, variety reduction and standardization, pool-system. etc.
Control of B Items
On these items the controls are 'via-media' of A & C, Usually, the safety stocks are decided on a
policy basis.
Other Analyses
The definitions and criteria of YED, SDE, FSN, HML and XYZ analyses have already been
tabulated on pages 5-36. Keeping in view the objective of such categorization and nature and, volume of
inventory, the classification is made by each organisation suiting to its own requirements and controls. For
example, non-moving items in an organisation may be the list of those items which were not consumed
during a period of last one year while another organisation engaged in Projects or Maintenance Services
may fix a period of even 2 or more years to identify such items. It is however useful to keep a list of 'V'
items with stores officer,
's' with purchase officer and 'A', 'V', S' & 'N' with chief executive for
40
Materials Management
There are many limitations in the above method of calculating ordering cost. Firstly the cost has been
uniformally distributed to all orders by taking average. In actual practice there is wide variation from order
to order. For example, the cost involved in procuring an item on the basis of tendering will be much higher
than placing order to a standard supplier (evaluated best through vendor rating). Similar cost of procuring
item from far off place will be much higher than local purchases. Secondly an order may contain only one
item or ten or even more items. If separate orders for each item are placed the cost will be much higher than
the common order for items at a time. Since the economic order quantities are being worked out order for
each item, the above ordering cost, which may be for a group of items, will not indicate a clear picture of
the OC relating to the item in question. Thirdly, by increasing no. of order in a year for an item, the
quantity per order will reduce. The reduced quantity
Inventory Control
41
for some items may not be feasible due to exhorbitant freight whereas it may be feasible for other items
having more requirements. It is therefore very difficult to assess the actual ordering cost/order separately
for each item. Statistics therefore comes to our rescue and average figure is adopted assuming that each
order is for one item only. It is, however, quite clear from the actual experience that up to certain number
of orders a minimum ordering cost has to be incurred due to the minimum infrastructure required for the
purchase department. After that placement of additional number of orders will require more purchase staff
and other facilities and hence the ordering cost will go on increasing. Further, if the quantity per order is
increased, -the total no., of orders to be placed per annum, assuming a fixed annual requirement, will
reduce in inverse proportion. Less the no. of orders for an item per year, the lesser the ordering cost. The
cost curve against ordering quantity per order is shown in Figure 5.1.
Inventory carrying cost is the cost of holding inventory. Various elements of cost falling under this head
are as given below:(i)
Interest Joss/opportunity loss on the capital locked up in the form of average inventory.
(ii)
(iii)
(iv)
Depreciation of handling equipment, racks, furniture and other facilities used in stores.
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
The method of calculating ICC is to estimate cost against each one of the above elements during the
past year and divide it with the average
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Materials Management
Av. Inv. =
A better estimate of average inventory can be made by adding stock balance on the last day of each
month of the previous year and dividing it by 12.
Let us take an example to explain the method of calculating ICC. If the stock balance on the last day
of each month for previous year is 4, 4.5, 3, 6, 5, 4.5,4,4.5,5.5,3,2, 2lakhs then
Av. Inv. =
4+4.5+3+6+5+4.5+4+4.5+5.5+3+2+2
12
4 lakhs
If the bank interest on working capital is 18% and total inventory holding cost against all elements
listed from (ii) to (ix) above is Rs. 40,000 then
The I.C.C has a straight line relationship with the average inventory as shown in figure 5.1.
Economic Order Quantity is defined as the order quantity against which total of OC and ICC is
minimum. As shown in figure 5.1, EOQ will be the order quantity where both ICC and OC curves intersect
each other. Mathematically this quantity is calculated by the following formula :-
Where Q = EOQ
A = Annual Consumption of the item in units.
S = Ordering Cost in Rs.
I = Inventory carrying cost as a fraction of the Av. Inv.
C = Unit cost of the item in Rs.
Inventory Control
43
Let us say that during the next year forecast of consumption of an Item is 5,000 units, S and I
calculated on the basis of last year data are Rs. 50/- and 0 . 25 respectively and the unit price of the item is
Rs. 2 then
everyday use it is possible to workout EOQ data for different levels of annual consumption. It is not
necessary to calculate the EOQ for each and every item, since the ordering cost and carrying cost vary only
with number or orders and the value of purchase and not with the nature of the item to be purchased. An
illustrative table' incorporating economic order quantity and cost data for seven values of annual usage is
given in table below:(EOQ data with = Rs. 10 per order and I = 20 per cent or 0.20)
Annual Usage
(A) Rs.
Economic Order
Quantity (Q) Rs.
Time Supply
(A/Q)
40,000
2,000
18 days
20
10,000
1,000
5 weeks
10
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Materials Management
Annual Usage
(A) Rs.
Economic Order
Quantity (Q) Rs.
Time Supply
8,100
900
6 weeks
4,900
700
7.5 weeks
1,,600
400
3 months
900
300
4 months
100
100
1 year
Number of
From the table it can be easily seen that for C items, the cost of carrying inventory is naturally small
and, for minimizing total cost, the ordering cost has to be kept low and so these items are ordered as
infrequently as once or twice a year. On the other hand, for A items the inventory-carrying cost is high and
for minimum total cost, the ordering cost should be very nearly equal to it. This means that the number of
orders should be greater and purchases should be made more frequently in small lots so that inventories
may be carried at a low level and at a low total cost.
While, normally, purchases should be guided by the EOQ data similar to that shown above,
departures can be made for good and valid reasons. The practical order quantity may be slightly more or
less than that theoretically calculated. It should be noted that the total cost curve is flat at the bottom and
the total cost is therefore relatively insensitive over an appreciable range around the theoretically calculated
quantity. It can be shown mathematically that for an order quantity ranging from 75 percent to 125 percent
of the theoretical quantity, the cost increase is less than 10 percent. Some practical considerations, as
mentioned below may suggest a different quantity for purchase than the one mathematically obtained by
the EOQ formula:
(1) Simplification of routine-for example, instead of 13 orders per annum, 12 orders per annum may be
issued.
(2) Ordering in nearest trade quantities or packing-for example, instead of ordering 11-1/2 dozen,
order a gross (12 dozen).
(3) By slightly increasing the order quantity a better freight rate may be obtained-for example, instead
of seven -eights or three-quarters of a wagon load, order a full wagon load.
(4) In the case of perishable items or items whose shelf life is very low, it may be advantageous to
order less than the economic order quantity.
Inventory Control
45
(5) If an item is of a season~1 nature, it may be necessary to buy large quantities during the season,
regardless of the EOQ.
(6) Considerations of shipping facilities from abroad and Government import policy may indicate a
different order quantity for imported items.
(7) Internal transportation difficulties, quota licenses, etc. may also justify different quantities from
the EOQ.
(8) Liberal discounts may be applicable to bulk purchases which may suggest buying much larger
quantities than indicated by EOQ. Each case should be worked out in terms of ultimate cost,
considering extra inventory costs, additional costs f05 storage and handling, dangers of
deterioration and pilferage, etc.
Normally the aim should be to order the nearest practical quantity approximately to the EOQ.
Where large deviations are considered necessary, each case should be examined carefully to ensure that
the deviation from the EOQ does actually benefit the undertaking in the long run.
Quantity Discounts
Whenever discounts are offered for bulk purchases, each case should be considered in terms of its
ultimate cost. A rough and ready formula for deciding such cases can be worked out if, to simplify matters,
we assume that the ordering cost is negligible compared to the other factors involved. If one month's usage:
of an item is added to the EOQ by bulk purchase, the average inventory cost of the item is increased by half
I a month's usage i.e., by A/24 of a year's usage where A is, as before, the annual consumption value of the
item. If m months' usage is added to the EOQ the average inventory will be increased by mN24 rupees.
The increase in inventory-carrying cost will be mAII24 rupees where I is the inventory-carrying cost
expressed as a fraction of the inventory cost. The reduction in cost offered by the discount must be more
than this increase. If x is the reduction (expressed as a fraction) offered per rupee-worth of material, the
annual cost reduction due to bulk discount will be xA rupees.
46
Materials Management
This indicates that bulk purchases can be profitably made if the per cent discount offered is greater
than the number of months' usage added to the EOQ. Though this is a very rough formula, it is useful and
the following example will make its application clear.
Example: The price and discount pattern for an item is as follows:
Quantity
Discount
1-99'
100
100-999
95
5 percent
1000 &
over
85
15 per cent
If the monthly usage of the item is 150 and the EOQ is 500, would it be advisable to increase the
order quantity to 1000 to take advantage of the bulk discount?
Per cent discount if 1000 units are ordered at a time instead of
As 10.5 is greater than 3.3, the order quantity can be raised from 500 to 1000 to take advantage of
the discount.
Replenishment
There are two ways to find out when and how much quantity is to be ordered. The first is based on
fixing a Re-ordering point (known as Re-ordering level or R.O.L) and when the stocks fall below this
point an order is placed. The second approach is to place an order at fixed intervals of time. These two
approaches can be termed as :(1) R.O.L. Method of Ordering
(2) Periodic Ordering Method.
R.O.L. Method
The R.O.L. is determined by adding the Lead Time requirements to safety stock.
R.O.L. = Safety Stock + Lead Time Requirements. The
Inventory Control
47
Ordering Quantity is usually the Economics Ordering Quantity as shown in Figure 5.2.
(i) When the ordering quantity is fixed (EOQ); it is checked whether! it the periodic reviews the
stocks have fallen below a Re-order Limit (R). If the stock is lower than the Re-order Limit,
order is placed for E.O.Q. but if it is above the Re-order point, no action need to be taken till the
next Review date.
The Re-order limit R is calculated as follows:
R = Safety Stock + Rate of Consumption (Lead Time +
Review Period)
2
R = Re-order limit (in units)
B = Safety Stock (in units)
Sd = Average Daily Sales (unit/day)
L = Average Lead Time (in days)
P = Review Time (in days)
Inventory Control
48
(ii) Where there is no fixed ordering quantity, Q is determined as the difference between the actual stocks
held at the time of Period Review and the Maximum Inventory Level (M).
M = Safety Stock + Consumption Rate (Lead Time + Review Period), Depending upon whether the
Lead Time is greater or lesser than the Review Period, one of the following two rules is used in
fixing the Reordering Quantity:
Q = : M - (Actual Stores held at the time of Review + Quantity on order)
Inventory Control
49
Safety Stock
The safety stocks become necessary in order to avoid 'Stock Outs' if the rate of consumption
increases and/or the lead time gets extended from the values considered for the replenishing systems.
Thus, a simple way of establishing the safety stock would be to find out the above two variations that
could normally occur over a period of time in terms of additional quantity of stock to be maintained.
Applying the Probability Theory, safety stock would be determined as follows:(i) When R.O.L. System is used:
According to Kobert, it might be a good idea to define three degrees of criticality in regard to safety
stocks for which he establishes the following reaction rules:
* Minor items whose stock out would cause little inconvenience and could easily be overcome: Any safety
stock for this type of item would be a needless expense.
* Major items whose stock out would cause expediting inconvenience, and additional costs due to minor
production delays, extra shipping and handling charges etc: Emergency qualities of these types of
stocks could be obtained locally at a premium. The extent of the extra costs should determine the size of
stock these types of items.
50
Materials Management
* Critical items whose stock out would cause major delays in shipment and/or production with excessive
costs resulting from both the effects of the stock out and the efforts to overcome the situation:
Emergency quantities of these items are not available locally at any cost. Safety stocks would be called
for with these types of items, but reasonableness should be considered in determining their size.
The factor K is taken out from the table given below:
Acceptable
Average
No. of
Years between
Stocks
outs
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
20
2.64
2.39
2.24
2.13
2.04
1.96
1.89
1.83
1.78
1.73
1.69
1.64
15
2.54
2.29
2.13
2.01
1.92
1.83
1.76
1.70
1.64
1.59
1.55
1.50
12
2.48
2.20
2.04
1.92
1.82
1.73
1.66
1.59
1\53
1.48
1.43
1.38
10
2.39
2.13
1.96
1.83
1.73
1.64
1.57
1.50
1.44
1.38
1.33
1.28
2.36
2.09
1.92
1.79
1.68
1.59
1.52
1.45
1.38
1.33
1.27
1.22
2.31
2.04
1.86
1.73
1.63
1.53
05
1.38
1.32
1.26
1.20
1.15
2.26
1.98
1.80
1.67
1.56
1.47
1.38
1.31
1.24
1.18
1.12
1.07
2.20
1.92
1.73
1.39
1.48
1.38
1.30
1.22
1.15
1.09
1.02
0.97
2.13
1.83
1.64
1.50
1.38
1.28
1.19
1.11
1.04
0.97
0.90
0.84
2.04
1.73
1.53
1.38
1.26
1.15
1.05
0.97
0.89
0.81
0,74
0.67
1.92
1.59
1.38
1.22
1.09
0.97
0.86
0.76
0.67
0.59
0.51
0.43
1.73
1.38
1.15
0.97
0.1l1
0.67
0.55
0.43
0.32
0.21
0.10
1.38
0.97
0.67
0.43
0.2l
K factors used to calculate the safety stock needed to provide various levels of protection against
stock out for items whose usage pattern is similar to a Poisson distribution.
Ready Reckoners
For the replenishing system (including for safety stocks) tables could be prepared which would act as
Ready Reckoners to replace the laborious calculations involved. Some examples of such tables are given on
next page:
Inventory Control
51
For example if the cost of placing an order is Rs. 10 and the Inventory carrying cost is 24%, the
following tables could be prepared to determine either the E.O.Q. in terms of number of orders to be
placed in a year or number of months' requirements per order.
Annual Usage Cost in
Rs.
Upto200
201-500
501-1,000
1,001 - 2,000
6 months'
4 months'
3 months'
2,101 - 6,750
2 months'
6,751 - 27,000
12
1 month
27,001 -1,20,000
14
2 weeks
52
1 week
The review periods depending upon the Annual usage cost is given in the following table.
Annual Usage Cost in Rs.
401-600
5
601-1000
1,101 - 2,000
2,001 - 6,000
Costs do not always represent the correct value for this factor and the principal that Balance Sheet
should always represent a fair view of the concern, favour market price method of valuation of stock. The
market price adopted may be replacement price i.e. the price at which stores can be currently purchased or
it may be realisable value i.e. the price at which the stores can be currently disposed of. However, the
market price method takes unrealised profit into account which is against conservative principle of
accounting.
52
Materials Management
The decision rules in inventory control systems employ order points or order-up-to-Levels based on
safety stocks developed through analysis of errors of forecasting the needs of individual components
treated independently. The weaknesses of such an approach in a manufacturing environment can be
summarized as follows:
1. There is no need to statistically forecast the requirements of a component. Once the production
plans for all items in which it is used have been established, the requirements of the component
follow, as dependent demand, by simple arithmetic. The patterns of inventory balance vis order
point for independent demand from customer, dependent demand of components and raw
materials are shown in figure 5.5.
END PRODUCT
MONY SMALL INDEPENDENT DEMANDS FROM CUSTOMERS
Inventory Control
53
2. The procedures for establishing safety stocks are usually based on reasonably smooth demand.
This is usually unrealistic in the case of component items.
3. Inventory control systems are geared to replenish stocks immediately following large demands
that drive inventories to low levels. In a "lumpy" demand situation, a large demand may be
followed by stock out but it makes no sense to immediately replenish the stock. Unnecessary
carrying cost would be incurred by such an action. The causes of lumpy demand of 'steel z' for a
hand tool manufacturing unit are shown in Figure 5.6.
4. Where several components are needed for a single assembly the inventories of these individual
components should not be treated in isolation. To illustrate, consider the case where twenty
different components are required for a particular assembly. Suppose, under independent control
of the components that for each component there is a 95 percent chance that it is in stock. Then
20
the probability of being able to build a complete assembly is only (0.95) or 0.36.
Definition
All materials in an organization after the point of issue from stores to the point of receipt in the salesgodown are called Work in Process (WIP) Inventory. The time gap for the flow of materials between these
two points is called processing time. WIP has direct relationship with the processing time. WIP is normally
expressed as the value of materials being processed during processing time. This value goes on increasing
from the starting point that is issue of materials from stores to the last point. In the beginning this value is
just the materials cost and then labour cost, machine cost and overheads go on adding. Since labour cost,
machine cost and overhead are
55
also directly proportional to the processing time, these costs will also be affected by the processing time.
Figure6.1 shows WIP curves. Solid curve is for the processing time T (before its reduction) and dotted
curve is for the processing time t (after its reduction). Area below the curve is an indication of the value of
WIP. It is clear that area below dotted line is less than the area below solid line. If an effort is made to cut
the processing time from T' to t and assuming the time reduction is spread equally throughout the process,
the post WIP curve will plot such that the horizontal axis value shifts to the right (is reduced) by the value
T -t. If level of WIP is Wand
Manufacturing sales are S than WIP Inventory turnover ratio = l2S
W
Calculation of WIP
WIP inventory as explained above is a function of manufacturing cost (C) and processing time (T).
Where D1 is the cost incurred or the input in the month before a product is completed, D2 is the input two
months before the product is completed and Dr is the input T months before a product is completed. The
value of WIP i.e. W is shown by
This does not, however, include input in the month of completion since these goods become finished
goods at the point. OT.T is determined by the manufacturing costs and the distribution of work performed
monthly (WIP distribution co-efficient) in particular the processing time T. Let the co-efficient be called
E.
Assuming that the input (C) remains same but the processing time is reduced from T to t thereby changing
WIP co-efficient from E to e. The new
56
(5)
Example 1
Through factory automation (FA) the processing time in an automobile factory is reduced from 4
months to 2 months. Month-wise break-up of inputs are given below:1 month before completion
2 months before completion
3 months before completion
4 months before completion
Before FA
After FA
50,000
1,00,000
1,50,000
2,00,000
2,00,000
3,00,000
---------
If the manufacturing sales are Rs. 5.50 lakhs, calculate the WIP inventory, WIP ratio and %
reduction in WIP before and after FA.
Solution:
1. Before FA
Manufacturing Cost (C) = 0.5 + 1.0 + 1.5 + 2.0 = Rs.5 lakhs. WIP distribution co-efficient (E)
6.6
2. After FA
Manufacturing Cost (C) = 2 + 3 = 5 lakhs
Manufacturing sales (s) = 5.51akhs
57
Example 2
Processing time in an electronic industry is reduced from 12 days to 3 days through process
improvement and line balancing. Day-wise break-up of input to the factory is as follows:
Before Im-
10
11
12
10
20
provement
After Im-
provement
Solution:
C = 1 + 1 + 2 + 2 + 4 + 1 + 1 + 2 + 3 + 2 + 1 + 10 = 30
CE = 1 x 1 + 1 x 2 + 2 x 3 + 4 x 5 + 1 x6 + 1 x 7 + 2 x 8 + 3 x 9 +
2 x 10 + 1 x 11 + 10 x 12 = 244
W = CE-C = 244-30 = 214
C = 3 + 7 + 20 = 30
Ce = 3 x 1 + 7 x 2 + 20 x 3 = 77
w = 77 -30 = 47
58
Materials Management
* Line Balancing.
* Minimum movement through improved Plant Layout.
* Maximum speed of flow of materials between processes through mechanised handling.
* Minimum Setting Time. Quick die change mechanism, standby tool holders and machine
heads etc.
* Minimum process time. Use catalytic agents. Maximum tool speeds, feeds and depth of cut.
* Rigorous use of preventive machine maintenance systems.
* Self inspection by operator. Eliminate inspection stages by adopting running inspection and sampling
inspection during material movement between processes.
* Minimum number of operations.
* Most efficient operations through factory automation.
* Just-in-time Production System.
Specific Problems
The main problem with spares required for day to day repair, maintenance of plant and machinery is
that there never seem to enough of them when required and too many in stock of such spares which are not
required. This is only the symptom of the illness. The main causes of this universal state of affairs are :1. The wage usage rates of spares are very low as compared to raw materials of general stores; this
causes their requirement to be highly fluctuating from period to period. The spare parts manager is
always at the end of his wits to assess and catch up with this variation.
2. The wage range of spare parts is very large and their individual value, relatively small. This raises
the problem of the level of control. Most spare parts inventory management is done at the lowest
organisationallevel. The senior manager just does not have time to deal with such a large range.,
though the problem of spare parts are most complex and can be appreciated by a trained manager
much better than a stores clerk.
3. The rate itself is difficult to establish from past records especially for the slow movers which form
the bulk of the spare parts inventory. Little usage history is available and the natural variability of
usage causes over estimates of requirement. As such, usage rates of spare parts have to be an
engineering assessment. If at all the maintenance engineer is consulted, he tends to make an over
estimate by himself taking over the material manager's function and allowing for safety margin,
also to allow for his own error of judgment.
The above problems have been tackled scientifically only in recent years. The solutions are far from
ideal but provide a much greater satisfaction as compared to the situation currently obtained in most
organizations.
60
Materials Management
Let us consider an example from the transportation industry where a single workshop looks after a
large fleet of, say, 10,000 vehicles. If the average requirements of fan belt per lead time (such as one
month) was 10% then the workshop should place a demand when the stocks fall to 1000 fan belts (10%
to 10,000). Vehicles are now split into ten groups of 1000 each, and each group is supported by the
different workshop (the lead time for procurement remaining the same as before) then, on the average,
each workshop will experience a consumption of 100 fan belts during the lead time but the variation
from workshop to workshop will be of the order of perhaps, 90 to 110. In their attempt to provide all the
spares when required, each workshop will then tend to retain a stock of 110. Causing a total stock of
1100 amongst all the workshops.
Now if each of these groups of 1000 vehicles is further split up into 10 groups of 100 vehicles
each, then there will be in all 100 groups of 100 vehicles, each experiencing .an average monthly
demand of 10 fan belts per group. However, now the actual variation of requirement of fan belts from
group to group would perhaps 'be of the order of 5 to 15. If 100 different workshops were to service
these 100 groups, then each workshop would tend to keep a stock of 15 fan belts to ensure full
availability when required so that the total 'deployed' stock would now rise to 1500 whereas the true
requirement was only 1000. This can be carried on further. Intuitively, one can guess that the variation in
consumption will increase as the usage rate goes down. Finally, when the usage rate becomes fractional,
the variation can be from 0 to at least 1 or even 2. The deployed stocks will then rise as shown in the
following table:
No. of
Vehicles
in each
group
Average
rate per
group
Variation
of usage
rate per
group
Total no.
of groups
Total
Spares
Stocked
Safety
stock (excess over
average)
10,000
1000
1,000
100
90-110
10
100
10
5-15
100
1500
500
10
0-2
1000
2000
1000
0.1
0-1
10000
10000
9000
1000
1100
100
The above table clearly brings out the tremendous relative increase in the variation of usage below
and above the average as the latter decreases and becomes fractional consequently, the safety stack, i.e.
the quantity to meet the excess requirement also goes up sharply. In fact, it
61
also points to the method of reducing spares inventories. Thus, if the spares support is rendered from a
central store, the effective usage rate increases and its variation is reduced so that the safety stock required
is also small. Splitting vehicles into small pockets effectively reduces the usage rate, variation of. which
then becomes greater and greater and safety stock increases very rapidly.
Statistical Analysis
Having noted the fact that there is random variation in the actual requirement of spares from period to
period, the next step is to look for any pattern that may exist in this variation. Research conducted in
Western countries and in the Armed Forces has proved that a statistical law governed the requirement of
maintenance spares for every kind of equipment be it air-craft, submarine, ship, radar, tank, vehicle,
machine tool, telephone or radio. To understand how these patterns can be used to determine the safety
stock, a simple numerical example can be taken.
Assume that we had a large amount of data available relating to the requirement of a certain spare
over a long period, Figure 7.1 above indicates this data. The height of the vertical bars represents the
proportion of times that particular spare (on the horizontal axis) was required. Typically, the data
pOl1rayed in Figure 7.1 shows that Qty. 8 spares were required 2% of the months Qty. 7 spares were
required 6% of the months. Within the total number of months examined, it was observed that there were 1
% of the months during which no spare at all was required (The reference is to be one particular spare).
62
Materials Management
No. of
No. in
Spares
which required
1
2
3
10
15
20
25
18
6
2
=
=
=
3
20
45
80
125
108
42
16
4
5
x
x
(i
=
=
=
=
=
439
No. of months
100
Safety Stock
Assurance %
Risk%
100
98
92
74
26
49
51
29
71
14
86
1
0
96
97
63
It will be seen that as the safety stock increases there is a progressively lesser and lesser addition to
the assurance obtained by it. In other words, although the cost of spares increases, the additional assurance
of availability does not increase in the same proportion.
This is a typical manifestation of the economic law of diminishing returns. This is why it is not
economic or worthwhile to demand the same assurance of availability from all spares irrespective of their
cost.
Safety Stock Calculations
Figure 7.1 indicated only a hypothetical situation regarding the requirement of spares and their
frequencies. AS mentioned earlier, a statistical law (called POISSON DISTRIBUTION) influences these
frequencies in the case of spares. This is indeed fortunate because when we know the average usage rate of
spares, it is unnecessary for us to calculate individually the percentage of times different quantity of spares
will be required during the lead time, as in the case of Fig. 7.1. Just as the area of circle is known
immediately the radius is known, so also these frequencies are known once the average usage rate of
spares is known. This enables the use of a simple formula given below for calculation of safety stock.
Where K is a constant which depends upon the level of assurance to be given and M is the average
usage (During lead time). The Reorder Point (ROP) of a spare consists of two parts, viz., the average or
expected usage M during lead time and the additional or safety stock, for the required level of assurance,
hence
Depending upon the annual consumption value (ABC Analysis), criticality (VED Analysis) and
availability (SDE Analysis), assurance level of a particular spare will vary. For 'c' items a thumb rule
principle of keeping 3 months average consumption as safety stock can work very well. Following table
has been prepared to select 'K' value for a spare part depending upon its classification against above
mentioned three types of analyses:
Criticality
Availability
Annual Consumption
Value
1.7
2.1
1.5
2.0
1.3
1.9
64
Materials Management
Criticality
Availability
Annual Consumption
Value
B
A
E
1.2
1.6
1.0
1.5
0.8
1.4
0.8
0.8
0.8
The above table shows that the cycle stock i.e. the 'average usage' part of the ROP becomes
relatively an insignificant part as the usage rate diminishes where the safety stock becomes the predominant
part for any given level of assistance. Typically, for a fast moving item having a monthly usage of 16, the
safety stock required for 85% assurance (K=1.0) is 4.0 whereas, for a slow moving item with a monthly
usage of 0.1 the safety
65
stock for the same level of assurance comes to .330 which is 3.3 times the average usage during the lead
time. This relationship also shows that the slow moving items (which form the bulk of the range of
maintenance spares) are mostly held as safety stocks.
Insurance Spares
When the usage of spare parts (during Lead Time) falls below 0.5 even the above method fails.
Typically, for a usage of 0.36 and K = 0.8 (70% Assurance) the ROP = 0.36 + 0.8 x Y36 = 0.36 + .48 = .84.
A doubt now arises whether to round off the fraction 0.84 to nearest integer i.e. 1, since we cannot hold
spares in fractional quantities
If we round off 1, the holing will be excessive. If we round off to 0, it will be insufficient. Strictly
speaking, this problem would come in rounding off figures such as 1.8, 2.3 etc. also, but the relative error
in rounding off a fraction such 1.8 to 2.0 is much less (10%) compared to the error in rounding off 0.8 to
1.0 (25%) ..
In such cases, the problem, therefore, is to decide whether to round off to 1, (i.e. hold the spare at
all) or to 0 (i.e. not to hold it). Majority of the so-called maintenance spares have very low usages; such
items are often very expensive.
The typical inventory manager, on the advice of the maintenance engineer, tends to play safe and
decides to stock at least 1 of each such spare. This inflates the cost of the inventory enormously. In fact, in
many organizations, the stock value of such insurance spares may be several times the stock value of the
fast movers though their real requirement is very little.
To help the inventory manager select a sensible policy, a simple technique of determining their
requirement has been developed. The technique consists of selecting a value C1 for the cost of not having
the spare when required and comparing with C2, the present cost of the spare. The ratio C2 X 100% is
C2
compared with the engineers' estimate of the chance of requiring the spare at all during the life time of the
machine or group of machines which use that spare.
Thus, for a certain machine (or a vehicle) let the present cost of a certain spare (C2) be Rs. 1000/-.
If the spare is not kept in stock and is needed, it will take time to get it from suppliers. Apart from the cost
of downtime of the vehicle, the rush-actions required for getting the part (ie. telephone calls, cost of
airfreight etc.) will cost money. Also the part may be now more costly, if it has to be specially made by
the supplier, or anyone else. All these costs can be roughly estimated. Let us say, this cost (C1) is
estimated at Rs. 10000/-.
66
Materials Management
This value is called the "indifference level", The maintenance engineer is now asked whether, in'his
estimate, the chance of requiring that spare in the life-time of the affected vehicle fleet is as high as 10%. If
his answer is 'yes', the spare is stocked. If the answer is 'No', the spare is not stocked but bought only when
actually required,
It should be noted that the engineer will not be able to answer the questions "what is the probability
of requiring a given spare during a given time" but when his thoughts are pegged against a specific figure
(the indifference level) he will more often than not, be able to bring to bear his entire experience and
engineering knowledge upon this question. It will be rare that he will not be able to answer even this
question, because, just as there is never complete knowledge, there is also never complete ignorance.
If the cost of the slow moving spares is very low, the above analysis is not required. The spare partsmanager should stock them at quantity l or 2, if they are critical and none or 1 if they are not
Purchasing
Preliminary Considerations
It is a belief of long standing that purchasing is a matter of experience, contacts and bargaining
skills. There exists, however, the other important side which helps economic purchasing and these are
certain modern techniques that give a more systematic approach and help in giving a sharper edge to the
experience and bargaining skills.
The five essentials of a good purchase are:
(1) Right Quality
(2) Right Quantity
(3) Right Price
(4) Right Time
(5) Right Source
/
Right Quality:
The quality is usually specified by the designers or the engineering personnel. The tendency is
always to specify quality a step higher than necessary to doubly ensure the performance. The extra quality
however adds nothing but costs to the product. The purchasing can always scrutinize the quality
specifications by comparison with the quality the competitors are buying and bring it to the notice of the
designers. The other aspects are being in touch with the markets. Purchasing can always supply to the
designers with information about alternative materials that can meet the specified quality requirements. In
many requisitions the quality is specified so vague that future troubles are guaranteed; in such cases
purchasing must insist for explicit statement of quality requirements. The purchaser should consider
following points for ensuring right quality:
- As per own requirements.
- Clear specifications (ISI).
- Simplification & Standardizations.
- Support to supplier.
Materials Management
68
Right Quantity
The concepts of E.O.Q. have already been considered elsewhere; there are two more aspects of Right
Quantity from the point of view of transportation costs and quantity discounts. If the supplies are in truck
loads or wagon loads substantial savings in transportation costs can be affected. At times two or three
items can be purchased from one supplier; it gives savings in transportation costs. The other aspect is of
discounts.
When buying for discounts, it is necessary to calculate the increase in inventory costs and also
chances of deterioration or obsolescence. E.O.Q. usually will give a value which may not be very suitable
from both the above angles and purchasing will have to modify it suitably. Before deciding right quantity,
following points should be considered:
- E.O.Q.
- Economy on Transportations.
- Quantity Discounts.
Right Price
and the interests in anticipation of delayed payments. Analysis of all these costs is necessary when
comparing When we talk of price, we talk of cost of materials upto factory which consists mainly of
ordering costs, the price of ready goods, the packaging costs, the handling and transportation costs,
forwarding and clearing costs prices as consideration only of the goods cost can be misleading.
The packaging, forwarding and clearing charges and damages ir transport can be reduced to a
minimum by purchasing locally. Again for different modes of transportation the packing need not be of the
same type. Handling costs can be reduced by getting the goods in packages that are ready for issuing to
shops. Last of all, if a supplier knows that he would not get his bills paid for a year, he is bound to charge
extra. Calling open tenders too increases the ordering costs and consequently the price and should be done
only when necessary. Consider following point before deciding right price:
- Need not be lowest price
- Total cost to be considered
- Make or Buy.
Purchasing
69
Right Time
The time of receipt of goods from the time a need is created can be divided into in plant-time,
ordering period, supplier's processing time and delays, forwarding and transportation time and the receipt
and inspection time.
The most important is the supplier's process time, which is fairly beyond the control of the buyer. It is
here that an advance planning helps to allow sufficiently for the suppliers delays. Follow up of orders can
also be of some use.
The implant time and delays and the ordering periods can be reduced by use of tagged requisitions
indicating urgency. Care must be taken to see that these are used only when necessary. Transportation can
be expedited by use of other mode but costs should be considered. In case of emergency orders it is
worthwhile for the purchasing to go into the implications of delays.
Aging of commitments by level of requirement all items are not required at the same time in
sequencing of stock commitments. If the overall lead-time for an operation is X-weeks, then individual
items are required at X, X-I, X-2, X-3, weeks, etc. The closer delivery- can be coordinated to the demand
week, the less actual inventory will be on hand.
Pipelining Allows scheduler to gamble on stocks which haven't actually arrived yet. It requires close
monitoring of suppliers and subcontractors, as well as internal departmental scheduling. This technique can
especially be applied to items of low criticality, because if one is wrong in his expectations, he can easily
recover.
Materials Management
70
Right Source
Locating right source that can satisfy the requirements of quality, quantity, price and time is probably
the essence of good purchasing. Most of the suppliers cannot meet all these and a compromise has to be
made. There are many magazines, periodicals, trade association journals and Hand books which help in
locating suppliers. In addition a search into where others buy the same items can give clues.
Make or buy decisions to reduce hedge inventories against irregular demands. One way to account
for demand variability other than inventory investment is to consider outside procurement during peak
demand times. This technique can sometimes be adopted as a regular operating policy even during nonpeak demand periods. Many U.S. companies have been relying more and more on the outsourcing of parts.
Obviously, outside purchase during peak demand cuts down inventory carrying costs, but those cost
savings must be weighed against the cost of outside procurement. Many U.S. companies are finding that
they can actually buy an item overseas cheaper than they can make it, as well as receive a higher quality
item in many cases. This is true even after considering extra shipping costs and duties. Outsourcing can be
applied to personnel as well as inventories.
Inspection of suppliers plant can give an idea of his capabilities to meet the requirements. It is best to
have two or three suppliers for an item to provide flexibility and competition. Some of the reliable
contractors of the company can be given opportunities of more and more items. At times some contractors
cannot meet the requirements since they do not possess properly qualified personnel or know how. In the
ultimate interests of a company every good contractor is an asset. As much help as can be justified should
be rendered in terms of technical advice, managerial and administrative advice or capital help.
Following points may be taken into account while selecting a right source:
- Investigate supplier thoroughly.
- Direct contact.
- Knowledge of all possible sources.
- Establish goodwill with supplier.
- Help supplier through Tech. Advice.
71
Purchasing
- Vendor Rating.
- Ethics (No gifts, bribe etc.)
Materials Management
72
Quality like price, is generally competitive on similar lines of off-the shelf items. However, there
may be advantages to a buyer's specific requirement in analyzing and evaluating the ranges in tolerances
being offered.
In the initial or inquiry, stage, the task of analyzing and evaluating vendors of commodity items
requires knowledge of markets including manufacturers, distributors and dealers; commercial specification,
and specific pricing structures. The end result of the process is selection of the one or perhaps several
vendors as suppliers. Because of the many variables involved and the possibility of misunderstanding of
buyer requirements, this process should involve negotiation rather than the typical comparative approach.
"Capability" Suppliers
When the procurement is for unique requirements calling for special design~ performance or
reliability features and entailing special tooling, preparatory time and even capital investment, the buyer is
virtually procuring vendor capability. This supplier becomes, in, effect, an extension of the buyer's inhouse resources, or, in other words, an external manufacturer. Therefore, the need is to analyse and
evaluate these vendors in terms that are relatively proportionately meaningful. Qualifications should be in
terms of technical, manufacturing, financial and management capabilities.
Some of the typical questions the buyers should be posing when undertaking a Vendor Capability
survey are:-
* Will the vendor comply with the buyer's engineering standards and procedures for items made to buyer's
design, and will produce drawings on buyer's format when requested?
Purchasing
73
* Does he have any objection to contracting on other than a fixed price basis?
* Will he designate specific individuals in his engineering, production and
financial organization from whom the buyer can obtain pertinent information
and data as he requires it?
Materials Management
74
have been instances when some fasteners have held up the whole assembly line.
So when it is a question of urgent development of a small item, it may not be
easy to get the desired personal attention from the large suppliers.
One has to be careful, however, to prevent the over dependence of the
small supplier on the buyer, and hardships resulting from haphazard planning
on the part of the small supplier.
Purchasing has to take a broader view of supplier development through a
more imaginative and aggressive approach to source creation than is associated
with the developing of a new item in an already existing industry.
Prices should not be allowed to rise except as a result of factors beyond
the control of the supplier; and further, the supplier should make every
reasonable effort to minimize the effect. This is possible and small suppliers if
properly developed are more co-operative.
The old doctrine "Caveat Emptor" (meaning "Purchasers Beware") which
is a negative approach emphasizing caution, distrust and timidity must give way
to the mote "Know your Contract" (Partum Serve), which is the positive
approach.
Buyer Seller Relations
It has long been considered an essentially sound sales policy to develop
good will on the part of customers toward the seller.
Goodwill between a company and its suppliers need to be just as
assiduously cultivated and just as jealously guarded.
Buying being a compliment to selling, it should be realized that any
trading agreement, terms and conditions of sale should be satisfactory to both
the buyer and seller. It should also be recognized that short comings are not
confined to suppliers only. Buyers too have faults, errors in specification, not
strictly observing the terms of payment and dogmatically expecting the
suppliers to be right the first time.
Competition
It is commonly believed that more than one source of supply is essential
but many rely on only one. Choosing the best, based on an efficient assessment
system and predicting the future requirements can build a highly competitive
source. It may not always make sense to deal with unnecessarily large number
of suppliers and increase the cost of the end product. No doubt, buyers have a
real responsibility in improving our competitive positions in the world. One has
to stimulate competition and build up company image. In other words, the
suppliers should be made to realize that they would get
Purchasing
75
fair prices for the quality guaranteed service and dc1ivery, the factors which the
buyer had to insist so as to ensure proper supplier development.
Purchasing Systems
Blanket Orders
The blanket order is the most popular alternative to the single-item,
fixed-price order. A blanket order may be an agreement to provide a designated
quantity of specified items for a period of time at an agreed price. If the price is
not specified, a method of determining it is made a part of the contract.
Deliveries are then made under a specified 'release' system. A second type of
blanket order is an agreement to furnish all of the buyer's needs for particular
items for a designated period of time. Under this type blanket order the quantity
is not fixed until the time period has elapsed.
The unique purpose of a blanket order is to purchase a variety of items for
which there are frequent deliveries from one source, typically a middle man.
The blanket order is best for items with low unit value, but high annual usage,
whose rate of usage cannot be accurately planned.
Typically, a blanket order covers a 12 month period, although other time
periods may also be used. A purchasing department employing the blanket
order procedure usually finds its advantageous to stagger the expiration dates of
its blanket orders to avoid concentrating the work involved in negotiating new
orders.
The description of products covered by a blanket order may be handled in
one of three ways. The order may completely itemize and describe each product
covered. In other instances blanket orders may be written to cover categories of
goods that are broadly described, for example, fasteners. Occasionally a blanket
order specifies that it covers all items that the supplier is able to furnish.
Price is also handled in a number of ways in a blanket order. Fair prices
may be negotiated for each item covered. The blanket order may specify
'market price' and include a method of determining such price. In some cases a
ceiling price is established and the actual price of a sale is designated each time
the supplier releases a product under the order. If the price exceeds the ceiling
figure, the transaction is treated as a new and separate purchase which requires
the buyer and seller to negotiate it as a single-purchase transaction.
Blanket orders are of interest to suppliers in that they also may achieve
cost savings from such arrangements. Once a supplier has been selected and the
negotiations leading to a blanket order contract are concluded, his selling costs
are almost eliminated. Furthermore, the assurance of specified costs and volume
leads to more accuracy. Since most blanket order contracts
Materials Management
76
MATERIAL REQUISITION
DATEREQD.
SPECIFICATION
PART NO.
QTY ON ORDER
UNIT QIT
WORK ORDER
DESCRITPION
SIZE
TOTAL QTY
BATCH NO.
WEIGHT
UNIT PRICE
TOTAL PRICE
QTY. ISSUED
NO.
STORESCLASS
STOCK
BALANCE
Fig. 8.1
DATE REQD
MATERIAL REQUISITION
PRODUCT/ASY NO.
QTY ON
ORDER
STORES
CLASS
S.NO.
PART NO.
AUTHORISED
BY
ISSUED BY
DESCRIPTION
DESCRITION
RECD. BY
QTY
DATE OF ISSUE
UNIT
PRICE
ENTERE
D BY
TOTAL PRICE
Purchasing
77
Specify monthly invoicing, it follows that the supplier's paper work can be
significantly reduced.
Systems Contracting
A systems contract is a total corporate technique designated to assist the
buyer and seller to improve reordering or rapidity, use materials or services with
an absolute minimum of administrative expense and with-the maintenance of
adequate business controls.
Some of the specified points of difference between a system contract and
the other methods of purchasing lie in the following areas:
Choice of vendor: Under the systems concept not only will the agreement
be of longer duration, but a much more formal method of selecting the vendor
will be employed to eliminate personal considerations. The service requirements
imposed on the vendor by the contract are more stringent and a specified price
is more commonly an integral part of the arrangement. The total costs for all
items and services covered in a systems contract is the determining factor. The
chosen vendor should be a specialist in the materials covered by the contract so
as to be able to offer maximum quantity to a large buyer of such items and
discounts to the buyer.
Materials covered by the Systems Contract: A selected vendor will
generally be used to assist the buyer in analyzing his requirements of the
materials covered by the contract so that his purchase will reflect the product
variations and prices most suitable to his needs. The prior rate of usage of
particular products must be determined as well as the frequency of re-ordering
over some past period.
Since such analysis require a study of closed purchase orders, a policy
question arises as to the wisdom of providing access to the vendor to such
records. The records show not only transactions with that supplier but also
previous purchases from competitive sources. One could argue that transactions
have no bearing on the choice of systems contract which has already been made.
In addition, it is likely that the systems supplier was a major supplier in the past
and is already in possession of much of this information.
Materials Management
78
The negotiated price is listed in the catalogue, and this obviates the prior need to
provide the accounting department with a copy of all purchase orders as a basis
for checking the price at which items are invoiced.
Catalogues with confidential information such as price are given to the
purchasing, accounting, and auditing departments. Unpriced catalogues are
distributed to the requisition points.
Purchasing
79
material, while in the press tender, the supplier may not supply the
material at all.
(c) Single Tender :- In this case, only one man is asked to send the
quotation. This is generally used under the following situations :(i) Emergency
(ii) Propritory (No else is supplier of that item)
(iii) For C class items (C class items are such as pencils, papers, etc.)
(d) Cash purchasing is used either in emergency or for C class of items.
To decide, which method of tendering is to be adopted, following factors
are to be considered :(i) Total price involved
(ii) Quality and quantity
(iii) possible suppliers
(iv) Delivery time.
The following informations should be essentially given in the tender :-
(i) Quantity and Quality: - The details should be given" as far as possible
in the commercial language.
(ii) Delivery time.
(iii) Opening time.
(iv) The tendering should be legally sound.
The quotations are always opened before the available suppliers.
Analysis of Tenders
(i). Quotations are studied in a very short period immediately after opening
the quotations and the discrepencies are brought to the notice of
indenter or supplier for clarification. The most important thing during
analysis is the validity of tender. No tender can be rejected on the basis
of validity time. Validity time of a tender depends on the types of
material to be supplied. There are few materials, whose cost fluctuates
very rapidly such as copper, gold, etc. In the case of copper, the
validity time may be only few hours.
(ii) After thorough study of tenders, the preparation of comparative
statement is made. Any sort of discripency are brought to the notice
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Materials Management
of the indenter or supplier. A specimen Tender Evaluation Form is
shown in figure 8.3.
Part Name
Specifications
Code No.
Inquiy
S.
No.
Supplier's Name
Quotation
Quan-
Quan-
tity
tity
Price
Tool
Delivery F.O.I3.
Terms
Cost.
Fig. 8.3
Following informations are necessary in the comparative statement: (a)
Name of Supplier
(b) Name of Manufacturer
(c) Reliability of supplier whether registered in DGS and D; D.G.T. &
D.; State Government Directorate of Industries and reputed
engineering concerns.
(d) Pre-purchase price, supplier, order Nos. and date (when the old
order was placed and to whom etc.). Sometimes this factor decides
the quantity of material to be purchased. If the present quoted
prices are very high, the purchase officer should purchase the
quantity which is must to continue the production. Later he should
keep an eye on the market trend and can place the order, when the
cost is appreciably low.
(e) Place of delivery.
(1) Which taxes are included; which are not.
(g) Delivery period.
(h) Terms of payment and validity of tender.
(i) Details of the quality and quantity quoted.
U) Other information if necessary such as whose inspection is valid,
price variation clause etc.
(k) Whether black-listed by any buyer or institution.
Purchasing
81
Purchase Order
Number
Date
Ship to :
Arrive at destination by
F.O.B.
S.No
Item Description
Destination
Quantity
Ship point
Unit
Unit
Amount
price.
Total
INSTRUCTIONS:
1. Invoices in Quardruplicate.
(Authorised Representative)
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82
Purchase Order
Purchasing
83
Purchasing Methods
Material Requirement
The first step in Purchasing is to collect requirements of different types of
materials from the user departments or stores. The requirement might be
received for a single item in the format as shown in figure 8.1. or for a group of
items as shown in figure 8.2. The requirements received from various
departments/stores are consolidated so that a common order is placed if
possible. In certain cases separate order may have to be placed for each
requisition. As shown in requisition form, specifications for the item(s) are
given in detail which help purchase department in issuing
. orders accordingly. Following methods of purchasing are very common:
(2) Purchase for Specified Future Period: This is the standard practice
adopted by most of the industries for buying goods which are regularly
consumed. The material is readily available in the market. The period
for which the purchase is to be made, may be determined
Materials Management
84
Vendor Rating
It is absolutely essential to know the vendor by their performance. It will
greatly help the Materials Manager in cutting coats of procurement by cutting
down number of suppliers to be contacted and in making their choice simpler
when specific purpose is to be met such as quality of
85
Purchasing
Supplies. This will also help in developing sources for the company's needs on
a long term contracts. The techniques of measuring the performance of the
suppliers are termed 'Vendor Rating' and is nothing but condensing the
company's experience with them, in quantified terms. The Vendor Rating
Scheme of a typical company making use of past records of dealing with the
suppliers is described below:
It was proposed that vendor rating be introduced for all the suppliers of
'A' items to start with, and extended to B&C items later. The following factors
and weight ages were used:
Weightage
Factors
(i)
Quality
(ii)
Price
(iii)
Service
40 points
35 points
25 points
Quality Rating
The quality is rated on the assumption that the incoming material is
either acceptable with or without authorised deviations, or not acceptable. If
the lot is accepted with authorised deviation which may be treated as 50%
acceptance and 50% reject. The rating is determined as follows:Quality Rating = No. of Acceptable Lots
No. of Lots
x 40
Excellent
Good
Satisfactory
Unsatisfactory (needs investigation)
Price Rating
The price rating is based on comparative prices from various
suppliers/vendors for a pre-specified quality of goods. The lowest net price
gets the maximum of 35 points.
Lowest Quotation ________________x 35
The price rating =The Quotation of the Supplier under consideration
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Materials Management
Service Rating
The service rating is found out from previous records. The number of
times each supplier was able or unable to meet the specified delivery schedules
and expressed as a percentage.
Excellent
93 to 99 points
Good
83 to 92 points
Satisfactory
Below 83 points
Unsatisfactory
(needs to be investigated)
87
Purchasing
third party cannot hold the principal responsible.
(ii) Essentials of a Valid Contract
(a) A proposal or an offer with definite terms and conditions. (b)
An acceptance in toto.
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Materials Management
Risk purchase ought to be done within 6 months from the date of default.
The terms of contract should be the same as in the original contract and
the material to be purchased should have the same specifications as in the
original order. The enquiry should not exclude any supplier who had
quoted against the original enquiry. For practical purpose, it would be
advisable not to undertake risk purchase articles of short supply or where
there are limited numbers of suppliers.
Materials Handlings
Introduction
There are two types of materials handling which concern Purchase
Department. One is the handling outside the factory premises and the other is
within the factory. Outside handling involves transportations of materials from
supplier to the purchasers site. Almost one-fourth of the basic price of bulky and
low cost materials is spent on transportation and every items of very high value
may directly or indirectly include five to ten percent of basic price as transportation
cost. Considerable savings in this expenditure is possible by proper traffic
management. Inside handling includes movement of materials within stores, from
main stores to sub-stores and from stores to the point of use.
* Avoid remanding
* When gravity will not suffice, use mechanical means where practical.
90
Handling Equipment
Outside Handling
Inside Handling
Materials Management
Materials Handling
91
92
Materials Management
and then steel containers. Corrugated board boxes can be used for conk 'lining a
maximum load up to 50 Kgs. whereas fiber board can Conklin up to 150 Kgs. and
steel containers up to 300 Kgs. The relationship between the container cost and
quantity contained is shown in figure 9.1.
Store-Keeping
Receiving and Inspection
Organization/Functions
. Office
a. Correspondence including queries from/with suppliers
Materials Management
94
b. Discrepancies, claims
c. Certification of bills
d. Periodical Reports
Receiving Section
e. Checking and arranging inspection
f. Actions on
emergency requirements
receipt of heavy items
receipt of excess stores
receipt after delivery date
c. Documentation
d. Handing over to custody
e. Rejections
Claims
Examine the liability of the supplier/carrier/insurance company.
Advise to raise claim, if material is not received within two months of
the date on RR.
Store-Keeping
95
Customs within three months. If again rejected, appeal to the
Board of Revenue within 6 months.
General Average
Captain of the ship declares loss caused by measures taken for
ship's safety. General average adjusters are at each port.
Contribution towards general average is re-imperishable by the
insurance company.
Inspection
(i) Determine purpose of inspection.
(ii) Factors relevant for drawing up quality specifications
Dimensions, weight, conductivity, hardness, surface finish, co
lour, physical & chemical properties, etc.
Functional utility of the product.
Capabilities of the production process.
(iii) Specifying Quality
By brand or trade names
Established specification of buyer or seller
Drawings
ISI, BSI (British Standard Institution)
ASTM (American Society for Testing Materials)
Chemical composition
Samples
Restrictive specifications ought to be avoided.
(iv) Role of purchasing dept.
Materials Management
96
* These would vary according to the type of industry and nature of items.
There are three stages.
* Incoming/receiving
* In process
Final inspection
(vii) Methods
Stores must be kept in a manner that may facilitate counting and issue on
FIFO basis. A location card for each material is prepared (Fig. 10.3). The quantities
and other details of the materials received are entered in the stock ledger and the
Bin Card. The format of the Bin Card is shown in Figure 10.4. The format of the
Stock Ledger is similar to Bin Card. While Bin Card is kept in the bin where
material is stored, the location card and stock ledger are kept in the office of the
storekeeper
Store-Keeping
NOTE:
AND
97
LEGEND: 1. REF. NO: Goods Inwards Note No or work Order No. Or Rejection
Note No or Purchase Order No. Depending upon the
Usage/purpose of the Tag.
2. STATUS: The Status in which the Material is Identified such as
Accepted Rejected Scrap, Salvaged Quarantined etc. is Stamped in
Bold Letters with the use of a Rubber Stamp.
3. The inspector ticks in the Relevant Box
INSPECTION/INDENTIFICATION TAG.
Fig. 10.2
LOCATION CARD
Fig. 10.3
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Materials Management
Preservation
Causes of damage
a. Biological
b. Non-biological
c. Shelf life items
d. Misc.
Preventive measures
There are different approaches for various types of materials, viz linnen,
metals, timber, bamboos, rubber goods, drugs, etc.
Issues
Procedure ought to be dependent upon the nature and type of items.
-Issues as per need (small value items - negligle control)
- Automatic issues - as per norms
-Issues as per authorisation/bill for materials
-Small tools
-Special tools
-Eatables
-Capital items
Delegation of powers ought to specify the levels authorised to indent.
Specimen signatures of authorised personnel to be available with the stores dept.
Materials are issued against stores Credit Note or Material Requisitions. Format of
stores Credit Note is shown in Fig. 10.5. The quantities issued and balance are
entered in the Bin Card and Stock Ledger. Value of materials issued is calculated
as per the Valuation Method.
Lay-out of Stores
Consideration
1. Centralised and Decentralised Stores.
2. Nature of Materials.
3. Quantity.
4. Utilisation of Floor Space.
5. Scope for future expansion.
6. Accessibility - Aisles width.
99
Store-Keeping
7. Type of Storage Equipment.
8. Use of Material Handling Devices.
9. Protection against loss, theft, etc.
Factorys
1. Rate of consumption
2. Weight
3. Inflammable
4. Impervious to weather
5. Special Protection Treatment
6. Messy items
Lay-Out Aspects
. Straighten flow with wide gangways
2. Minimum handling
3. Minimum distance
4. Efficient use of space
5. Flexi ability for expansion
6. Safety, Fire Hazards, Insurance & Nearness to Point of Use
Considerations in Storage
- Near outlet
Heavy items
Inflamable &
Dangerous items
Sprinkler system
- In outside yard
Bulky
Require special protective
Treatment
In airtight containers
- Stored separate
100
Materials Management
BIN CARD
Store-Keeping
Control System
Periodic Review of non-moving items.
Analysis of stocks during physical verification.
Periodic clean up campaign.
Contract Terms
Validity Period
Security Deposit amount and time
Change of rates, period, time, etc.
To be lifted outright by your men & transport
Penalty if scrap is not lifted regularly
24 hour notice before lifting scrap so as to inform security and
concerned departments
No liability for accident to your men
101
102
Materials Management
Stores Accounting
Materials constitute a major share of the Working Capital. Management of
working capital is therefore possible only if an account of materials received,
consumed and balance is kept. Accounting is also necessary to prepare annual
accounts. Preparation and analysis of variance statements W.r.t. cost of
consumption, purchases, inventory carrying cost, ordering cost, etc. is an important
input for the chief executive and Head of materials management deptt. in
controlling materials functions.
Stores Valuation
The value of materials-issued from the stores is essential in all the
organisations. In the government departments it is basis for calculating actual cost
of works, comparison of actual cost with the budget and putting up supplementary
demands. In the commercial organisations it forms the basis for product costing
and cost control, preparation of profit and loss account and balance sheets,
assessment of pilferage loss etc. Valuation is also necessary for inventory analysis
e.g. ABC analysis and HML analysis and for calculating Economic Order
Quantities (EOQ) of each item.
Issue price of an item is purchase price of that item plus storage charges.
Example: 300 Kgs. of screws are bought at the listed price of Rs. 8.75 per
kg. ex-works. The supplier delivers material in non-returnable boxes each
104
Materials Management
Charges are Rs. 150/- and insurance in transit is Rs. 15/-. The supplier allows
quantity discount as given below:
Stores Accounting
105
106
Materials Management
Stores Accounting
107
108
Materials Management
Store Accounting
109
Materials Management
110
Physical Verification
Stock is a 'Current Asset' just like cash. It has to be carefully protected,
counted and checked like what Bank. Cashier does
Purpose
* Process of counting, weighing or measuring.
* Periodic verification
* Random verification
Perpetual verification is most common. A team of physical verifiers carry out
this task throughout the year so that all items are verified at least once in a year.
The results of the verification done every day are entered in the stock verification
note (Fig. 11.1). This note is got signed from the stores officer and sent to the
Chief Accounts Officer (CAO). A summary of verification during the week is also
sent to CAO.
Minor discrepancies may be due to handling of large nos. of quantities while
checking count, weight or measurement; errors in scales; crude measuring
methods; "Breaking Bulk" items i.e. issue in small quantities over a period from <}
bulk store.
Investigation of Discrepancies
111
* Check if previous physiGl1 verification was correct and errors arc not continuing.
* Enquire from user departments, if there are issues or returns without documents.
112
Materials Management
Adjustment
1. Prepare list of items of discrepancy on Special Discrepancy report form.
2. Calculate total net deficiency.
3. Specify powers of writing off deficiencies at different levels of
management.
Specify penalties and fix responsibilities
Arrangements to be made before physical verification
* Update entries of previous receipt and issue vouchers and stop further till
physical verification is over.
* Take all normal stock including packages, scrap, residues, items on loan and
goods under inspection.
* Control issue of stock taking sheets (serially numbered) and account for
all at end of stock taking.
* Include. in the total list, items sent out for repairs or for processing or stored
elsewhere or in the hands of suppliers.
113
identified. Also the consumption figures of the current year should be compared
with the previous year figures and variance analysed: A system of reporting
abnormal variance to the appropriate authorities should be designed. The system
must aim at.
Advantages
1. To Producer
1. Fewer set ups on production line.
11. Reduced
Ill.
tooling.
inventory.
2. To User
1. Lower
11. Readier
Ill.
availability.
Variety Reduction
Principles
115
Single item shall serve for as many different purposes or for as many
different classes of equipment and kinds of construction as possible.
Disadvantages
116
Materials Management
117
Principles
1.Consistency.
2. Comprehensiveness.
3. Mutual Exclusiveness.
4. Under stable by no specialists.
5.Order of complexity must be maintained
System
(a) Numerical
- Significant
- Sequential
- Combined
b) Alphabetical
(c) Combination of numerical and alphabetical.
(d) Visual codes.
Advantages
2. Roller
3. Locating peg
4. Drive pin
5. Dowel pin
6. Pinion spindle
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Materials Management
Value Analysis
Concept
Value is the least cost that can accomplish reliably a function or a service.
This implies that in achieving reduced cost, the quality and performance of the
items are maintained. The Value Analysis, therefore, is a technique which builds
'Value' into an item.
VALUE = Worth to you
Price you pay
It can be seen that several components make up 'Value'. There is value
arising from the function or use of an item and from its ability to perform a useful
function reliably. This is called 'Use Value'. There is another aspect of value in
terms of esteem or prestige value of artistic value like extra chrome and styling
used to sell automobiles. This is called' Asthetic Value'. While all these values play
an important part in our personal lives, 'Use Value' is of primary importance in
industry and our national economy. Value Analysis on an item starts with the
identification of its function. Some
119
Item
Bolt & Nut
Electric Bulb
Sugar
Spanner
Paint
Function
Fastens parts
Gives light
Sweetens
Provides
Protects
In case an item is comprised more than one components the functions and
cost of each Component are determined. The total cost of an item/component is
then allocated to the function performed by In case an item is comprised more
than one components then functions and cost of each it. An example of CostFunction analysis of a lead pencil is given below:
Cost Function Analysis of Pencil
Component
Cost in
Function-Cost
Lead
Makes Markets
Wood
Protect lead
Enable Hold
Protect Wood
Attract Buyer
Painting
Analys
Marking
Advertise
Profit
Motivate Sale
Total
20
*Basic
Cost
Functi
* Peripheral
* Profit
20
20
120
Materials Management
II Information
III Speculation
IV Evaluation
bad
V Planning
121
VI Programme Execution.
seek involvement.
VII Report
a) Current item
(b) Proposed design
(c) implementation plan stocks
* implementation plan
* time planning
VIII implementation
Techniques
1) Avoid generalities
(2) Get all available costs
(3) Use information only from the best source
(4) Blast, create, refine
(5) Use real creativity
(6) Identify and overcome roadblocks
(7) Use industry specialists to extend specialist knowledge
(8) Turn all tolerances into cash
(9) Use vendors available for functional products
(10) Utilise and pay for vendors skills and knowledge
(11) Use speciality processe
(12) Use available standards
(13) Does cost equal material + labour + reasonable overheads and reasonable
profit, purchase research.
(14) Use criteria "Would I spend my money this way."
4pp/ications
1. Capital goods - plant, equipment, machinery, tools and appliances;
2. Raw and semi-processed material, including fuel,
3. Sub-contracted parts, components, sub-assemblies, etc;
122
Materials Management
4. Purchased parts, components, sub-assemblies, etc;
Examples
DETERGENT POWDER
Evaluation
Performance must be measured against standards of operation and materials
budgets. This is the control segment of materials management. The
evaluation must consider the following:
* Utilisation of facilities.
Criteria for Success of Materials Management
Annual RM consumption
Average RM Inventory
125
126
Materials Management
A. Planning Information
* Orders to be placed.
* Orders actually placed.
* Delay in placing orders.
* A, B & C categories.
* Past Consumption.
* Levels of Maximum.
Minimum
Re-order Point
Re-order Quantity
* Problems.
* Action.
127
Operating level
A.
2. Code No.
quantity)
3. Indent No., date, received
Quantity
4. Estimated price
2. Code No.
8. Material expected
9. Delay in receipts
Action required.
6. Minimum level (Qty.)
Senior Level
A. Purchase report (Monthly)
1. Frequency-Monthly (instead of weekly)
2. Items -- Only exception items (which have reached minimum and
reorder level)
3. information -- Similar to that in operating level
4. Delays in placing orders
5. Problems, Action Taken, Action required.
Total
2. Information for exception items only (minimum and reorder level
reached)
3. Anticipated delays in receipts stock outs.
Materials management
128
Top Level
Stores & Purchase (Monthly)
1. Total stock position
2. Exception items - A, V, S', & 'N' items (Stores and
purchase action)
3. Delays in placing orders, anticipated Stockouts and delays in material
receipts.
4. Action on surplus stores.
5. Remarks - Problems, Action taken, Action required.
Case Study
An engineering company has undergone rapid expansion during the last
five years. Curve A in Fig. 13.1 shows trend of consumption of
materials, Curve B shows average inventory in months supply and Curve C shows
average inventory in rupees.
Since there has been increase in Inventory Turnover Ratio from 1.1 to 3.2 in
just five years and almost every year this ratio is increasing, it indicates that
performance of materials management department is very good.
The Objectives
The objectives of computerisation of the materials management system are:
1.
Activities
To meet the above objectives a computer based system has to be designed.
This involved a number of activities namely:
1.
Output Design
Materials Management
130
2. Input Design
3. Physical System Design
4. Files Design
5.The System Design 6.
Program Design
To illustrate the use of computer, the case of software design for an XYZ
company is given in the following paras. With the same step by step approach the
design can be adapted by any company, tailor made to its own requirements.
OUTPUT DESIGN
There are three main information user department :
1. Purchase Department
2. Stores Department
3. Accounts Department
Purchase Department
Report
Frequency
Weekly
Monthly
Monthly
Monthly
Technical Dept.
. Finance Dept.
Purchase Dept.
4. Item Code
5. Item Description
6. Class of Item
7. Unit
8. Quantity Requested
9. Department Code
10. Department Name
11. Expected Date
1. Supplier Code
2. Supplier Name
3. Purchase Order Number
4. Purchase Order Date
5. Purchase Order Line Number
6. Item code
7. Item Description
8. Class of Item
131
132
Materials Management
9. Unit
10. Quantity Ordered
11. Rate
12. Value
13. Quantity Accepted
14. Quantity Pending
15. Expected Date of Pending Item
16. Status of Purchase Order
1. Supplier Code
2. Supplier Name
3. Purchase Order Number
4. Purchase Order Date
5. Purchase Order Line Number
6. Item Code
7. Item Description
8. Class of Item
9. Unit
10. Quantity Ordered
11. Rate
12. Value
13. Expected Date
Queries
Apart from these reports there are 3 different Query forms of the status of
Purchase orders for the decision making of the Purchase Dept. The 3 Query
forms are:
1. Itemwise Pending Purchase Orders Query
2. Supplierwise Pending Purchase Orders Query
3. Purchase orderwise Pending Items Query
133
Stores Department:-
Reports
Frequency
Monthly
Weekly
Monthly
Yearly
5. ABC classification
Yearly
134
Materials Management
8. Maximum Level
9. Re-order Level
10. Quantity on Hand
11. Order Quantity
12. Quantity on Order
13. Under stock Quantity-With Order
14. Under stock Quantity-Without Order
135
7. Maximum Level
8. Re-order Level
9: Quantity on Hand
10. Rate
11. Value
12. Quantity on Order
13. Date of Last Receipt
14. Date of Last Issue
15. Age in Months
ABC Classification
1. Item Code
2. Item Description
3. Past Class
4. Consumption Value
5. Cumulative Consumption
6. No. of Items
7. % No. of Items
8. % cumulative Consumption
9. Present Class.
Queries
Apart from these reports the system offers the facility of querying the Stock
Status. The elements in the Query are as follows:
1. Item Code
2. Item Description
3. Quantity on Hand
4. Quantity on Order
5. Quantity Requested by Department and
6. Finally the Quantity Expected & their Expected Delivery Dates.
136
Materials Management
Accounts Department
Reports
Frequency
Monthly
1. Item code
2. Item Description
3. Class
4. Previous Years Consumption Quantity
5. Previous Years Consumption Value
6. Present Years Consumption Quantity
7. Present Years Consumption Value
8. % Variance Quantity
9. % Variance Value
Department wise Material Consumption Report
1. Department Code
2. Department Name
3. Item Code
4. Item Description
5. Account Head
6. Unit of Measure
7. Consumption Quantity for Month
8. Consumption Value for Month
INPUT DESIGN
The objectives that are kept in view throughout the input design are:
1. To produce a cost effective method of input
2. To achieve highest possible accuracy
137
3. To ensure that the input is acceptable to and understood by the user staff
4. To facilitate data entry.
There are two aspects in input design.
Input Forms
Screen Inputs
Input Forms
For creation of master data alone, the user departments have to feed the data
on separate formats,
All the above input forms are generated on an "as and when required" basis.
The various details/elements that are elicited through the input forms, the source
of the input forms and the storage locations of the input forms are the following:
138
Materials Management
SI.
Input Elements
No.
Purchase Requisition Number
1
3 Department Code
4 Item Code
5 Expected Date
6 Unit of Measure of Receipt
7 Quantity Requested
8 Date of Receipt
-Technical
-Finance
-Purchase
Purchase
Storage:
SI.
Input Elements
No.
1 Purchase Order Number
2 Purchase Order Date
3 Mode of Payment Direct or Through Bank or
Through Performa Invoice
4 Supplier Code
5 Purchase Order Line Number
6 Item Code
7 Unit of Measure of Receipt
8 Quantity Ordered
9
Rate of Supplier
S1.
Input Elements
No.
10 Total value of Item
11 Expected date of Delivery
12 Least Rate by any Supplier
13 Status of Purchase Order
Stores Receipt Voucher Form
Source: Stores
Storage: Stores, EDP, Purchase
139
140
Materials Management
Indenting Department
Storage:
SI.
Input Elements
No.
1 Stores Issue Voucher Type
2 Stores Issue Voucher Number
3 Stores Issue Voucher Date
4 Department Code
5 Item Code
6 Unit of Measure of Issue
5 Account Code
6 Quantity Issued
Stores
Storage:
Stores, EDP
Sl.
Input Elements
No.
1 Item Code
2 Imported/Indigenous (I-imported, o-indigenous)
3 Item Description
4 A or B or C Class
5 V or E or D Class
6 H or M or L Class
7 Unit of Measure of Receipt from Supplier
8 Unit of Measure of Issue from Stores
9 Lead Time for Purchase of Item
10 Safety Stock
11 Maximum Level of Stock
Sl.
Input Elements
No.
12 Reorder Level
13 Economic Order Quantity
14 Weighted Average price
15 On hand Quantity
16 On Hand Value
17 Year Opening Balance Quantity
18 Year Opening Balance Value
19 Consumption Year to Date Quantity
20 Consumption Year to Date Value
21 Quantity on Order
22 Date of Last Issue
23 Date of Last Receipt
24 Previous Year Consumption Quantity
25 Previous Year Consumption Value
26 Month Opening Balance Quantity
27 Month Opening Balance Value
28 Previous Month Opening Balance Quantity
29 Previous month Opening Balance Value
Purchase
Storage:
Purchase, EDP
Sl.
Input Elements
No.
1
2
3
Supplier Code
Supplier Name
Address
141
142
Materials Management
SI.
Input Elements
No.
4
Address
Address
City
State
Country
SI.
Input Elements
No.
1
Account code
Account name
Stores
Storage:
Stores, EDP
SI.
Input Elements
No.
1. Department Code
2. Department Name
Screen Inputs
The screen inputs follows from the input forms but two dimensions are
emphasized in the Screen inputs design.
(1) Egronomics: - Those aspects that deal with physical parameters, e.g. size
of character, positioning, etc. and
143
144
Materials Management
145
Master Files
1.
Item Master
ITEMMAS
2.
Supplier Master
SUPMAS
3.
Account Master
ACMAS
4.
Department Master
DEPTMAS
Transaction Files
Among these a further category can be seen:
Main Files
1.
PREQMAS
2.
POPENDH
3.
POPENDT
4.
RCTTRNTH
5.
RCTTRNT
6.
ISSTRNH
7.
ISSTRNT
8.
VENDOR
9.
STKVAL
Backup Files
1.
PREQTRN
2.
POTRNH
3.
POTRNT
4.
5.
6.
ISSH
7.
ISST
SYSTEM DESIGN
System Flow
The systems flow which integrates the inputs, outputs and the files should be
prepared. The description of the system follows the precedence structure and
describes in brief each of the process/menu boxes:
1. Transaction
146
Materials Management
2. Processing
3.
Reports
4.
Queries
5.
6.
Vendor Evaluation
7.
Exit
As can be seen. from this there are three Data management choices namely
Transaction, Master file maintenance and Processing, three Reporting choices
namely Reports, Queries and Vendor evaluation and the last one allowing user to
exit from the system.
Purchase Requisition
2.
Purchase Order
3.
Receipt Voucher
4.
Issue Voucher
5.
Exit
For the first four choices made system further allows user to
Add/Edit/Delete/View the transaction and apart from these in two cases namely
in that of Purchase Requisition and Receipt voucher allows user also the facility
to close the transaction.
Master file Maintenances
This menu gives the user a further 5 choices 4 of them to maintain the 4
masters and the last one to quit/exit to the previous menu namely the main menu.
The choices are
1. Item Master
2.
Supplier Master
3.
Account Master
4.
Department Master
5.
Exit
147
The first four menu choices when selected further gives the choice to the
user for Adding/Editing/Deleting or un deleting/removing/viewing the respective
masters.
Processing
This menu has got 4 choices:
1. Weekly Processing
2. Monthly Processing
3. Yearly Processing
4. Exit
The WEEKLY PROCESSING choice do not have any further choices, the
selection of this choice prints the reports that are required on a weekly basis.
The MONTHLY PROCESSING choice updates various files as well as
prints reports automatically.
The YEARLY PROCESSING choice apart from updating various files and
printing reports also clears up/weeds out the various transaction files.
The EXIT choice takes the user back to the previous menu namely the main
menu.
Reporting choices
Apart from printing reports automatically through the processing programs,
it is also possible to print reports selectively and individually through this menu.
This choice further gives 5 choices:
1. Purchase Reports
2. Stores Reports
3. Accounts Reports
4. Supplier Report
5. Exit
Purchase Reports
The choice Purchase reports allow the user a further choice of 5 choices.
These choices are:
1. Weekly-Purchase Indent List
2. Monthly Pending Purchase Requisition Report
148
3.
Materials Management
3.
149
1.
2.
J .LT. Systems
3.
4.
WIP Accounting
5.
6.
Materials Budgeting
Item
Cost/
Annual
Yearly
Piece (Rs.)
Usage
Total (Rs.)
1.
609 F
1.00
100,000
100,000
2.
283 A
4.60
12,000
55,200
3.
192 C
1.30
200,000
260,000
4.
54 W
500
15,750
5.
671 P
31 50
5.50
12,000
66,000
6.
891 A
6.25
1,000
6,250
7.
672 N
150
13,125
800
7,200
300
1,890
1,750
35,000
120
8.
124 G
87 50
8.00
9.
126 G
6.30
10.
81 P
11.
94 P
20 00
0.24
500
12.
96 A
9.41
20,000
188,200
Contd ...
Item
151
Cost/
Annual
Yearly
Piece (Rs.)
Usage
Total (Rs.)
13.
127 R
8.81
10,000
88,100
14.
617 F
30.67
100
3,067
15.
127 F
7.87
5,000
39,350
16.
32 G
15.85
50
79,250
17.
83 B
95.00
600
57,000
18.
197 W
3.00
1,500
4,500
19.
204 G
1.65
100
165
20.
197 P
26.40
50
1,320
21.
890 G
3.20
10
32
22.
641 K
4.72
23.60
23.
182 A
1.68
80
134.40
24.
237 0
45.50
100
4,550
25.
918 W
4.70
1,000
4,700
26.
50 G
8.30
100
830
27.
556 F
0.30
24
7.20
28.
45 F
1.20
60
72
29.
56 F
3.15
80
252
30.
568 A
4.46
1,100
446
31.
35 F
0.38
1,000
380
32.
202 A
6.09
100
609
33~
642 B
9.00
550
4,950
34.
763 E
4.98
50
249
35.
194 C
18.42
10,000
184,200
36.
33 T
4.00
40,000
160,000
37.
332 A
4.00
150
750
38.
124 0
6.90
2,000
13,800
39.
802 I
15.00
100
1,500
Contd
Materials Management
152
No.
Item
Cost /
piece (Rs.)
Annual
Yearly
Usage
Total (Rs.)
40.
407 N
18.00
20
360
41.
57 S
0.20
5,000
1,000
42.
84 H
0.60
10,000
6,000
43.
979 R
17.00
45,000
765,000
44.
469 D
9.50
200
1,900
45.
211 L
0.33
50,000
16,500
46.
199 U
7.03
20,000
140,600
47.
381 E
4.78
500
2,390
48.
961 T
7.95
1,000
7,950
49.
948 A
4.00
10
40
50.
702 0
1.00
500
500
51.
703 I
0.50
250
125
52.
812 N"
2.00
800
1,600
53.
649 S
4.75
1,500
7,125
54.
84 P
2.12
70,000
148,400
55.
329 U
10.00
500
5,000
56.
631 T
9.00
25
225
57.
122 H
0.87
100
87
58.
648 T
1.25
5,000
6,250
59.
143 S
'3.50
500
1,750
60.
156 T
4.00
75
300
61.
290 A
5.00
900
4,500
62.
818 E
5.10
500
2,550
63.
819 T
0.04
9,100
364
64.
351 A
1.70
10,000
17,000
65.
167 0
9.00
90
810
66.
839 T
7.29
500
3,645
Contd ...
Item
153
Cost/
Annual
Yearly
Piece (Rs.)
Usage
Total (Rs.)
67.
35 N
1.28
400
512
68.
202 S
15.00
500
7,500
69.
642 H
9.00
400
3,600
70.
763 R
24.00
900
21,600
71.
33 D
0.92
80
7,360
72.
332 L
2.80
600
1,680
73.
90 U
0.50
10
74.
124 P
1.00
400
400
75.
80 U
8.00
550
4,400
76.
407 T
18.30
90
1,647
77.
578 H
7.75
200
1,550
78.
669 T
0.85
1,000
850
79.
899 N
5.00
700
3,500
80.
211 G
2.50
8,000
20,000
81.
381 H
3.00
200
600
82.
522 E
23.15
400
9,260
83.
961 S
1.10
50
55
84.
948 T
0.10
40
85.
63J A
0.60
60
36
86.
122 U
1.40
800
1,120
87.
68 P
3.20
40,000
128,000
88.
14 R
4.00
14,000
56,000
89.
156 U
6.13
300
1,839
90.
290 T
8.94
900
8,046
91..
258H
1.20
10
12
92.
16 E
1.60
800
1,280
93.
186 T
5.00
50
250
Contd ...
Materials Management
154
No.
Item
Cost/
Annual
Yearly
Piece (Rs.)
Usage
Total (Rs.)
94.
73 A
7.50
900
6,750
95.
57 0
9.70
700
6,790
96.
491 R
6.55
500
3,275
97.
167 S
7~00
50
350
98.
703 T
9.50
600
5,700
99.
231 U
8.30
1,000
8,300
100.
839 V
3.00
538
1,614
155
3
A.
Materials Management
156
...
157
Dear Sir,
You are one of the vendors whose name appears on the list of approved
suppliers being maintained by us.
In the present day situation, the supplier and purchaser must join hands
and make co-ordinated efforts to control and reduce the rising trend in prices.
With this thought in mind, we approach you as a Specialist in your
product--and request that you may review your manufacturing processes and
handling arrangements, and let us know how we, as buyers, can help you. It is
understood that the quality of the product should be maintained and
performance improved.
Materials Management
158
2.
159
Case Studies and Business Games
depending on the size of the sub-contractor, a number of sub-contractors may
be used. The above number will vary from product to product. For capital
intensive items, a single source .is used.
The company gives prime importance in developing relations with subcontractors. Technical and sometimes even financial assisL1nce are provided to
sub-contractors for the development of components. This advance is given in
lieu of 5 to 10% deduction from the final price of the product.
The company evaluates the performance of sub-contractors based on
three parameters:
1.
Cost Factor
2.
Quality Factor
3.
Delivery Factor
For this purpose, there are sub-contractor evaluation forms to aid the
purchase personnel to rate sub-contractors.
The company negotiates with potential sub-contractors to decide the
price, quality delivery and credit terms of the part to be purchased. Before
starting negotiations, information about the technical set up of the sub-contractor, the prices charged to other buyers, the costing breakups, present
industrial condition of the items purchased, prevailing market prices of the
concerned product and any other strong and weak points of the sub-contractor
are collected. Sometimes, the balance sheets are studied and the spending on
materials and overheads are determined and analysed.
A cost based pricing is used while sub-contracting and certain percentage
of the casts is allowed as the margin for profit. AU excise formalities arc
followed along with sales tax on job work and related procedures of MODVA
T are used wherever applicable. The company is facing a number of problems
160
Materials Management
Shape. Subsequently, it is observed that financial crisis creeps in which
affect production and delivery within the promised time frame.
As a result of such uncertainties, considerable allowances are provided in
161
162
Annexure-A
Items
In Lakhs of
1986-87
1985-86
1984-85
(-)50
(-)30
(-)10
1.
2.
Total Assets
650
630
540
3.
Current Liabilities
250
250
200
4.
Current Assets
385.5
366
269.7
0.5
1.70
80
60
60
(b) W.I.P.
175
185
127
130
120
80
60
60
60
(b) W.I.P.
185
127
139
120
80
60
4.1 Cash
4.2 Closing Stock:
(a) Finished Goods
5.
Sales
500
440
410
6.
General Stores
160
154
142.5
7.
Mfg. Expenses
240
181
138
8.
Admn. Expenses
80
75
74
9.
100
95
91.5
6,300
3,780
4,200
163
30,000
3,800
B items
C items
Below
Rs. 1,000
The total annual consumption was Rs. 160 lakhs. The analysis showed for the year 1986-87:
A
B
938
14%
32
20%
5494
82%
5%
Tota
6700
100%
160%
100%
3. Inventories were analyzed on the basis of consumption in 1986-87 which was regarded as a normal
year, and the average stocks for 1986-87 showed stock position as follows:
Items
Total Consumption
Average Stock
120 Lakhs
80 Lakhs
32 Lakhs
16 Lakhs
81akhs
2 Lakhs
4. Each major category of stores items held was analysed and the ratios (expressed in %) of inventory
to consumption were worked out on the following basis :(a) Average stock equal to 12 months consumption represented 100 percent inventory in terms of
consumption.
(b) 6 months stock in terms of annual consumption represented 50 percent and so on.
(c) 24 months stock in terms of annual consumption represented 200 percent and so on.
164
Materials Management
165
to be kept. All the sub-contracted items are looked after by one of the purchase assistants in the
purchasing section.
9. As regards price, the Company has been paying higher prices every year for both sub-contracted and
other purchased materials. The price escalation is 7-8% even at times when the market prices were supposed to be at the same level.
Ratios
1965-86
1984-85
(-) 12.5
(-) 7.4
(-)3
135.5
116
68.7
70
60
35
3.2 W.I.P.
180
156
133
125
100
70
9.3
7.8
5.9
13.6%
7.3%
6.1 Goods
16.-6%
71.3%
6.2 W.I.P.
13.3%
17.2%
25%
42.8%
7.1 R.M.I.T.O
1.28
1.54
7.2 F.G.LT.O
7.86
7.83
7.64
7.3 W.LP.LO
2.5
2.40
2.47
1.
ROR
2.
Working Capital
3.
Average Inventory:
4.
5.
6.
Year.
Increase In Inventory over previous year:
166
Materials Management
167
Cost of Holding
Cost of Ordering
The average consumption during last year was 12,000 cartons per month. They estimate next 2 years
average consumption figure at 15,000 cartons per month with a fluctuation of (normal distribution) 3000
cartons per month during normal periods. They expect peak consumption of 25,000 cartons 5,000 cartons
during the 5th, 6th and 7th months of the year. There is also a lean period during the 1st & 2nd months of
the year when the average consumption would be 5000 1000 cartons. During the 3rd month of the year
there is no consumption, as the plant is shut down.
Procurement
The procurement period is normally 2 months and may vary by one month (about 35 percent
chances). Orders should be placed in multiplies of 10,000 cartons which could form one lorry load.
There is an opening stock of 20,000 cartons. The withdrawals by the packing department are in unit
of 1000 cartons.
With the above data, you are expected to formulate your own inventory policies and take decisions
on buffer stock levels, purchase order quantities and supply batch quantities.
You will be given the consumption figures and receipt of orders, month by month. Use the enclosed
forms for your ordering and make store bincard entries. After playing the game for 2 years, analyse your
performance by finding out.
1. Average Inventory level and average inventory cost
2. Average stocks held as a percentage of total consumption in months.
3. Your performance (total of stock holding cost, stock out cost, ordering cost and difference between
total purchase cost and total consumption).
4. Turnover
168
Materials Management
Ordering Follow-up Form
: 15000 Cartons
: 5th, 6th & 7th months
Peak Period
Shut Down
3rd month
Buffer Stocks :
Maximum :
Minimum:
IInd
Year
1st Year
Delive
Purchase Order
No.
Qty. Cum.
No.
Qty.
Bal on
Order
Reed.
No.
1.
1.
2.
2.
3.
3.
4.
4.
5.
5.
6.
6.
7.
7.
8.
8.
9.
9.
10.
10.
11.
11.
12.
12.
Notes:
Deli
Purchase Order
Qty.
Cum.
No.
Qty
Policy
Buffer Stock:
Ordering:
BaI
on
Ord
Retd.
169
Store Bin Card
1st year
Month No.
Reed.
Issue
IInd Year
Ball in
Stock
0.5.
Mooll1 No.
Reed.
Issue
B.F.
1.
1.
2.
2.
3.
3.
4.
4.
5.
5.
6.
6.
7.
7.
8.
9.
10.
10.
11.
11.
12.
12.
c.s.
Total
II Ordering Cost
IV (Received__Consumed) x Rs.3/- =
Total Rs.
gal in
Stock
Remarks
Materials Management
170
Data for Use of Empire
Consumption
I.
4000
2.
5000
Receipt of Orders
3.
4.
12000
1 & 2
5.
29000
6.
28000
3 & 4
7.
20000
8.
15000
9.
14QOO
10.
14000
8 & 9
II.
12000
12.
12000
13.
6000
10 & 11
14.
6000
12
16.
16000
13 & 14
17.
22000
18.
25000
15 & 16
19.
21000
17
20.
17000
21.
17000
22.
18000
23.
17000
15.
19 & 20
21
171
3 Months
4 Months
5 Months
Stores
Expenses incurred during previous year by stores department:
1.Salaries and wages of staff
2.Depreciation/pilferage predundancy of goods
3.Rent paid for the stores building
4.Interest rate charged by bank on capital invested.
Rs.2,65,000/Rs.25,000/Rs.2,1O,000/18.5%
172
Materials Management
The company does not envisage much change this year in the costs incurred.
Purchase Department
Purchase department has computerised purchase order generation and follow up. It has been found
that the sum of Rs. 1000/- is expended for every order generated.
The company does not envisage much change in the expenses of purchase department for the
following year. The total numbers of orders placed during the previous year were 95.
Stockout costs
The partial stockout costs as found out by research division is Rs. 1600/- per unit not available/week.
The company has a stock of 7000 units of compressors in the stores at present.
173
DAMC
GROUP NUMBER
Order
Quantity
Placed
in Stores
during
(A)
Week (if
any)
Week
I.
2.
3.
4.
5.
6.
7.
8.
9.
10.
II.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
52
Quantity
Received
from supplier (13)
WORKING SHEET
Total C=
ConA+13
sumption
During
the Week
(D)
+
Balance
in Stock
E = C-D
174
Materials Management
= Average Stock
x Price /Unit
=Average Stock x 2000/ICC =
+ 0.85
AVG.CAPITALLOCKEDUP
... Inventory holding cost = ICC x Average Capital Locked
(A) Rs ...................................
Rs.
=
=
=
(C)
Rs.
Total Cost: D = A + B + C
Rs.
Rs.