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Definition & Scope
Organization of MM
Material Planning
Purchase Function
Stores Function
Inventimited Tender Enquiry (LTE)
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from Interstate Commerce Commission economic regulation. By far the largest portion of exempt carriers
transports agricultural commodities or seafood.
"If through any keyword search or any reference you have stumbled upon this professional and
exclusive site on MATERIALS MANAGEMENT, you've landed ,rightly, on a Unique site !!"
Every organization, big or small, depends on materials and services from other
organizations to varying extents. These materials and services are obtained through
exchange of money and the physical arrangement of it all is called Materials
Management or even Material Management.
Various materials used as inputs, such as raw materials, consumables & spares, are
required to be purchased and made available to the shops / users as & when needed
to ensure uninterrupted production. Therefore, efficient management of input materials
is of paramount importance in a business organization for maximizing materials
productivity, which ultimately adds to the profitability of the organization.
Profit Sales
ROI = ---------- X -----------------------------------------
Sales Current Asset + Fixed Asset
All the materials related activities such as material planning & indenting, purchase
systems & procedure, variety reduction through standardization & rationalization,
reducing uncertainties in demand & supply, handling & transportation, inspection,
proper storage & issue of materials to the internal customers, inventory management,
vendor management & finally disposal of obsolete, surplus & scrap materials etc.
taken together is termed as “INTEGRATED MATERIALS MANAGEMENT”
To carry out these functions efficiently, it is essential to have a very good supplier
base, order booking process & inventory management system as well as expert
MATERIALS MANAGEMENT (MM) professionals.
Materials Management as such is a key business function that is responsible for co-
ordination of planning, sourcing, purchasing, moving , storing and controlling materials
in an optimum manner so as to provide a pre-decided service to the customer at a
minimum cost.
In its process of managing , materials management has such sub fields as inventory
management , value analysis, receiving, stores and management of obsolete , slow
moving and non moving.
Materials Management's scope is vast. Its sub functions include Materials planning
and control, Purchasing, Stores and Inventory Management besides others. The
various activities represent these four functions:
• Planning and control Learn Purchase Procedure
• Purchasing
• Value analysis and
• Physical distribution
The planning and control functions are inventory management , production planning
and scheduling.
Purchasing functions are buying, subcontracting, value analysis and follow ups.
• To buy at the lowest price , consistent with desired quality and service
• To maintain the specified material quality level and a consistency of quality which
permits efficient and effective operation
• To hire, develop, motivate and train personnel and to provide a reservoir of talent
• To maintain good records and controls that provide an audit trail and ensure
efficiency and honesty
The broad Materials function has the following as identified and interlinked sub
functions:
Materials planning and control: Materials
required for any operation are based on the
sales forecasts and production plans.
Inventory control : One of the powerful ways of controlling the materials is through
Inventory control.
It covers aspects such as setting inventory levels, doing various analyses such as ABC ,
XYZ etc ,fixing economic order quantities (EOQ), setting safety stock levels, lead time
analysis and reporting.
Materials Management's scope is vast. Its sub functions include Materials planning
and control, Purchasing, Stores and Inventory Management besides others.
Materials management can thus also be defined as a joint action of various materials
activities directed towards a common goal and that is to achieve an integrated
management approach to planning, acquiring, processing and distributing production
materials from the raw material state to the finished product state.
In its process of managing , materials management has such sub fields as inventory
management , value analysis, receiving, stores and management of obsolete , slow
moving and non moving items. The various activities represent these four functions:
• Purchasing
• Stores
• Inspection
• Traffic
Once the whole Materials Management function has been divided into its different
sub-functions as above, the sub-functions too are divided into their functions which
are usually seen to be as :
Purchasing
• Administrative : Purchasing administration
involves all the tasks associated with the
management process, with emphasis on the
development of policies , procedures, controls and
the mechanics for coordinating purchasing
operations with those of other departments.
• Receiving Bay
• Custody
• Inventory control
• Disposal
Material Planning
In any integrated Materials Management environment, planning for getting the
materials is the starting point for the whole MM function. Materials planning sets the
procurement function and the subsequent material functions rolling.
Material planning is a scientific way of
determining the requirements starting with
raw materials, consumables, spare parts
and all other materials that are required to
meet the given production plan for a certain
period.
Material planning is derived from the over
all organisational planning and hence it is
always a sub-plan of the broad
organisational plan.
What it does is forecasting and initiating for
procurement of materials
2) Micro factors : These are essentially the factors existing within the organisation
such as corporate policy on Inventory holding, production plan, investments etc. For
any organisation, factors such as Lead
Obviously, any saving achieved by it results into direct saving for the company and all
such savings are a company's profit.
Going by a thumb rule "even 1% saving achieved in Purchasing results in 5% profit for
any organisation".
Procurement vs. Purchasing
It is used to define one of several supply functions involved in logistics activities. In the
broadest sense procurement includes the entire process by which all classes of
resources (people, materials, facilities and services) for a particular project are
obtained. Since purchasing is a unique function , it differs a bit from procurement in the
sense that while procurement , with the same objective has a wider domain , purchasing
with the same objective is included in it !
Objectives of Purchasing:
The classical definition of objectives of purchasing is to buy materials and services of
the right quality , in the right quantity, at the right place , from the right source and at the
right time.
However , in general management parlance the objectives of purchasing are:
• To support company operations with an
uninterrupted flow of materials and services.
Purchasing is no doubt a vast subject and as the competition among the firms grows
this function of business is expected to see a lot of evolution
Types of Purchasing:
Considering the nature of business an organisation has there could be different
approaches and hence Purchasing can be any of these types:
Forward Buying
Tender Buying
Speculative Buying
Systems Contracting
Rate Contract
Reciprocity
Zero Stock buying
Blanket Order
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is
received in the Purchase department ,the concerned dealing person scrutinizes it , in
respect of :
In many firms , if the number of items is not large then the sources are known and on
the basis of suppliers record the Purchase order can be placed.
A tendering process addresses itself by clearly describing the need i.e. materials or
service with complete specification (tender specification) so that there is no ambiguity
left between the purchaser and the seller, identifying the sources (vendors / suppliers )
from whom the need can be satisfied and spelling out the terms and conditions for
agreement between the seller and the buyer. It's basically the urge to get the right price
that the concept of competitive buying emerged.
It implies generating competition among the sellers in respect to the price for their
acceptable materials / service , on the basis of other terms and conditions , by the
buyer.
It is based on the tendering process that ultimately the seller is selected for placement
of order.
The following are the widely recognised modes of tendering ,both in private and the
public sector domains.
In fact, these modes are the modes of tendering recognised by the materials
management function every where :
• Open Tender/ Global Tender
• Limited Tender Enquiry (LTE)
• Single Tender
• Rate Contract,
• DGS&D Rate Contract
Besides the above , other dimension of the modes of tendering is the tendering steps
that is to be followed while scruitinising the tenders. The following are popularly used
methods :
• Single Bid
• Two stage Bid
• three stage Bid etc.
What is LTE ?
Thus the selection of a vendor for LTE is done by the purchaser to ensure that :
The enquiries are sent on the same day and a date is mentioned ,clearly, for opening
it.
The original LTE papers are despatched through registered post/ under certificate of
posting/ e-mail/ FAX/ Courier on the address of the firm as available in the records of
the purchase department.
What is STE ?
The item concerned is manufactured by many firms but due to certain specific
reasons ,enquiry can be issued to only one party. It usually happens in case of
retrofitting cases where the earlier material has been supplied by the same firm and the
needed material is to be fitted in that only, for example , spare parts of an equipment.
Normally, the proprietary items are purchased on supplier's terms as the supplier knows
that the buyer depends on it only for meeting the requirement. This is disadvantageous
from buyer point of view. In fact, the more are the vendors, the more is the competition
and the more are the chances of getting comparatively low price , a situation that
favours any buyer.
RATE CONTRACT
What is Rate Contract ?
In certain situations , mostly in case of
manufacturing units but otherwise also,
there are items of regular use for which it
is advantageous on commercial as well as
technical grounds to have one long term
order / contract with one or more than one
vendors to meet the recurring requirement.
What is normally done is that a rate is fixed ,through tendering and selection process of
a vendor and then repeated orders are placed depending on as and when the
requirement arise.
How it is done ?
For entering into rate contracts / long term contracts, the mode of tendering to be
followed may be decided as per the nature of the item, the available sources, etc.
It enters into Rate contracts for a number of items of wide demand by the different
ministries and Public Sector Undertakings ( http://www.dgsnd.gov.in/ )
Such demanding agencies are known as
Direct Demanding Office under the
DGS&D contracts.
Order / Enquiries are issued directly to the supplier(s) having DGS&D Rate Contracts by
the purchaser.
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Purchase Procedure
A typical purchase department is usually engaged in purchasing a number of materials
and services falling in different categories. The activities are performed regularly by
purchase professionals with the objective of fulfilling organisation's materials and
services needs.
Naturally, depending upon the nature of procurement, environmental practices etc the
purchasing systems and procedures may also vary substantially. However , purchase
procedure can be seen to have a bit of standardisation across the globe and therefore a
professional purchasing system does show following steps that eventually constitute a
purchasing cycle.:
Procurement activities in an organisation start right since the stage a need is felt for any
material or service.
An organisation categorises it's material requirements into two broad ways , viz.
Inventory Control item or Non inventory item.
A department within the organisation may require an item which is non inventory and
thus the department concerned shall have to describe the need. It implies writing down
the specification of the item , the volume (quantity) etc of the item and some other
related information to process it further.
For an Inventory item ,usually, there is a forecasting method by which the need for an
item is addressed. What could be a need ?
Once the need is made available to the purchaser, through a requisition , he has to
check the requisition for its correctness and completeness and then to ensure that
appropriate method has been used to satisfy the user and also to select the supplier.
The indents for purchase of materials/ job contracts is raised by the department
concerned or any agency within the organization authorized to raise the indent. These
Indents are prepared in the a format designed by the organization. The indent carries a
unique identification number and is also checked for its correctness by the higher
authorities within the department , usually the the Head of the Department. Appropriate
ways are devised for control purposes.
In the indent , the Indenter gives complete
information w.r.t. the description and
specification of the material to be procured
such as description of the jobs to be
executed along with the materials to be
supplied and equipment.
For the items to be supplied, the quantity
along with detailed specifications and
drawing number, etc., are given in the
indent.
Similarly, for the equipment to be deployed
the desired capacities of the equipment,
their ownership, procurement through
rent/lease, etc., are specified in
the Indent. The overall quality of the jobs to be executed along with the expected
Performance Guarantees are also mentioned in the Indent.
Normally the specifications given are standard ones conforming to national or
international standards organisations such as IPSS, PS, ISS or DIN, etc. Wherever
required, additional information in the form of Manufacturing Drawings , a check-list ,a
certificate on the prescribed proforma, in respect of proprietary items , incorporation of
special requirement of inspection/check-list for special packing instructions, matching/
complementary parts of an equipment/ assembly , etc are enclosed in adequate
numbers with the Indent.
In some organizations , especially bigger ones, the cost estimates also form part of the
indent and as such are to be done by the indentor.
Estimated values provide a basis for examining the reasonableness of the prices
offered by the parties.
3) Bill of Materials
In brief, all the parts / components needed to make a
product ,when listed along with the individual quantity,
are called Bill of materials.
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is
received in the Purchase department ,the concerned dealing person scrutinizes it , in
respect of :
In many firms , if the number of items is not large then the sources are known and on
the basis of suppliers record the Purchase order can be placed.