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1. introduction to materials management

2. Linkage of Production System with Inventory

3. Materials Control Through J IT System

4. Material Requirement Planning (MRP)

5. Inventory Control

6. Work-in-Process Inventory

7. Spare parts Management

8. Purchasing

9. Materials Handlings

10. Store-Keeping

11. Stores Accounting

12. Materials Cost Reduction Techniques

13. Evaluating Materials Management Performance & MIS

14. Computerized Materials Management System

15. Studies and Business Games

Introduction to Materials Management


It deals with purchasing and storage of materials so as to provide
optimum customer service consistent with efficient operation at minimum
inventory investment. Inventory in an organization is analogous to water level
in a bath tub. The level increases if rate of outflow is less than inflow. A perfect
synchronization of rate of outflow with rate of inflow through a suitable control
mechanism will ensure a minimum water level just enough to meet


Relationship with Productivity

Productivity in manufacturing sector in India has declined at a rapid rate
during 1960 to 1980. The rate of declined in engineering industries has been
much higher than other industry, more so in the case of non-electrical machinery
and transport equipment where the rate of decline is ashigh as 1.6% per annum. This is
despite the fact that labour productivity in these industries has been growing at
an impressive rate of 3-4% per annum. Among other measures in arresting
this decline, better inventory management and reduction in cash holdings are
2 Materials Management

Productivity = ____ Values of Goods & Services produced___
Inputs(Labour +materials +Capital +Energy+)
As nearly 70% of the total cost of production in manufacturing organizations is
constituted by Materials Cost, a small % reduction in this cost is going to
increase productivity substantially than effecting same % reduction in any other
input factors like labour, energy etc. Moreover, better availability of materials
will increase production and sales values.
Inventory Syndrome
A supplier producing 4 units/week & meeting requirement of 4 customers with a
consumption of 1 unit/week, delivered 4 units to each after 4 weeks. Each unit
will have average inventory of 2 units 4+0
Customer A puts up a false demand of 1 additional unit as safety stock so as
to be more safe than other units. Since the total demand in 4 weeks is now 17
against production capacity of 16, the supplier 'is forced to increase lead time
from 4 weeks to 5 weeks. Immediately orders from other 3 customers will also
be increased from 4 to 5 units making a total demand to 20 units. Each customer
will then have an average inventory of 3 units
4 +0
With thereal consumption of 1 unit/week only.

Customer 'A' then to be ahead of others will place an order of 6 units
making a total demand of 21 units. The supplier will therefore increase the lead
time to 6 weeks forcing other three customers also to place orders for 6 units.
Total demand will be 24 units. Each customer will have to keep an
average inventory of 4 units, 2+4+0 with the real consumption of
1 unit/week as earlier.
And so on--this process continues. The inventories go on increasing
without any real use. If the system of constant demand of 4 units/week would
have continued, the balance of demand and supply would not have disturbed
resulting into smooth functioning with a level of 2 units of average inventory.
Fictitious demand, long lead times and piled-up inventories are the result of such
A survey of the 161 Public Sector manufacturing units carried out in India
during 1985 revealed the following:

Introduction to Materials Management 3

Total Investment =43000 Crores
Annual Output =55000 Crores
Average Inventory =12800 Crores
(Stores only)
This means the inventory maintained in the form of stores inventory is
approximately 3 months stock. In addition to the inventory lying in stores, a
large work-in-process (WIP) inventory is also observed in an industry. It is
quite normal practice to observe heaps of stock at each work station. Further,
there are temporary stores and inspection points within the shops.
Inventories in the form of finished goods (FG) are also not a small figure.
Due to seasonal demand, incorrect forecast, improper co-ordination between
Marketing and Production Planning, uncertain power supply, production
leveling etc., some FG inventory may be necessary. FG inventory in various
organizations however vary from few days to over 6 months, depending upon
the nature of product.
Adding up inventory of Raw Materials, Maintenance Spares, Operating
Supplies, WIP & FG, it is estimated that a medium size industry keeps 4-6
months stocks.
Most of the companies in Japan work on zero inventory or 2-3 days
stocks. Agreed that the environment and work culture in India is such that the
J apanese Standards of inventory cannot be met, however the level can certainly
be brought down to less than a 1 month with little of planning and effort. This
means that thousands of corers of rupees blocked in the form of inventories can
be released for country's developmental projects.
Importance of MM
The pie diagram (Fig.1.2) shows that 64% of sale rupee are spent on cost
of materials, 16% on labour cost and 20% on overheads. This is as per the result
of the survey of 29 major industries in India. In addition to the cost of materials,
the inventory carrying cost should also be taken into account when considering
material cost. This comprises various elements e.g. interest charges, storage and
handling costs, insurance, obsolescence etc. All this amounts to at least 20% of
average inventory that means total material cost will be about 70%
64 +0.20 x
64 0 . As a big chunk of expenditure i.e. 70% is
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.
4 Materials Management
It is true that most of the MM techniques are very simple to apply as
compared to techniques of reducing wages and overheads.

Fig. 1.2
Causes of Higher Inventory at Various Stages in an Organization

Storage Place Causes

(i) Central Stores * Bulk Purchases to avail discounts.

* Seasonal availability of materials.

* Purchases during periods of low

* Full Wagon load to economies on

* Full Lorry load to economies on

* Inanticipation of price rise at a rate
higher than bank interest.

* Scarce commodity (Not always

* Long lead times.

* Wide variation in lead time.

* Quota item (Quantity and time of
delivery not within control).

* High stock-out cost.

* Reduced No. of orders or large
order quantities
Introduction to Materials Management

* Availability of Safe Storage
* Long term contract with ancillary
units/suppliers w.r.t. quantity and
time of delivery.
* Helping suppliers by making
purchases in quantities more than
actual requirement.

(ii) Sub-Stores
* Avoid frequent issues to
eliminate 'Q' formation at central
* Avoid frequent handling in small
unit loads between central store &
* Spares, consumables and tools
Exclusively purchased for
departmental use.
* Extra guard against a particular
item feared to be out of stock at the
central store.
* Safety stock to meet contengency
in case of rejections, higher rate of
production, overtime work.
* Drawal of materials for IInd &
I1Ird shift if the central store remains
open during 1st shift only.
(iii) Semi-Finished
* Waiting for the specified unit load
quantity to move to the next
* Waiting for other components, sub-
assemblies, bought-out item.

* Waiting for clearance by
Inspection Staff.

* Re-work required before transit to
next section.
(iv) Work Stations
* Waiting after the operation for
transit to next station.
* Operator absent/slow/late.
* Machine breakdown.
* Machine setting.

* Solving Quality problems on the
machine or re-work required.


Materials management

* Bottle-neck operation

(v) F.G. Stores
* Waiting for customer orders.
* Waiting for customer clearance vis-
a-vis payments
* Production leveling for better
capacity utilization to meet seasonal
* Cancellation of customer orders.

* Stop dispatch due to anticipated
price rise.

. * Waiting for
wagon/lorry/container load.
* Waiting for customs clearance
wherever required.

* Waiting for quality

* Seasonal demand.

* Lack of co-ordination between
Marketing & PPC deptts.

* Errors in sales forecasting.
* Waiting for good remuneration
(vi) Scrap, Obsolete
Items & Disputed

* Normal delay in correspondence in
settling disputes.
* Long procedure in obtaining
approval for disposals.
* Waiting for accumulation of
sufficient quantity before disposals.

Functions of Materials Management
Major tasks involved in Materials Management are:


Material Requirements as per
master production schedules;
identification, classification and
codification of items that must be
manufactured, sub-contracted or

Introduction to Materials Management


2. PURCHASING:- Selection of the sources of supp-
ly, placement of orders, follow up of
orders, inspection before dispatch,
transportation, payment of bills,
vendor rating
3. INVENTORY CONTROL:- Determination of EOQ, Safety
Stock, Lead Time; Implementation
of Selective Controls &
Replenishment Systems
Receipt and Issue, Layout &
Handling, Maintenance, Upkeep
and Safety of Items, Scrap/Surplus

Valuation of stores, Physical
Verification, Cost & Budgetary
Value Analysis, Variety Reduction,

Benefits of MM
The health of an organization is measured by calculating its Rate of
Return (ROR) on investment:

Application of MM techniques result in reducing inventory thereby
. reducing capital and hence increasing Capital Turnover Ratio. The techniques
also help in reducing cost of materials through effective purchasing, value
analysis, standardization, efficient material handling and reducing
loss/obsolescence, thereby increasing profitability. Multiplication of both these
factors creates a double effect on ROR and therefore it is true to say that the
technique effects favorably from the top (increasing profit) and from the
bottom (decreasing capital employed). It also lowers the Breakeven (BE) point
as shown in figure 1.3


Symptoms of Poor Inventory Management
1. Inability to meet delivery promises.

Materials Management

2. Continuously growing inventory while turnover is almost constant.
4. High rate of customer turnover or order cancellations due to non-
attendance to their complaints.
5. Uneven production with frequent layoffs and re-hirings.
2. Frequent need for uneconomical production runs to meet sales

6. Excessive machine downtime because of spares shortages.

7. Periodic lack of adequate storage space.

8. Consistently large inventory write-downs because of price declines,
distress sales, disposal of non -moving stocks and so on.

8. Widely varying rates of inventory loss or turnover among branch
warehouses or widely varying rates of turnover ratios among major
inventory items indicating surplus stocks.
9. Consistently large write-downs at the time of physical stock taking.
MM-Not an Easy Task
High stocks cover up most of the management lapses. This is like driving
a ship in a deep sea. The driver is not at all worried of any chance
Introduction to Materials Management 9
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

MM being an important function should be under direct control of the
chief executive. A typical organization set up of a medium size Engineering
industry indicating position of Materials Manager in shown below

It may be noted that various functions of materials management are being
looked after by separate officers. Since most of the parts are supplied by
ancillary units, a separate officer has been posted for this function and a separate
officer for clearing & forwarding. There is no person for material planning since
this functions/has been distributed between Inventory Control and purchase officers.
Organization structure under Materials Manager normally varies from
organization to organization depending upon the nature & volume of business.

Linkage of Production System with
Materials Planning is closely related with the type of production system in a manufacturing
organisation. The conventional systems and their linkage with inventory are briefly discussed in this
Line Production System
Line production system is the specialized manufacture of identical articles on which the equipment is
fully engaged. Line production system normally associated with large quantities and with a high rate of
demand. While in the job and lot type of manufacturing the production capacity normally exceeds the rate
of demand, line production system is justified only when it" capacity can be sustained by the market. Here,
full advantage should be taken of repetitive operations in the design of production auxiliary aids, such as
special tools, fixtures, positioners, feeders and materials handling system, inspection devices, and weighing
and packing equipment.
Lot Production System
Lot production System is the manufacture of a number of identical articles, either to meet a specific
order or to satisfy continuous demand. When production of the lot is terminated, the plant and equipment
are available for the production of similar or other products. As in job shop production, policies regarding
tooling, fixtures, and other aids are dependent on the quantities involved. If the order is to be executed only
once, there will be less justification for providing elaborate production aids than when the order is to be
Job Shop Production System
This is the manufacture of products to meet specific customer requirements of special orders. The
quantity involved is small, usually "one off" or "several off," and is normally concerned with special
project, models, prototypes, special machinery or equipment to perform specialized and specific tasks,
components or assemblies to provide replacement for parts in existing machinery, etc.


Linkage of Production System with Inventory 11

Production & Inventory Control in line Production System
Some Key Points
(1) To keep production levels constant by adjusting product inventories.
(2) To balance capacity among all processes.
(3) To have buffering stock to avoid interference between processes.
Kinds of line production system
(1) Single-model assembly line:-
An assembly line which is prepared in advance to produce an identical single item.
(2) Mixed-model assembly line :-
An assembly line which is prepared in advance to produce continuously identical multi items
which can be assembled through almost same operations.
Procedure for designing a single model assembly line
(1) Determination of a cycle time.
(2) Computation of a minimum number of processes.
(3) Line balancing.
(4) Determination of the length of the operations range of each process.
(1) Cycle time:-
A cycle time is an elapsed time between completed units coming off the end of an assembly line.

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 lineoutput
T : total operations time to assemble the product
[] : minimum integer not less than the accurate figure in it

12 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.



tj: Performance time for operations assigned to the jth process.
N: The resultant number of processes needed after the assignment procedure in compliance with
the precedence relationships.
BD: Balancing delay.
Procedure for designing a mixed-model assembly-line
The procedure for designing a mixed-model assembly line involves the following step:
(1) Determination of a cycle time
Linkage of production System with Inventory 13

(2) Computation of a minimum number of processes
(3) Preparation of a diagram of integrated precedence relationships among work elements
(4) Line balancing
(5) Determination of the sequence schedule for introducing various products to the line

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.

This condition (constraint) will be described as the following formula:

Qi: planned production quantity of the product Ai (i=1,2 .)
Tij: operation time of product Ai on the jth process
C: 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

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

(2) Mixed-model assembly line

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:


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.

Linkage of Production System with Inventory 15

An example of production planning in a single process
A basic cyclic schedule which both satisfies requirements during the planning period and minimizes
quantities of work-in-process is presented in this section.
TET (Total Elapsed Time) can be expressed as follows:

Ri: requirements of item i during the planning period
tsi: setup time of item i
Tmi: machine processing time of item i
N: the number of setups during the planning period
To satisfy requirements during the planning period, the following inequality must hold true:
Thus N (the upper limit of the number of setups) that satisfies requirements of all items during the
planned period) can be derived as follows:

[]: 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


(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.

(2) Loading system :-
There are two types of loading systems:
1) Backward loading:-
Backward-loading is done by starting with the due date on which the order is required to be
shipped and calculating the schedule backward to determine the proper period for each
operation to be loaded to.
2) Forward loading :-
Forward-loading starts with either the present time or the first open time at the first operation
and compute the planning period for each operation to be loaded.

Materials Control Through JIT System
Inventory requirements in an organisation are closely related to the production or consumption
systems. J IT (J ust-in-Time) is a production technique which helps in reducing inventory. The technique
developed by Toyota Company in J apan has now spread all over the world. JIT system is an integrated
manufacturing and supply system aimed at producing the highest quality and, at the same time, the lowest
cost products through the elimination of waste.
J IT integrates and controls the entire process. It specifies what should be stored, moved, operated on
or inspected and precisely when it should be done. Just-in-Time production continuously strives to
improve production processes and methods. It attempts to reduce, and ultimately to eliminate inventories
because high inventories tend to cover up production problems. Various components of a JIT production
system are given in figure 3.1.
Components of JIT Production System
FILL-UP: A PULL Type Ordering System
Contrary to the conventional system where a central controller co-ordinates material flow from the
first to the last stage of manufacturing, a pull system triggers action from the market demand. As soon as
an order is received from the market, the dispatch section places an. order on final assembly section who
in turn to sub-assembly section and so on to the stage of withdrawal of materials from stores for
manufacturing. A chain reaction starts where-in each user is responsible to withdraw materials from the
preceding operation eliminating the need for the central controller. A concept chart showing the
conventional push type ordering system and the new pull type ordering system is given in Fig. 3.2. The
production stages, storage stages, information and material flow channels have been shown explaining
both the systems. The system is flexible and is adaptable to quick changes in demand. Only the required
quantity of materials for use during a ~ay or a part thereof is drawn from the previous operation, thereby
leaving almost nil inventory at work stations at the end of the day. The chances of accumulation of
process inventory in a Push System are more since total output of a work station is pushed to next work
station whether required or not.

18 Materials Management

Materials Control Through JIT System 19

20 Materials Management

Small Lot Production
As the lot size increases, the work in process increases. To reduce inventories, the lot size should be
reduced. In an ideal situation there should be one piece production and conveyance. The objective is to
reduce production lead time through line balancing and redu6itg setting up time to almost zero. Use of
flexible manufacturing system; standby tools, jigs and fixtures; automatic holding and conveying
equipment; fastest possible speeds, feeds, depth of cut, CIM, automatic dimensional control etc., are some
of the aspects which can be considered and adopted. A frame-work of reducing production lead time is
shown in figure 3.3.
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.
A Kanban is a hand sized signboard contained in polypack that is the key control tool for J IT
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

Materials Control Through JIT System 21

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 w give written instructions every time and hence it
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.

22 Materials Management

Materials Control Through JIT System 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

24 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 J IT systems in J apan as per the survey conducted in 1986 are
summarised below:

Material Requirement Planning (MRP)

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 Weight
Old forecast
= 100 x 0.5 = 50 x 0.9 = 90
= 70 x 0.5 = 35 x 0.1 = 7
New forecast = 85 97
Second Week
Old forecast
x 0.9
= 87
x 0.1
= 11
New forecast 98
General formula
New forecast =a x Sales +(1-a) Old forecast. a is called weighting
factor and can be estimated by the management for each

type of product separately. a =0.01 in the above ex


26 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
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

Material Requirement Planning (MRP) 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

28 Materials Management

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 1 2 3 4 5
Gross requirements 10 40 10
Scheduled receipts 50
Projected available balance 4 54 44 44 4 44
Planned order releases 50
Lead time =1 period
Fig. 4.2.

Lot size =50 The Basic MRP Record

(4) Projected available balance
The next row is called Projected Available Balance. i.e., the row is the projected balance at the end of
the period after replenishment orders have been received and gross requirements have been satisfied. An
extra time bucket shown at the beginning shows the balance at the present time.
(5) Planned order release
Whenever the projected available balance would show a quantity insufficient to satisfy requirements
(a negative quantity), additional material must be planned for. This is done by creating a planned order
release at the beginning of the period in time to keep the projected available balance from becoming
(6) Action bucket
The MRP system produces the planned order release data in response to the gross requirement,
scheduled receipt, and projected available data. When a planned order is created for the most immediate or
current period, it is in action bucket. A quantity in the action bucket

Material Requirement Planning (MRP) 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

30 Materials Management

Fig. 4.4 Product Structure diagram


Material Requirement Planning (MRP) 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.

Linking the MRP Records

Figure 4.6 shows the linked set of individual time-phased -MRP records for the top handle assembly of the
snow shovel.

Technical Issues
Processing frequency
Since conditions change and new information is received, the MRP records must be brought up-to-
date 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.

32 Materials Management

Material Requirement Planning (MRP) 33

Safety stock and safety lead time
Carrying out detailed component plans is sometimes facilitated by the inclusion of safety stocks
and/or safety lead times in the MRP records. Safety stock is a buffer of stock above and beyond that
needed to satisfy the gross requirements. Safety lead time is a procedure whereby shop orders or purchase
orders are released and scheduled to arrive one or more periods before necessary to satisfy the gross
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 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.
Firm planned orders
If changes have taken place since the last time the record was processed, the planned order releases
can be very different from one record-processing cycle to the next. Since the planned orders are passed
down as gross requirements to the next level, the differences can cascade throughout the product
One device for preventing this cascading down through the product structure is to create a firm
planned order (FPO). FPO, as the name implies, is a planned order that the MRP system does not
automatically change when conditions change.

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, V-
belt, 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:
Definitions and application of these analyses are tabulated as in the following pages.

36 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:-

38 Materials Management

Class of items

Item %

% of Annual Usage Cost










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
continuous follow up & control.
Economic Order Quantity (EOQ)
Total cost of managing inventory of an item depends upon three factors :-
(i) Ordering Cost (OC).
(ii) Inventory Carrying Cost (ICC).
(iii) Quantity Discounts (QD).

40 Materials Management

Ordering Cost (DC)
Ordering cost is the cost of placing one order. Total ordering cost per order can be determined by
estimating annual cost actually incurred during the past one year against following elements :-
(i) Salaries +Perks paid to all the employees in the purchase department.
(ii) Proportionate part of salary +perk of the executives and employees of other departments spending
part of their time in making purchases. This will include accounts personnel associated with pur-
chase department in evaluating quotations and making payments. Also QC department engaged in
inspection and testing of purchased items.
(iii) Traveling expenses related to procurement.
(iv) Telephone, telegram
telex, postage and stationery relating to procurement.
(v) Depreciation of accommodation (or rent of building) and equipm nt used for procurement.
(vi) Insurance, power, water and other service charges relating to purchase department.
(vii) Any other cost (entertainment etc.) incurred for purchasing.
If N is the number of orders placed during the year, ordering cost

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 (ICC)

Inventory carrying cost is the cost of holding inventory. Various elements of cost falling under this head
are as given below:-
(i) Interest J oss/opportunity loss on the capital locked up in the form of average inventory.
(ii) Salaries and perks of the employees engaged in the stores.
(iii) Depreciation of accommodation (or rent of building) occupied by stores and stores
(iv) Depreciation of handling equipment, racks, furniture and other facilities used in stores.
(v) Obsolescence of Items in stores.
(vi) Deterioration, damage and pilferage of items during storage.
(vii) Telephone, telex, postage and stationery used by stores.
(viii) Handling expenses paid to contractors, transporters, etc.
(ix) Insurance and taxes on stores.
(x) Electricity, oil, water and other service charges on stores.
(xi) Any other cost relating to holding of stocks in the stores.
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
42 Materials Management

inventory during that year. Average inventory can be calculated as follows :-

Av. Inv. = Opening Stock +Closing Stock

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
= 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

If we assume the ordering cost S =10 and the inventory carrying cost 1=20 per cent or 0.20, for
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 Economic Order Time Supply Number of or-
(A) Rs. Quantity (Q) Rs. ders per Year
40,000 2,000 18 days 20
10,000 1,000 5 weeks 10

44 Materials Management

Annual Usage Economic Order Time Supply Number of
(A) Rs. Quantity (Q) Rs. orders per year
8,100 900 6 weeks 9
4,900 700 7.5 weeks 7
1,,600 400 3 months 4
900 300 4 months 3
100 100 1 year 1

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
(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.

. '. xA >mAI / 24
x >mI / 24
If I is taken as 24 per cent or 0.24.
x >m / 100
or100x >m

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 Unit Price (Rs.) Discount
1-99' 100 -
100-999 95 5 percent
1000 &
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

Number of months' usage added to the EOQ by purchasing 1000

As 10.5 is greater than 3.3, the order quantity can be raised from 500 to 1000 to take advantage of
the discount.

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.

Periodic Ordering Method

The stocks are reviewed at fixed intervals of time (known as Review Period) and orders are placed
either for a fixed quantity or a variable quantity.

(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)
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

The average stock works out to : safety Stock +1/2 of EQQ

(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)
The Inventory fluctuation by this system is shown in Fig. 5.4.

Average Stock =Safety Stock +l/z Consumption Rate x Review Period

If Lead Time <Review Period
Q = M - (Actual Stores held at the time of Review)
Inventory Control 49

Optimum Review Period (RP)

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:

(ii) When periodic Review 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:

No. of
Order Quantity in Month'. Supply

Years be-
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
9 2.36 2.09 1.92 1.79 1.68 1.59 1.52 1.45 1.38 1.33 1.27 1.22
8 2.31 2.04 1.86 1.73 1.63 1.53 05 1.38 1.32 1.26 1.20 1.15
7 2.26 1.98 1.80 1.67 1.56 1.47 1.38 1.31 1.24 1.18 1.12 1.07
6 2.20 1.92 1.73 1.39 1.48 1.38 1.30 1.22 1.15 1.09 1.02 0.97
5 2.13 1.83 1.64 1.50 1.38 1.28 1.19 1.11 1.04 0.97 0.90 0.84
4 2.04 1.73 1.53 1.38 1.26 1.15 1.05 0.97 0.89 0.81 0,74 0.67
3 1.92 1.59 1.38 1.22 1.09 0.97 0.86 0.76 0.67 0.59 0.51 0.43
2 1.73 1.38 1.15 0.97 0.1l1 0.67 0.55 0.43 0.32 0.21 0.10 0
1 1.38 0.97 0.67 0.43 0.2l 0 0 0 0 0 0 0
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 No. of Order per Year No. of Month's Require-
Rs. ments per Order
Upto200 1 1 years'
201-500 2 6 months'
501-1,000 3 4 months'
1,001 - 2,000 4 3 months'
2,101 - 6,750 6 2 months'
6,751 - 27,000 12 1 month
27,001 -1,20,000 14 2 weeks
1,20,000 & above 52 1 week
The review periods depending upon the Annual usage cost is given in the following table.
Annual Usage Cost in Rs. Review Period in Months
Upto Rs. 400 6
401-600 5
601-1000 4
1,101 - 2,000 3
2,001 - 6,000 2
6,001 & above 1
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
For an item with following data:

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.

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
the probability of being able to build a complete assembly is only (0.95)
or 0.36.

Work In Process Inventory (WIP)


All materials in an organization after the point of issue from stores to the point of receipt in the sales-
godown 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


Work in Process Inventory (WIP) 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
Calculation of WIP
WIP inventory as explained above is a function of manufacturing cost (C) and processing time (T).

Where D
is the cost incurred or the input in the month before a product is completed, D
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

From equations 1, 2 & 3 :-

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
Work in Process Inventory (WIP) 56

WIP (w) will be as follows :-
w =C(e-l) ... (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:-
Before FA After FA
1 month before completion 50,000 2,00,000
2 months before completion 1,00,000 3,00,000
3 months before completion 1,50,000 -----
4 months before completion 2,00,000 -----

If the manufacturing sales are Rs. 5.50 lakhs, calculate the WIP inventory, WIP ratio and %
reduction in WIP before and after FA.
1. Before FA
Manufacturing Cost (C) =0.5 +1.0 +1.5 +2.0 =Rs.5 lakhs. WIP distribution co-efficient (E)

WIP (W) =5 (3 - 1) =10lakhs
WIP T/O Ratio = 12 X 05.5 =6.6
2. After FA
Manufacturing Cost (C) =2 +3 =5 lakhs
Manufacturing sales (s) =5.51akhs

Work in Process Inventory (WIP) 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:

Day before the final assly & testing
1 2 3 4 5 6 7 8 9 10 11 12

Before Im- 1 1 2 2 4 1 1 2 3 2 1 10
After Im- 3 7 20 - - - - - - - - -

Calculate % reduction in WIP inventory & % reduction in process time.
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

How to Reduce Process Time?

* 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.
* J ust-in-time Production System.

Spare Parts Management
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

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 Average Variation Total no. Total Safety
Vehicles rate per of usage of groups Spares stock (ex-
in each group rate per Stocked cess over
group group average)
10, 000 1000
1 1000
1, 000 100 90- 110 10 1100 100
100 10 5- 15 100 1500 500
10 1 0- 2 1000 2000 1000
1 0. 1 0- 1 10000 10000 9000
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

Spare Parts Management 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

Hence, average requirement 439/100 =4.39 per month.
From these figures, we can calculate the risk, or assurance associated with each stocking policy. It
should be noted that in the present case, the average consumption per month during the 100 month period is
only 4.39 as calculated above.
If we had stocked exactly 4 spares we would have had a 50% assurance only i.e. there would be a
50-50 chance of having enough spares when required. If we wish to give a better assurance than this, we
must increase the stock. This excess stock is the true/safety stock. The relationship between assurance and
safety stock in the present case is as under :-

Stock at the time of Safety Stock Assurance % Risk%
8 4 100 0
7 3 98 2
6 2 92 8
5 1 74 26
4 0 49 51
29 71
14 86
No. of No. in Total No. of Spares
Spares which required
0 x 1 = 0
1 x 3 = 3
2 x 10 = 20
3 x 15 = 45
4 x 20
5 x 25
x 18 = 108
7 x 6 = 42
8 x 2 =


No. of months 100
4 96
3 97
Spare Parts Management 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
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. J ust 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,

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
V S 1.7 2.1
D 1.5 2.0
E 1.3 1.9
64 Materials Management

Criticality Availability Annual Consumption


E S 1.2 1.6
D 1.0 1.5

E 0.8 1.4
D S 0 0.8
D 0 0.8

E 0 0.8

k for an item classified as 'E-S-A' is 1.2 & for 'V-D-B' is 2.0

The k values proposed above provide assurance between 70 - 99.7% that items will not be out of
stock. Assurance is more where k value is more and less where it is less i.e. for k =2.1 it is 99.7% and for
k =0.8 it is 70%.
This simplification avoids the need for too many tables for various levels of assurance. In any case, it
has been found that, in practice, the quantity of spares the tables would indicate at low levels of assurance
would almost always be 0.

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
Spare Parts Management 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
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 parts-
manager should stock them at quantity l or 2, if they are critical and none or 1 if they are not

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.
68 Materials Management
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
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
In any case it should be seen that following points are considered
before choosing right time:
-Receipt when stock balance is minimum.
- Hand to mouth buying.
-Forward buying.
-Speculative buying.
-Internal Processing Time.
-Delivery Time.
-Internal Clearing Time.
-Follow up to reduce time.
70 Materials Management
- Rush Purchases/Local Purchases.
- Co-ordinate Supplier with User Dept.

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 non-
peak 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.

Purchasing 71

- Vendor Rating.
- Ethics (No gifts, bribe etc.)

Source Selection and Supplier Development
The elements of major importance in the purchasing system are location of sources of supply.
The important responsibilities of the purchasing system are location of sources of supply.
Two of the important responsibilities of the purchasing executive are :-
(i) To select the right source of supply
(ii) To develop new suppliers
In other words, supplier selection and new source development are major contributions of the
purchasing function and so should have properly planned approach. Half the battle is over once the
right caliber of supplier is chosen. A good supplier actively participates and helps the purchase to meet
his customer's requirements. Suppliers also contribute their specialized knowledge and help build
quality into the purchasing company's products.
S electing the Supplier
The type of procurement involved greatly influences the factors to be considered in making the
evaluation. Historically, vendors have been considered as providers of "commodities" when, in fact,
they should be considered as providers of "functions". For example, it provides a means of marking or
When the specific procurement involved is for a commercially available or off-the shelf item, the
buyer is selecting a "commodity" vendor. When the requirement involves special design or
performance features, such as custom tooling, investment costs and start-up time, the buyer is selecting
a vendor's capability.
"Commodity" Suppliers
Service is undoubtedly the most significant factor and it includes a vendor's willingness and ability
to fill buyer requirements reliability. This is often the only advantage one vendor can offer over his
Prices .are generally competitive for equivalent quality lines, but pricing structures may vary with
respect to quantity discounts. This aspect offers opportunity for analysis and evaluation.

72 Materials Management

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 in-
house 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?
* How does the vendor control and incorporate engineering changes?
* What are the vendor's inspection procedures and controls?
* How frequently does he calibrate tools, gauges, and test equipment for meeting primary engineering
* What are his procedures of in-process inspection and quality control?
* What is his procedure for receiving inspection?
* What is the nature of his planning, scheduling and inventory control system?
* Will he furnish price breakdown by cost elements on fixed price contracts?
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?
* How has he performed for other customers?
Developing a Source of Supply
In some cases a buyer is not able to select and has to create a satisfactory
supplier. Also if existing suppliers cannot satisfy a company's needs, a logical
alternative is to attempt to develop a new supplier.
Occasionally, a buyer's company must create its own spare subsidiary
company in order to have a satisfactory source of supply. (captive unit - e.g. for
Small Supplier Development
It may be advantageous to encourage small firms in the engineering field
so as to utilize the services of the new entrepreneurs, no doubt keeping in mind
that they are appropriate in size and technical ability to manufacture the
components as specified by the company. This is a very important factor.
Not merely, that, in the true sense, competition appeared to diminish as
the value of purchases increased and the size of the firm became big to accept
orders for small quantities. While large scale production can and may be
economical in manufactures, it is equally true that lower prices may not be
There have been instances where both large suppliers and small suppliers
charge the same prices for the same product, and the purchaser finds it difficult
to estimate the real cost of production. Here again, is a case where it will be
worthwhile to encourage the small supplier from whom it will be easier to
assess the real cost.
Small suppliers tend to need more assistance but purchasing personnel
who have to watch for and develop new suppliers find that the small units are
more responsive. Here, the purchase of raw materials and sometimes
consumable tools by small ancillaries at comparable prices at which large
consumers cal} obtain is a major problem. Perhaps with the general policy of
the Government to encourage the development 9f small scale industries, it is
likely that this problem may be solved by positive government assistance, or by
a co-operative approach by the small scale industries. The maintenance of
production levels may depend mainly on the success of the purchaser's active
search and development of new sources of supply. There

74 Materials Management
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
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.
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
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

76 Materials Management






Fig. 8.1






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.
Standardization: Under a system contract the buyer receives only the
brands produced or sold by the contractor. This generally means that a
standardization programme must be adopted, but for most companies this is
desirable for its own sake.
Catalogues: The catalogue is vital to a systems contract, since all of the
items must be identified. The catalogue is usually prepared by the vendor; hence
the number system is his. Typically, unit packaging is specified to facilitate
requisitioning in economic order quantities (EOQ).

78 Materials Management

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.
Requisitioning: Since a systems contract vendor guarantees delivery, and
to remain a contractor, must perform dependable, there is no need to requisition
more than the buyer's immediate needs. The requisition, properly countersigned
by the purchase approval agent, is forwarded to the contractor. There is no need
for multiple copies of a requisition as is the case with most purchasing
Order Filling by Vendor: The systems contract vendor assigns a number
to a requisition when it is received. The numbers are consecutive under each
contract, and this numbering system permits much better control than the usual
numbering sequence in which all vendor's requisitions are intermingled.
The vendor prices the requisition, since it comes to him unprice. He
selects the method of shipment, since on-time delivery is a crucial element in
the systems contract arrangement. Most vendors agree to deliver on 24 hour
notice, which is about the same as requisitioning from a company store room.
Payment: A periodic payment is customary even though each requisition
technically constitutes an invoice. The periodic payment is made on the basis of
a simple tally sheet of all transaction with a vendor for a stipulated period of
time. The consecutive numbers on the requisitions ensure to both parties that the
period payment is complete.
Tendering Systems
The tendering decides the method of purchasing. The following types of
tenders are commonly used:
(a) Open Tender or Press Tender: - In this case, the requirement of
material with its full specifications is published in paper. Who so ever
is interested, can send the quotation.
(b) Limited Tender:- Only few suppliers are asked to send the quotations
for a particular material. The advantage in this case is, that only
reliable suppliers are being as-ked for quotations and they will always
fulfill the demand, once they have sent the quotations, while in the
previous case any supplier; may not be legal supplier, can send the
quotation. There is always guarantee for the supply of

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


Materials Management

of the indenter or supplier. A specimen Tender Evaluation Form is
shown in figure 8.3.

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.
Part Name Tender Evaluation form Specifications
Code No.

Inquiy Quotation
S. Supplier's Name Quan- Quan- Price Tool Delivery F.O.I3. Terms
No. tity tity Cost.

Purchasing 81

(iii) Selection of which tender or quotations is best.
This is based upon the evaluation made through comparative

ABC Company Industrial Purchase Order
Area, Chandigarh.
Number Date
Please show the above number on all documents and con-
To: Ship to : Purchase Deptt., ABC Company
Arrive at destination by
F.O.B. Destination Ship point
Item Description Quantity Unit Unit Amount
1. Invoices in Quardruplicate.
2. Advise at once if ship is delayed.
3. Pre-pay transport charges. Don't ship 'Collect'
ABC Company
By ________________
4. Sales tax to be charged. Excise Duty examption (Authorised Representative)
form enclosed.
5. Combined shipments permitted if package

Show correct, P.O.No.
6. Original copy to be retained & duplicate
returned as order acknowledgement
Fig. 8.4

Purchase Order

Materials Management

It is always advantageous, if a systematic procedure in regard to purchase
orders is followed.
(a) No goods should be obtained without a proper written order having sign
of proper authority.
(b) A written confirmation must be obtained from every supplier with
clearly mentioning the time of delivery.
(c) All the orders must be clearly worded regarding the specifications and a
complete drawing is also attached. It should have detailed instructions
of quality list, physical or chemical tests applied to the material. A
specimen Purchase Order is shown in figure 8.4.
(d) Each purchase order issued to the supplier is made out in triplicate.
Two of them are sent to the supplier and the third is retained by
purchase department. The duplicate issuing orders allows that one of
the copy to be returned to the purchaser as the acknowledgement.
Useful Purchase Order Terms
1. Time is of the essence on this order. Purchaser reserves the right to
cancel this order, or any part thereof, without obligation, if delivery is
not made at the time(s) specified.
2. Seller warrants that there has been no violation of copyrights or patent
rights in manufacturing, producing, or selling the goods shipped or
ordered, and seller agrees to hold the purchaser harmless from any and
all liability, loss, or expense occasioned by any such violation.
3. All goods shipped against this order must have been produced in
compliance with the requirements of the ISI specification. Seller must
certify this compliance on each invoice submitted in connection with
this order.
4. The terms and conditions of sale as stated in this order govern in event
of conflict with any terms of seller's proposal, and are not subject to
change by reason of any written or verbal statements by seller, or by
any terms stated in seller's acknowledgement, unless accepted in
writing by us.
5. If price is omitted on order, except where order is given in acceptance
or quoted prices, it is agreed that seller's price will be the lowest
prevailing market price and in no event is this order to be filled at
higher prices than last previously quoted or charged.



6. We reserve the right to inspect all shipments after delivery to us and to
reject any material that may be defective or not in accordance with
specifications as to quality or performance.
7. In the event any article sold and delivered hereunder shall be defective
in any respect whatsoever, seller will indemnify and save harmless
purchaser from all loss or expense by reason of all accidents, injuries,
or damages to persons or property resulting from the use or sale of
such article or which are contributed to by said defective condition.
8. If seller performs servires, or constructs, erects, inspects or delivers on
buyer's premises, seller will indemnify and save harmless buyer from
all loss or expense by reason of any accident, injury or damage to
persons or property occurring in connection herewith.
9. Purchaser may at any time insist upon strict compliance with these
terms and conditions, notwithstanding any previous custom, practice,
or course of dealing to the contrary.
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:

(1) Purchasing Strictly by Requirement :- It means, no purchase is made
until a need arises and only the necessary quantity is to be purchased.
Though it is a great problem to say how much a particular material is
to be purchased at one time, but, the quantity should be such that the
material can be supplied to the facilities as per their requirements.
Such situation arises only in emergency, and such situation can be
tackled when the buyer has got good connections with the supplier.

(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

by production schedules. The quantity of material can also be calculated
on the basis of economical lot size.
(3) Marketing Purchasing:- When purchases are made in accordance with
conditions of market i.e. to take advantage of price fluctuations rather
than to meet the immediate needs. This method is used by the
manufacturers who have definite manufacturing programmes for long
The market fluctuations can be studied by constant study of market
statistics and the factors affecting the price and thus the purchase
department may forecast the trend of market price.
This system has the following advantages:
(a) Lower purchase prices.
(b) Greater margin of profit.
(c) Saving in purchase expenses.
However, it has following disadvantages also:
(a) More storage and carrying costs involved.
(b) Error in judgement of market tendency which may cause a great
(4) Speculative Purchasing:- Means to purchase large amount of goods at a
gamble market. It absolutely depends on the market price saving, not on
demand of business. This system is applicable where a single material
affects the industrial productivity. For example in textile industry, the
raw cotton offers a high profit if a paisa is saved on each rupee. Such
purchases are always handled by top management but not by purchase
(5) Contract Purchasing: - The contract is negotiated between the two
parties for supply of those materials which fluctuates widely in prices.
This system provides an assurance of continuous flow of material as
per schedule. Sometimes it is also called as Schedule Purchasing.

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
Purchasing 85

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:
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
The points scale may be converted into performance scale as follows:
40 points
Under 40 points to 37
Under 37 points to 35
Under 35 points
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
Service Rating

Materials Management

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.

Considering all the three factors a composite scale will be as follows:
100 points Excellent
93 to 99 points Good
83 to 92 points Satisfactory
Below 83 points Unsatisfactory
(needs to be investigated)
Some Legal Aspects in Purchasing
A competent purchase executive ought to ensure that the source selection
is such that there are no disputes and even if there are, the same are resolved by
discussion/negotiation. All the same he should also be familiar with some of the
important legal aspects, so that he takes care that his company is not hurt in the
event of a dispute with the seller against any purchase contract.
For details reference is to be made to the Indian Contracts Act-1872 and
Indian Sale of Goods Act-1930.
Some important aspects are indicated below:
(i) Law of agency
Agent is a Person who acts for another in all lawful transactions. There
can be no agency for criminal, illegal, and unlawful acts. Employees
and servants of a company are agents but an agent is not a servant or
employee, distinction being, that the employee is controlled by the
principal in the manner of doing his work, while the agent is not.
Purchasing officers are agents of their companies. Agents to sell goods
have no authority to receive payments, unless so authorised. Their
mistakes/errors would not absolve the company of liability unless they
acted dishonestly, without authority and in a reckless manner.
Contractual obligations cannot be avoided on plea of negligence of the
agent but could be avoided on plea of collusion between the agent and
third party and fraud on principal. Agent has an actual authority as also
an apparent. If he acts' outside both, the
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.
(c) Consideration: If it is stated that the price will be fixed later
without indicating the manner of such fixation, there is no legal
(d) Only a person, 'Major in age' and sound in mind is in a capacity to
enter into a contract.
(e) Free consent - No coercion.
(iii) Revocation of the Proposal
A proposal can be revoked before acceptance. The acceptance can be
revoked before the same is received by the propose.
(iv) Validity of Offers
Commercial code - 3 months, unless otherwise stated.
(v) Price and Payment Terms
Open end pricing, cost plus, time and material costs, price variation
caluse - upper limit desirable.
(vi) Quality
Sale by description, sample, specification.
(vii) Delivery
Can be essence of contract, but it ought to be so stated.
(viii) Measure of Damage
Party claiming damages ought to take all reasonable steps to mitigate
loss. Law specifies that the party claiming damages takes all
reasonable steps to mitigate the loss in the event of a breach of
contract. The figure to be specified for damage should be realistic and
not calculated to impose penalty.
(ix) Passing of Property
To be clearly indicated: FOB, FOR, FA W.
(x) Arbitration
Ought to be provided.
(xi) Patents
Infringements, inventions.
(xii) Inspection, Acceptance, Rejection As
per contract terms.

88 Materials Management

(xiii) Risk Purchase

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
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.
Principles of Materials Handling
* Plan handling for over-all economy.
* Sell the philosophy o( handling to the organization (training of foremen and
Other key men).
* Delegate responsibility to one man.
* Revise layout to reduce handling.
* Select the proper equipment and integrate it into the plant handling
* Coordinate the operation of material handling equipment.
* Ascertain the cost of handling.
* Cost of installation must be amortized within a reasonable length of time
(as per Income Tax Rules).
* Move in unit loads.
* Avoid remanding .
* Reduce terminal time of handling.
* Use gravity where possible.
* When gravity will not suffice, use mechanical means where practical.
* Standardise equipment and methods

90 Materials Management

Handling Equipment
Outside Handling

Inside Handling

Materials Handling 91

Cost Reduction Opportunities
1. Because rate structures are so complex, there are many opportunities to
make tremendous savings in buying transportation. There are many
loopholes that permit shipments to be made at lower tariffs and also by
spotting errors that 'carriers make in computing charges.
2. Charter Truck
Switching from common carriers to private chartered truck has been sure-
fire cost reduction technique for man y traffic controllers. Common
carriers charge rates much higher than their true cost for some
consignments in order to offset loss on others. If load of own materials is
less to justify a full truck, sharing with others will be economical. Traffic
managers should also try to route their trucks so that they expend a
maximum amount of time with payloads. One . way to do this is to use the
trucks to pick up materials from suppliers. Other way could be to search
for a transporting company whose trucks return empty on the route from
the supplier.
3. Tighter Scheduling
When a shipper controls his own fleet, he can more 'easily regulate
relative priority of various shipments. Sometimes he also can offer
prompter service to customers or reduce his in-transit inventories.
Scheduling can be adjusted to ensure full utilisation of unit load whether a
truck or a wagon.
4. Packaging
A proper packaging not only ensures protection of its contents but also
facilitates loading more quantity in a limited available space of the
transport. It is quite practical to equip company trucks with special racks
or other materials handling devices to cut packaging. Even when special
racks won't eliminate packaging, it still is possible to cut packaging costs
by using company trucks, since carriers are responsible for damage to
goods in transit, they insist that shipments be securely packaged. In some
cases it is possible to ship in lighter, cheaper containers with little increase
in damage. If there is almost no chance of damage because of poor
packaging, perhaps a less expensive package can be used. If damage
claims are high, more costly packaging might be worthwhile. A shipper
must pay freight not only for the product but also for the package that
holds it. In some cases can be reduced by selecting a container that
weighs less even though it may cost slightly more. Container cost in
rupees per kilogram of material contained depends upon the type of
material used for the container. Cheapest are the plain paper corrugated
board, then are the plain fiber board/wood containers

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.

5. Reducing Demurrage Charges
Railways charge demurrage if the wagons are not unloaded within 48
hours. Materials managers can reduce these charges substantially by
carefully scheduling shipments so that unloading facilities are not
overtaxed. Sometimes it may be economic al to pay demurrage than to
have unloading crew work overtime at premium rates. Also some
companies may prefer to pay demurrage during peak production periods
rather than invest in the additional storage space that would require
storing it.

Receiving and Inspection

Stores Dept. is pivotal in materials management, and in this receiving is the
most important. Goods are received along with the Goods Inward Note or Goods
Receipt Note. Fore mate shown in Fig. 10.1.

. Office
a. Correspondence including queries from/with suppliers

94 Materials Management

b. Discrepancies, claims
c. Certification of bills
d. Periodical Reports
Stores Movement Cell
a. Arranging collection of stores
b. Payment of freight, where necessary
c. Where damage is obvious or pilferage is suspected, request for
Open delivery.
d.Handing over materials to receiving section
e. Arrange outward booking for rejected stores.
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
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.
* In respect of dispatches by sea, if found damaged at port, survey be
arranged within three days with steamer agents, insurance company,
customs. Steamer agents issue survey report. Insurance company
would accept claims up to specified value without their surveyor
examining. Maximum liability of the carrier is limited to certain
amount. Any amount over and above this has to be claimed from
insurance company or written off, if not insured.
Claims for custom duty to be lodged with Asset. Collector of Customs.
If rejected, appeal to the appellate collector of

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.
Gold Clause Agreement
Between steamers belonging to U.K. and some of the continental
countries, whereby the time limit for claims is extended to 2 years
(instead of one) and the maximum liability of the carriers is 200
(instead of 100) per package. Suit has to be in a court in U.K.
(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
ISI, BSI (British Standard Institution)
ASTM (American Society for Testing Materials)
Chemical composition
Restrictive specifications ought to be avoided.
(iv) Role of purchasing dept.
* coordinate with design, engineering, user departments, while laying
down specifications.
* ensure procurement of the quality needed.
* locate proper sources and assist suppliers where development
efforts areinvolved

96 Materials Management

(v) Inspection Planning
* How much to inspect?
* What to inspect?
* How to-inspect?
* When to inspect?
* Where to inspect?
(vi) Inspection Techniques
* 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
* Visual, touch, smell, taste, comparison with samples, testing.
Sampling plans - single, double, multiple.
Percentage sampling, random sampling, sequential sampling.

After inspecting materials, entries are made in Inspection Tag as shown in
Fig. 10.2. This tag along with corresponding material is sent to stores. The
storekeeper decides place where these materials are to be stored. The
decision will depend on

nature of the items
*storage facilities available

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

Store-Keeping 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
Fig. 10.2

Fig. 10.3

98 Materials Management

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.
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
-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
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.

Store-Keeping 99

7. Type of Storage Equipment.
8. Use of Material Handling Devices.
9. Protection against loss, theft, etc.
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

High usage items - Near outlet
Heavy items - Near broad gangway, Near outlet,
In open, Near point of use
Inflamable & - Isolated fire proof place,
Dangerous items Sprinkler system
Impervious to weather & - In outside yard
Require special protective - In cold storage, In dry chambers,
Treatment In airtight containers
Oils, greases, paint, etc. - Stored separate

100 Materials Management


Store-Keeping 101

Surplus & Scrap Disposal
-Who should be responsible for disposals?
- How surplus & scrap is generated?
-How to control surplus & scrap?
Careful screening of requisitions
Strict incoming inspection
Proper unit of purchase for min, waste
Variety Reduction
Prevent Overbuying
Proper Storage.
Control System
Periodic Review of non-moving items.
Analysis of stocks during physical verification.
Periodic clean up campaign.
Disposal Ways & Means
Utilise as substitute
Transfer to other deptts. or sections
Return to Supplier
Sale as Surplus
Sale as Scrap
Conditions of Scrap Contract
Prefer long term contract (3-6 months)
Adequate Security deposit
Payment terms considering contractor's financial status
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

102 Materials Management

* Contract will be terminated in case of lifting unauthorised materials/scrap
* Your responsibility for safe custody of materials once it is sold
and billed to you
* You can remove materials only after payment
* Liability for damage to company's property
* To. observe rules and regulations of company

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.

Purchase Price: It is calculated from the quotation given by the
Supplier plus:
Transportation charges from Suppliers Works to the receipt stores.
Insurance in transit.
Customs or other duties
Packaging charges.
Loading and unloading charges.
Trade discounts and quantity discounts if any are deducted from the quoted
price but cash discounts if any are not considered since these are financial
transactions only.

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
containing 500 gms screws and priced at 25 paise each. Transportation

104 Materials Management

Charges are Rs. 150/- and insurance in transit is Rs. 15/-. The supplier allows
quantity discount as given below:

Storage Charges : These charges are levied on purchase price to recover
store's costs i.e. interest on the capital tied up; wages to the stores and handling
staff; depreciation of stores building and equipment; electricity, water, telephone
and other service charge; loss, deterioration, obsolescence, insurance, etc.; stock
verification, record keeping, postage, etc. To simplify accounting all the actual
costs during the previous year are calculated. Total is then divided by the value of
materials actually issued during that year. This will give a % value of issues as
storage charges and the same can be used in the current year while computing issue
price of each item. The actual costs during the current year are also calculated. Any
profit or loss by way of applying this % value can be carried forward to the next
year and considered while computing this figure for the next year.
There are many systems of valuation of stocks but four are commonly used.
These are explained below:
First-In-First-Out (FIFO) Systems
In this system it is assumed that the material received first will be issued first
and as such the material that remains in the stores is from the latest supplies. We
can take an example of an item say Inlet Value which is as fast-moving item. Its
receipt arid issues/sales during the months from J uly to J anuary and their c()sting
according to the FIFO system are shown in Table-I.

Stores Accounting 105
Last-in-First-Out (LIFO) System
This system considers that the issues/sale made are from the latest stocks
and as such the material left behind is from the first stocks and the issues arc
valued on the basis of the cost of the lot to which the issues belong. The same
example of the purchase and sale/issue of the Inlet Values has been worked out
according to this system in the Table-2.
Weighted A verage System
This system takes into consideration the quantity of the batch' also along
with the unit cost of the batch. At any moment the unit cost of issues is the total
value of the stock in-the stores divided by die total number (units) in the stock.
Although this system takes care of the fluctuations in the market price, it is
cumbersome to find out the unit cost every time an issue is made, by dividing the
total value of balance stock by the total number of units present in the balance
stock. The working has been shown in Table-3.
Standard Cost System
According to this system a standard cost for an items is fixed for a
particular period during which the unit cost is the standard cost irrespective of the
cost of latest supplies. The variance between the actual cost and the standard cost is
worked out whenever a supply is made. The total cost algebraic sum of the
variance is accounted for towards the end of the review period to work out the
actual cost of the balance stock. The example of the Inlet Value has been shown in
the Table-4 according to the standard cost s)'stem
Each system has certain advantages and disadvantages as tabulated below:-

106 Materials Management

Stores Accounting 107

108 Materials Management

Store Accounting 109

110 Materials Management

Physical Verification
Stock is a 'Current Asset' just like cash. It has to be carefully protected,
counted and checked like what Bank. Cashier does
* Process of counting, weighing or measuring.
* Check accuracy of records and 'Suggest improvement in methods of recording.
* Identify causes of variations between physical and book balance and suggest
means of plugging pilferage, loss, etc.
* Check condition of items and suggest ways of physical protection.
* Perceptual or continuous verification
* 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
* Make sure that ther are no arithmetical errors or obvious commissions of
duplication in posting.
* See that there is no confusion over units of issue.
* Examine stores kept in neighbouring locations to see if balancing discrepancy
exists on another item.
* Check basic document for any unusual or exceptionally large transactions.
* Have physical verification results verified by an independent senior officer.
* Interrogate storekeeper if he can explain reasons of discrepancies

Stores Accounting 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

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
Specify penalties and fix responsibilities
Arrangements to be made before physical verification
* Appoint one person to control the whole operation.
* Close store houses for normal business.
* 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.
* Record separately damaged deteriorated or used items.
* Make sure that nothing is missed or checked twice.
* Items not belonging to the organisation should be marked or lablled in advance.
* List items received but not taken on stock.
* Include. in the total list, items sent out for repairs or for processing or stored
elsewhere or in the hands of suppliers.
* Return to store all items issued 'on loan'.
* Show the method of check (count, measure, weight) on stock sheet.
* Method of pricing in terms of units of issue should be known.
* In case of widely dispersed stock taking points, stores in transit at the date of
physical verification must be taken into account
Cost & Budgetary Control
One of the main objects of Stores. Accounting is cost control. By an
effective system a purchase budget & material consumption budget has to be
prepared. Cost figures relating to actual purchases and consumption

Stores Accounting 113

Should be complied periodically and variations from budgetted figures should be
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.
* Prevention of over and under stocking.
* Prevention of accumulation of obsolete, non-moving& items.
* Reduction ill capital lock up in stores.
* Prevention of excessive buying.
* Prevention of wasteful usage of materials.
* Increase in the rapidity of turnover.
* Economy in space, labour and clerical services.
* Elimination of over payments to suppliers.

Materials Cost Reduction Techniques

A standard may be defined as a model or a rule. established by authority,
custom or general consent.
Standardisation is a process of fixing standards, the term is used more and
more today in connection with technology, industry, production and process.

1. To Producer
1. Fewer set ups on production line.
11. Reduced tooling.
Ill. Possibility of increased mechanisation
. iv. Easier training of workers.
v. Low inspection cost.
vi. Reduced capital investment.
Vii. Reduced inventory.
viii. Reduced workload on design department. ix.
Simpler clerical and administrative work. x. Sales
and advertising effort more effective.

2. To User
1. Lower price for given quality.
11. Readier availability.
Ill. Improved service and maintenance facility
. IV. Reduced stocks at distribution points.
Variety Reduction

Primarily involves the elimination of unnecessary types, grades, shapes and
sizes of manufactured articles, business, methods and practices.

Stores Accounting Materials Cast Reduction Techniques 115
Single item shall serve for as many different purposes or for as many
different classes of equipment and kinds of construction as possible.
* Possible loss of customer 'Good-Will'.
* Possibility of reduced sales.
* Risk of suppression of new developments.
* Lower total costs.
* Higher total profits.
* Possible price reductions.
* Less complexity in manufacture.
* Greater potential output.
* Better delivery.
* Rationalisation of stores.
* Reduction of inventories.
* Increased effectiveness in Selling'.

116 Materials Management

The saving were possible through reduction of 6 sizes of hexagonal bolts
(S.N. 1-6) to only one size i.e. at S. No.4. Total requirement remaining same.
Consists in symbolising the selected characteristics by meaningful digits
which taken successively from a code number.
1. Easy identification.
2. Variety reduction and standardisation.
3. Mechanised accounting.
"Classification is the operation of bringing like things together and coding is the
allocation of a symbol

Stores Accounting Materials Cost Reduction Techniques 117

2. Comprehensiveness.
3. Mutual Exclusiveness.
4. Under stable by no specialists.
5.Order of complexity must be maintained

(a) Numerical - Significant
- Sequential
- Combined
b) Alphabetical
(c) Combination of numerical and alphabetical.
(d) Visual codes.

1. Systematic grouping of similar items.
2. Long description of items simplified.
3. Avoid duplicate stocking of same items under different names.
4. Enables variety reduction.
5. Helps in finding substitution and bringing standardisation.
6. Basis for setting up different stores.
7. Reduce clerical work and ensure better accuracy in accounting.
(A) An electrical firm had' 111' different names for a simple item of a single-
diameter rod, 3/6" dia x 6" length. e.g. :
1. Plunger 7. Pin mould holding

2. Roller 8. Sanding value roller
3. Locating peg 9. Motor drive spindle
4. Drive pin 10. Oil relief ball stop
5. Dowel pin 11. Armature stud
6. Pinion spindle 12. Trip arm pin etc, etc.

118 Materials Management

An Injection Procaine Penciling at S.No. '01' in the subclass 'Injections'
having code '2' and lying in 'Family Welfare Stores' having code 'I' will
have a code number '1201'.


Value Analysis

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

Stores Accounting Materials Cost Reduction Techniques 119

items and their functions are given below:

Item Function
Bolt & Nut Fastens parts
Electric Bulb Gives light
Sugar Sweetens
Spanner Provides
Paint 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 Cost-
Function analysis of a lead pencil is given below:
Cost Function Analysis of Pencil

Component Cost in Function-Cost Analys
Lead 2 Makes Markets 2 *Basic Functi 2
Wood 7 Protect lead 2
Enable Hold 5
Painting 3 Protect Wood 1
Attract Buyer 1 * Peripheral
Marking 3 Advertise 3 * Profit 5
Profit 5 Motivate Sale 5
Total 20 20 20

Ten Test for Good Value
(1) Can a feature be eliminated without detriment to the function or
reliability required?
(2) Does it provide more than it is specified?
(3) Does it provide more than it is worth?
(4) Is there something better with which to perform the job?
(5) Can it be made by a less expensive manufacturing method?
(6) Is there a standard or off the shelf part or speciality product available?
(7) Can the tooling costs be reduced?

120 Materials Management

8) Is it obtainable at less cost from other dependable manufacturers?
(9) Does it cost more than the total of reasonable lab our, overhead,
material and profit?
(10) Would you buy it with your own money?
I Selection) (a) Cost of item
(b) Volume
(c) Product life
(d) Investment and breakeven paint (e)
Relative cost/value of parts
II Information (a) What are the facts relating to the item?
(b) How can we get them?
(c) Defining the part and its function.
i) What is it
ii) What does it cost?
(iii) What does it do?
(iv) What is product worth?
III Speculation Practice as many alternative ideas as
possible w\,lich will achieve the required
Idea finding
(1) Free association
(2) Forced relationships
(3) Analytical
(4) Check listing
(5) Brain storming
IV Evaluation Systematic listing of good and bad
features of all alternatives, costing, weighing,

V Planning a) Systematic listing of all factors influenced if
selected item is changed,
b) Setting date targets for any further
information relevant to proposed changes,
c) Is it worth making the change?
(d) Establish functions, areas

Stores Accounting Materials Cost Reduction Techniques 121
( e) Recheck prior to implementation
VI Programme Execution. Sell changes to the people concerned,
seek involvement.

VII Report a) Current item
(b) Proposed design
(c) implementation plan stocks
* implementation plan
* time planning
VIII implementation Carry out plans, analyse
results to see if the
programme has been

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."

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;
5. Maintenance, repairs, and operational items;
6. Finishing items such as pamts, oils, varnishes, etc;
7. Packing materials, and packaging;
8. Printing and stationery items;
9. Miscellaneous items of regular consumption;
10.Power, water supply, compressed air, steam and other utilities
(services); and
11. Materials handling and transportation costs.

A) An analysis of cost. and value of different constituents of detergent
powder was made. A survey of users of the product was carried out to find out the
functions and properties expected by them and the worth of each function as judged
by them. Five important factions of the detergent power and corresponding worth
of each function are shown in the following table. Five constituents (A, B, C, D &
E) of the powder producing positive effect on the functions shown are also given
along with % cost of each constituent as compared to the total cost of the powder.
The ratio of worth (column 4) to cost (column 5) determines the 'VALUE' and is
shown in column 6. The ranking of each constituent, the I least value being shown
as No.1 is indicated in column 7. The proper approach to value analysis will be to
find out cheaper alternatives of the constituent 'E' which is ranked as No.1 and then
to take up that at No. II and so on. This approach will result into maximum
advantage with the same effort.

Evaluating Materials Management
Performance & MIS
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:
* Operating costs including maintenance and the reduction of functional
operating expenses but excluding salaries and training expenses.
* Materials procurement and availability, that is, materials are made
available at the lowest ultimate cost, optimising and reducing purchase
prices and transportation costs and improving vendor and carrier
performance service.
* Records and reports, which must be accurate and timely.
* Customer service.
* Cost reduction and the fact that materials management is one of the few
functions where many savings can be translated directly into profit.
* Management controls, that is, establishment of proper controls and feed.
back to determine problem situations, report them to management &
correct them.
* Utilisation of facilities.
Criteria for Success of Materials Management

The criteria for successful materials management performance vary from
company to company as do objectives, functions, organisations and activities. The
overall criteria must include meeting objectives and plans, meeting and improving
standards and budgets and developing a materials attitude through out the
company. Most important ratios used as criteria of evaluation are given below:
(i)Raw Material Inventory - Annual RM consumption
Turnover Ratio (MITO) Average RM Inventory

Evaluation Materials Management Performance & MIS 125

Average Inventory is calculated by taking average of the opening
stock and closing stock during the year or the average of the stock
balance on last day of each month in a year.
Performance is calculated by comparing the Current Ratio or
Index with the previous years. Reasons for poor performance should be
identified and classified into avoidable and unavoidable. Efforts should
then be made to control avoidable causes in the next year.
Management Information System (MIS)
To evaluate performance effective information/reporting system
should be introduced. There are basically two major functions under
materials management 'Purchase' and 'Stores'. The information required
to carryout these functions effectively is as follows:-

126 Materials Management

Information for Purchase Management

A. Planning Information
* Line Organisation to be served.
* Details of items to be purchased with specifications.
* Possible sources of supply.
* Prices.
* Delivery times.
* Reliability-past performance.
B. Control Information
* Orders to be placed.
* Orders actually placed.
* Delay in placing orders.
* Materials expected to be received.
* Materials actually received.
* Delays in receipt of materials.
* Problems.
* Actions.
Information for Stores Management
A. Stores Planning
* Stock categories, classification, codification.
* Movable and non-movable items.
* A, B & C categories.
* Past Consumption.
* Levels of Maximum.
Re-order Point
Re-order Quantity
* Cycle time, cycle time consumption
* Lead time consumption.
B. Stores Control
* Actual stock vs. predetermined levels.
* Overstocking or stock outs-Actual, Anticipated.
* Problems.
* Action.

Evaluation Materials Management Performance & MIS 127

To evaluate performance and exercise effective controls the information
required at different levels is different. The type of records, information and
frequency of reporting at three levels 'Top', 'Senior', 'Operating' is as given below:

Operating level
A. Purchase Report (Weekly)
1. Item 5. Enquiry tender floated on

2. Code No. 6. Supplies expected on (dates,
3. Indent No., date, received 7. Remarks-problems, Action taken,
Quantity Action required
4. Estimated price
B. Store Record (Weekly)
1. Item 7. Reorder level (Qty.)
2. Code No. 8. Material expected
3. Present stock (Qty. Value) 9. Delay in receipts
4. Present stock will last till 10. Stock outs-present and anticipated
5. Maximum level (Qty.) 11. Remarks-problems, Action taken,
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.
B. Stores Report (Monthly)
1. For main categories:
A - items stocks (value) - this month compared to past month and
Maximum, minimum level.
B -
C -
2. Information for exception items only (minimum and reorder level
3. Anticipated delays in receipts stock outs.

Materials management

5. Remarks-Problems, Action taken, Action required

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
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.

Computerised Materials Management
The Computerised materials management system has a major purpose that is
to make available to the materials manager upto-date information so that the
manager can do a more effective and economical job of purchasing and managing
the flow of materials.
The Objectives
The objectives of computerisation of the materials management system are:
1. To ensure availability of materials when they are required.
2. Reduce internal lead time in procurement through reports like pending
purchase requisition report, etc.
3. To maintain the inventory at a desirable level for all items to avoid
overstocking as well as stock-out.
4. To provide selective control statements like low stock items, high stock
items, non-moving items,
ABC classification, etc., so that inventory can be effectively controlled.
5. To provide advance intimation to purchase department or initiating
procurement action through Purchase Indent listing.
6. To reduce external lead time by reporting pending purchase orders so that
expediting can be taken up.
7. To serve user departments like Stores, Accounts & Purchase with
appropriate information so that they perform their functions effectively
and efficiently.
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.
There are three main information user department :
1. Purchase Department
2. Stores Department
3. Accounts Department
Purchase Department

Report Frequency

1. Purchase Indent List Weekly
2. Pending Purchase Requisition Report Monthly
3. Pending Purchase Order Report Monthly
4. Purchase Orders Raised During Month Monthly
Each of the above reports contains the following information items.
The Purchase Indent List
1. Item Code
2. Item Description
3. Safety Stock Level
4. Maximum Level
5. Class
6. Units

Computerised Materials Management System 131

7. Re-order Level
8. Quantity on Hand
9. Quantity on Order
10. Order Quantity
11. Lead Time (in weeks)
12. Action Taken
The Pending Purchase Requisition Report

1. Purchase Requisition Number
2. Purchase Requisition Date
3.Receipt Date 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
The Pending Purchase Order Report

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
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

The Purchase Orders Raised During Current Month Report

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

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

Computerised Materials Management System 133

Stores Department:-

Reports Frequency
1. Stock status and consumption report Monthly
2. Low stock item report Weekly
3. High stock item report Monthly
4. Non-moving item report Yearly
5. ABC classification Yearly

Stock Status & Consumption Report
1. Item Code
2. Item Description
3. Unit
4. Safety Stock Level
5. Maximum Level
6. Quantity on Hand
7. Unit Price
8. Consumption Quantity for Month
9. Consumption Value for Month
10. Year to Date Consumption Quantity
11. Year to Date Consumption Value.

Low Stock Item Report
1. Item Code
2. Item Description
3. Class
4. Current Year Average Monthly Consumption Quantity
5. Unit of Measure
6. Lead Time
7. Safety Stock Level

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

High Stock Item Report
1. Item Code
2. Item Description
3. Class
4. Current Year Average Monthly Consumption Quantity
5. Unit of Measure
6. Lead Time
7. Safety Stock Level
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

Non-moving Items Report
1. Item Code
2. Item Description
3. Class
4. Units
5. Lead Time
6. Safety Stock Level

Computerised Materials Management System 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.


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
1. Consumption Variance Report
2. Department wise Material Consumption Report Monthly
Consumption Variance Report
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
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

Computerised Materials Management System 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, the input is taken predominantly from original
documents thus avoiding duplication of work.
The modus operandi used for designing the input formats is
1. Identification of data elements to be collected.
2. Grouping them in logical categories based on:
3. Hierarchical arrangement of data items.
4. Designing detailed layout of input forms keeping in mind all aspects of
forms design.
5. Identifying the source of collection of input forms, its movements and its
6. Testing the forms with the users and incorporating their suggestions.
Based on this approach the various input forms that can be designed are as
1. Purchase Requisition Form 5. Item Master Form
2. Purchase order Form 6. Supplier Master Form
3. Stores Receipt Voucher Form 7. Account Master Form
4. Stores Indent/lssue Voucher Form 8. Department Master Form
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

Purchase Requisition Form
Source: Requisitioning Department
Storage: Requisitioning Department, EDP, Purchase

SI. Input Elements

Purchase Requisition Number
2 Purchase Requisition Date
3 Department Code
4 Item Code
5 Expected Date
6 Unit of Measure of Receipt
7 Quantity Requested
8 Date of Receipt -Technical
Purchase Order Form
Source: Purchase
Storage: Purchase, Supplier, EDP

SI. Input Elements
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

Computerised Materials Management System 139

S1. Input Elements
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

140 Materials Management

Stores Indent/Issue Voucher Form
Source : Indenting Department
Storage: Indenting Department, EDP, Stores

SI. Input Elements
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
Item Master Form
Source: Stores
Storage: Stores, EDP

Sl. Input Elements
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

Computerised Materials Management System 141

Sl. Input Elements
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
Supplier Master Form
Source: Purchase
Storage: Purchase, EDP

Input Elements
1 Supplier Code
Supplier Name

3 Address

142 Materials Management

SI. Input Elements
4 Address
5 Address
6 City
7 State
8 Country
Account Master Form
Source: Accounts
Storage: Accounts, EDP

SI. Input Elements

1 Account code
2 Account name
3 Year to month consumption value
Department Master Form
Source: Stores
Storage: Stores, EDP

SI. Input Elements
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
Computerised Materials Management System 143

(2) Computer-user Dialogue: The communication between the computer and
computer user. In this context an user-friendly system was designed that
had the following main characteristics:
1. System tells user what to do next
2. System allows user to change or edit entry
3. System takes only correct entry and informs user of errors
4. User need not remember anything to use system
5. Gives user understandable error messages
6. Apart from Alphanumeric' keys, arrow keys, 'Esc' key and enter key
no other key need be used by user
7. Typing effort is reduced by need to enter only codes and not
description or names.
Purchase Requisition Form
It originates from the Department requesting for material in Triplicate-one
copy is filed by Department, one to Technical department the third to EDP. From
Technical Department the Purchase Requisition after processing is sent to Finance
and finally it is sent to Purchase. But at every stage intimation regarding the
receipt of Purchase Requisition and the Date of receipt at Technical Department,
Finance Department and Purchase Department. Is sent tos EDP. And finally
Purchase Department after raising Purchase order for Purchase Requisition closes
the Purchase requisition and sends to EDP after updating the Purchase Requisition
status. EDP for updating sends Purchases dept. copy of Purchase Requisition back
to Purchase Department.
Purchase Order Form
The purchase order form originates from Purchase in Triplicate. One goes to
supplier, one is filed & the other goes to EDP. EDP enters details in system and
files Purchase order.
Stores Receipt Vouchers
This note originates from stores in Quadruplicate and on inspection of
material it is updated, one copy is filed and two copies along with bills received
from supplier is sent to Purchase and the other copy to EDP. EDP enters details of
SR V & files same. Based on supply of materials Purchase cl()1ies Purchase
order-line and indicates same on SRV and sends one copy to EDP. EDP closes
Purchase order line in SR V and sends back to Purchase.
144 Materials Management
Stores Indent/Issues Vouchers
This originates in Triplicate from Department Indenting for material and
brought to stores. After issuing goods and entering in SIV, one copy is filed in
Stores, another is filed by Department and the third copy is sent to EDP. EDP
enters details of SIV in system and files same.
Item Master Form
This form originates from Store in duplicate, one is filed and other is sent to
EDP, where details are entered in system and form is filed.
Supplier Master Form
This form originates from Purchase in Duplicate, one is filed and other is
sent to EDP, where details are entered in system and form is filed.
Account Master Form
This form originates from Accounts in duplicate one is filed, and the other is
sent to EDP, where details are entered in system & form is filed.
Department Master Form
This form originates from Accounts in duplicate, one is filed, and the other is
sent to EDP, where details are entered in system and form is filed.
The two aspects that are kept in mind while designing the files are:
1. To facilitate creation and maintenance of files
2. To optimize storage and retrieval time and cost
There are basically three kinds of files in the system
1. Master Files
2. Transaction Files
3. Intermediate Files Created for Reporting Purposes while
designing the files three rules are followed.
1. Removing repeating fields
2. Dependent fields in the record must be dependent on the
entire key expression
3. Dependence among dependent fields are eliminated
Computerised Materiel/s Management System 145

This resulted in the following Database files:

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. Purchase Requisition File PREQMAS
2. Purchase Order-Header File POPENDH
3. Purchase Order-Trailer File POPENDT
4. Receipt Voucher Transaction Header File RCTTRNTH
5. Receipt Voucher Transaction Trailer File RCTTRNT
6. Issue Voucher Transaction-Header File ISSTRNH
7. Issue Voucher Transaction-Trailer File ISSTRNT
8. Vendor Transaction Rating File VENDOR
9. Stock Valuation File STKVAL
Backup Files
1. Purchase Requisition File PREQTRN
2. Purchase Order-Header File POTRNH
3. Purchase Order-Trailer File POTRNT
4. Receipt Voucher Transaction Header File RCTH
5. Receipt Voucher Transaction Trailer File RCTT
6. Issue Voucher Transaction-Header File ISSH
7. Issue Voucher Transaction-Trailer File ISST

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. Master File Maintenance
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.

Function of the Menu Choices
Data management choices
Under this there are further 5 choices, relating to the long different
transactions that occur on a daily basis and the last one allowing user to exit to
previous menu namely Main menu. These choices are:
1. 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
Computerised Materials Management System 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
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
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 Materials Management

3. Monthly Pending Purchase Orders Report
4. Monthly Purchase orders raised during month report
5. Exit
The first four choices give the user the choice of printing the report directly
and the last i.e. EXIT allows the user to return to the previous menu namely the
Reports menu.
Stores Reports
The choice of stores Reports gives a further choice of 6. They are:
1. Monthly Stock Status and Consumption Report
2. Weekly Low Stock Item Report
3. Monthly High Stock Item Report
4. Yearly Non-moving Item Report
5. Yearly ABC Classification
6. Exit
The first 5 choices give the user the choice of printing the reports directly
and the last (i.e.) EXIT allows the user to return to the previous menu namely the
Reports menu.
Accounts Reports
This choice further gives 3 choices they are:
1. Monthly Department wise Material Consumption Report
2. Yearly Consumption Variance Report
3.. Exit
The first 2 choices give the user choice to print the reports directly and the
last allows user to exit to the previous menu namely the Reports menu.
Supplier Reports
This choice just gives 2 choices:
1.Supplier List
2. Exit
The first choice gives the user option to print the supplier list and the second
to quit to previous menu i.e. the Report menu.
This choice gives a further choice of 6. They are:
1. Stock Status
2. Itemwise Pending Purchase Orders

Computerised Materials Management System 149

3. Supplierwise Pending Purchase Orders
4. Purchase Orderwise Pending Items
5. Itemwise Supplier List
6. Exit
In the first 5 choices the user is given option to query regarding the various
things like stock status etc., after querying, inbuilt in the program is the option to
print the query if necessary. The last option allows user to exit to the previous
menu namely the main menu.
Vendor Evaluation
This choice gives a further choice of 3. They are as follows:
1. Vendor wise Vendor Evaluation Query
2. Itemwise Vendor Evaluation Query
3. Exit
Similar to the previous queries choice in this Vendor Evaluation menu also
allows user to query Vendor Evaluation-Vendor wise as well as Itemwise and also
gives option to print the query. The last choice allows user to exit to previous
menu namely the main menu.
In addition to the usage of computer in XYZ illustrated above for its
Purchase, Stores and Accounting functions, computer finds its application in the
following materials management functions also:

1. Material Requirement Planning
2. J .LT. Systems
3. Production Scheduling & Inventory Control
4. WIP Accounting
5. Stores Layout & Materials Handling
6. Materials Budgeting

Case Studies & Business Games
A list of 100 items purchased in a year by a company is attached.
Determine the necessary figures to permit a classification of these items in
three classes (A, B or C).

Draw the ABC Chart

Determine the policies to be undertaken in each of these cases in
(a) Frequency of orders to be placed
(b) Closeness of controls
(c) Lead times
(d) Record keeping
(e) Concentration of effort by Purchase Department.
No. 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 5.50 12,000 66,000
6. 891 A 6.25 1,000 6,250
7. 672 N

150 13,125
8. 124 G 8.00 800 7,200
9. 126 G 6.30 300 1,890
10. 81 P

1,750 35,000
11. 94 P 0.24 500 120
12. 96 A 9.41 20,000 188,200
Contd ...

Case Studies and Business Games 151
No. Item 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 5 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

152 Materials Management
No. Item Cost / Annual Yearly
piece (Rs.) 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 ...

Case Studies and Business Games. 153
No. Item 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 5
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 4
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 ...

154 Materials Management

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

For a given product known as "edge lines" , Krishan Electrical Pvt.
Ltd. wishes to have a minimum inventory level established.
Purchases of edge liners are made in lots of 1000, and purchase orders are
placed once every month, on the first day of the month. Thus the usage is an
average of 1000 edge liners a month. The maximum rate of usage is estimated to
be 1350 liners per month.
Part "A"
Assuming this estimate of 1350 to be realistic, determine the minimum
safety level implied under these circumstances. (The recorder level is 400 liners.)
Draw a graphic analysis of this problem to an exact scale, and determine
answer by same method.
Part "B"
Having established the safety level required above, determine the following
information. Assuming the rate of usage is maintained at 1000 pieces per month
and a new order of incoming material is expected to be late in arriving. Determine
how long the operation can continue without interruption because of shortage of
parts. Express answer in decimal part of a month.
Part "C"
Assuming the rate of consumption falls from 1000 items a month to 700 a
month, and the safety level and time for procurement remain the same,


Case Studies and Business Games 155

What new level of recorder may be established.
The maximum rate of consumption anticipated is 1000 per month under this
revised procedure. The purchase quantity is now 700 items.
Part "D"
If the lead time is reduced to half of its present size, determine the new
recorder level which may be established.
A. 1. Universal Equipment Manufacturers is a large multi-divisional company
having diversified lines of manufacture in their different divisions as
indicated below:
(a) Steel structures for bridges, sluice gates, cranes, railway wagons, etc.
(b) Lifting and hoisting machinery for cranes/gates, etc.
(c) Railway wagons and bridges
(d) Road rollers
(e) Mining and haulage machinery
2. The number of personnel working in this company is about 10,000.
3. The company has been in existence for quite a few decades and had been
making profits earlier. During the past few years, however, the company
has been incurring/losses.
4. The investment in this company is nearly Rs. 100 crores. In order to
maintain growth rate and competitiveness, old equipments are being
replaced, and balancing facilities added with a planned investment of Rs.
5 crores.
5. The materials management set up is rather fragmented. Most of the
purchases are being done by each of the divisions. Only a few items are
being purchased centrally. There is no procedure for enlisting the
suppliers. The company has, however, drawn up a list of number of
suppliers for about 75 items.
6. Shri Kutty, who has taken over as the Chairman-cum-Managing Director
appreciates the importance of source selection/source development and is
quite concerned. He discussed the position with his Finance Director and
decides to appoint a consultant.
7. Give your advice as a consultant.


Materials Management

1. Dynamic Enterprises is a large multi-unit concern in private sector

Manufacturing various components of machinery.

2. The Head Office of the company gives sufficient importance to the

materials management discipline and has formulated policy

guidelines on the subject for their various divisions .

3. In the matter of vendor registration/vendor rating, their policy

contemplates issue of advertisement in all leading newspapers once

in three years, for registration of suppliers listing out the various

types of purchases that may be made during the period of next three

Years. The various hand-books could also be referred to for this

Purpose. m case of imported items, trade representatives of the

concerned foreign country in India would also be addressed. The

list of suppliers thus compiled, should be scrutinised and approved

by a committee consisting of Quality Control, Materials Manage-

ment and Finance Representatives from the angles of quality rating,
delivery, price and performance. While a general survey may be

made once in three years, the list would be kept up-to-date with

Deletions and additions as they come to the notice from time to time.

So long as these suppliers on the approved list are contracted and

quotations obtained, the purchase could be considered as if it was

an advertised tender.

4. For purposes of vendor evaluation, the head office felt there ought

to be a comprehensive computerised system for vendor rating

whereby prior to closing of the purchase order file, when an order

is considered executed, the concerned purchase officer shall raise
an order performance sheet which will give material code wise list

of vendor performance of all the vendors against all the purchase

orders and subsequently, there would be an evaluation sheet which

would be available to the concerned purchase officer as and' when

a further tender is to be issued in order to decide the vendors which

Could be addressed.

5. The various factors which had been considered for evaluation were

quantity factors giving weightages for deviations, rework, rejec-

tions, quantity and delivery ratings, indicating the number of days

for which delivery was delayed as well as quantity supplied, and

price ratings, service ratings, etc.

6. The policy and the system for evaluation which was proposed may

be discussed.

1. Associated Engineers is a new company manufacturing transport-

tation equipment.

Case Studies and Business Games


2. Shri Raman, the Chairman-cum-Managing Director is quite alive to
the various Government policies and has appointed Shri Kundu as
Ancillary Development Manager for promoting ancillary units. His
effort is to standardise suppliers as far as possible. He has,
accordingly, advised his Purchase Manager, Shri Tikku, to work in
close co-ordination with the Ancillary Development Manager and
promote ancillaries.

3. Shri Tikku who was earlier working in another concern takes the plea
that his past experience in regard to ancilliarisation has not been happy
and whenever ancillary unit is set up there is constant difficulty and
problem regarding the execution of orders, fixation of prices, delivery
schedules, etc. Consequently, he is totally against ancillarisation and
tries to convince the CMD that ancillarisation is not a good
proposition. Give your, comments.

D. 1. Machinery & Equipment Manufacturers, a concern in Haryana, is
manufacturing various types of equipments required by the fertiliser
industry. The range of items held by them in their stores inventory is
roughly 50,000. The procurement of these items is being made through
several hundred suppliers.

2. Shri Tuli, the Purchase Manager of this concern, recently attended a
seminar on materials management, where considerable stress was
given towards buyer-vendor relationship and how such relationship
could result in cost reduction.

3. Shri Tuli, on return to his company, suggested to the CMD that he
would like to invite all the vendors on his list of approved suppliers for
a get-together with a view to promote good relations. The CMD did
not approve the proposal. The Purchase Manager, therefore, decided
that he would write to all the vendors on the list of approved suppliers
and sent the following letter:

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

We assure you that any suggestions/recommendations you make will be
given due and careful consideration by us. I am convinced that such an exercise
is very necessary and will be mutually advantageous.
Yours faithfully,
You may discuss the situation and formulate future strategy.
An automobile manufacturing company is engaged in production of both
passenger and commercial vehicles. There are huge production facilities.
Sub-contracting is an essential feature of all automobile manufacturers as
it is not possible to make all components that go onto .an automobile. The
company does sub-contract a number of items from various sources. They find
it necessary to sub-contract for the following reasons:
1. Finds it cheaper to buy from outside sources.
2. A better quality product is available outside.
Information about potential sub-contractors is obtained from the following
1. Industrial directories.
2. Trade exhibitions and fairs.
3. Supplier catalogues.
4. Telephone directories.
5. Small Scale Service Institutes.
6. Industrial journals and papers.

The different parameter on the basis of which sub-contractor is selected
1. He should be financially strong.
2. The sub-contractor should have a good image and reputation in the
When a small volume of an item is to be purchased, the entire amount is
obtained from a single sub-contractor. For press components, upto 2000 number,
a single sub-contractor is used. For more than 2000 numbers,

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 sub-
contractors. 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-con-
tractor, 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
with its sub-contractors:
1. Reliability of subcontractors is low. Assured supply of components
within a specified time frame is not always fulfilled.
2. The quality of products supplied by sub-contractors is sometimes low
leading to low life effecting the quality of the end product.
3. Spurious materials are sometimes used in the manufacture of items
purchased from sub-contractors. They are sometimes even used
knowingly with a mischievous intention of lowering the cost of
product at the expense of quality.
4. The financial status of some sub-contractors is not stable. When an
order is placed the sub-contractor is found to be in a good financial

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
lead time calculations in order to prevent stoppages in production. This lead
time can be effectively reduced leading to lower inventory holding cost, if the
subcontractors are reliable.
Previously, in the late 1960's there was a need to develop sub-con
tractors by the company. But now, a number of small scale industries are willing
to produce on their own without taking an y financial assistance from its buyers.
The Government is also giving a number of incentives to encourage such
industries in setting up factories to cater to the needs of the industry. With the
present trend continuing the day is not far off when the demand to sub-contract
items will not be greater than the number of sub-contractors leading to increased
competition and improved quality of service and product. With the screwdriver
technology having already entered India, the growth of small scale sub-
contractors, each specialising in his own product, is likely to mushroom in the
years to come.
Points for Discussion
1. Do you find some more reasons necessary to sub-contract.
2. List down some more parameters of selecting a sub-contractor.
3. Three main factors of evaluating sub-contractors are 'COST',
'QUALITY' & 'DELIVERY". List down various quantitative and
qualitative sub-factors and weightages to prepare a suitable model of
evaluating sub-contractors.
4. Discuss the present and anticipated problems with sub-contractors and
formulate strategies.
M/s Pioneer Engineering Co. (Pvt.) Ltd., is a medium size organisation
located in Punjab manufacturing electric motors, pumps and compressors. The
company was established in 1974. In all, about 10 different sizes of motors, 5
types of pumps and 2 different types of compressors are being manufactured.
The annual turn -over during 1986-87 was approximately y Rs. 5 crores. The
markets for their products extend all over India and a small consignment was
shipped abroad recently. The company expects an export order of nearly Rs. 50
lakhs during 1988.
The organisation is headed by the Managing Director who reports to the
Board of Directors. The Production Manager looks after the stores in
Case Studies and Business Games 161

addition to his production responsibility. The Office Manager has got an
Assistant Manager who is responsible for purchasing. Ail the purchase orders
are to be processed by the Office Manager through the Chief Accounts Officer
and finally signed. by the Managing Director. The Sales Manager has
frequently pointed out that the promised delivery dates are not kept up by
production and the Production Manager believes. That delay have been due to
non-availability of materials and sub-contracted items in time.
The Board of Directors met regularly once in three months to discuss the
various aspects of the functioning of the company and sometimes extra-
ordinary meetings are also held to discuss special matters. Last month, an extra
ordinary meeting was held to discuss the financial position of the company.
The Managing Director proposed that they should go in for further expansion
to capture the export market. He also proposed that additional capital required
for this purpose may be obtained by inviting deposits from the public.
During the Extra-ordinary meeting, one of the Directors pointed out that
they should first of all investigate and find out the reasons for the losses being
made by the company. He said, "The inventory has been going up year after
year and now stands at nearly Rs. 1.5 crores. This has not only locked up our
capital but also resulted in the increased cost of production". The Managing
Director maintained that the increased inventory was essential to cope up with
the expansion in Sales during the last 3 years. There were heated discussions
and finally the Chairman appointed a committee of two executives to carry out
a thorough investigation of the position of inventories held and report.
The Executive Committee has collected basic data and the information is
summarised in Annexure-A. The committee has now called for a meeting of all
the executives (totaling 8) in the organisation to discuss the data/information
before them in order to formulate a plan of action for further data collection,
investigation and reporting.
The Agenda for the meeting stands as follows:
(i) Analysis of available data/information in order to locate weaker areas.
(ii) Review the problem of inventories and draw-up specific lines of
approach for further data collection, analysis, scrutiny and a plan of
(iii) Any other issue concerning inventory planning, purchasing and stores.
(A Group Discussion on above Agenda follows)

162 Annexure-A

I. Extracts from Annual Statements of Accounts

Items In Lakhs of
1986-87 1985-86 1984-85
1. Profit before tax (-)50 (-)30 (-)10
2. Total Assets 650 630 540
3. Current Liabilities 250 250 200
4. Current Assets 385.5 366 269.7
4.1 Cash 0.5 1 1.70
4.2 Closing Stock:
(a) Finished Goods 80 60 60
(b) W.I.P. 175 185 127
(c) General Stores 130 120 80
4.3 Opening Stock:
(a) Finished Goods 60 60 60
(b) W.I.P. 185 127 139
(c) General Store 120 80 60
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. Selling & Distribution 100 95 91.5
II. Data Information Gathered
1. There are approximately 10,000 items including items related to
production, maintenance & repairs, and office supplies. An analysis of the
consumption revealed the following pattern:
Items consumed during 1985-86
Items not consumed at all during 1985-86
Items not consumed at all during 1986-87
Items not used during
1985-86 and 1986-87
3,300 items worth
Case Studies and Business Games 163

No. of issue requisitions in 1986. 30,000
No. of purchase orders placed in 1986-87. 3,800

2. An ABC analysis of moving items was made on the basis of:
A items Above Rs. 10,000
B items Rs. 1,000 to 10,000
C items Below Rs. 1,000
The total annual consumption was Rs. 160 lakhs. The analysis showed for the year 1986-87:

No. of items %age of items Annual usage %age of value
A 268 4% 120 75%
B 938 14% 32 20%
C 5494 82% 8 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
A 120 Lakhs 80 Lakhs
B 32 Lakhs 16 Lakhs
C 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
(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

Analysis showed the following inventory status of major categories

Note: Categories 1 to 8 are production items; 9 to 12 maintenance and repair items;
13 office supplies; 14 and 15 miscel1aneous consumable items.

5. The Accounts Department had prepared a list of individual items with more than 12 months; stock
and which represented stock valued at over R'S. 50001- each at the last annual stock-taking. There
were 250 such items totaling approximately Rs. 47 lakhs. About 100 items represented stocks
sufficient to last for 2 years to 5 years and 50 items represented stocks sufficient to last over 5 years,
on the basis of 1986-87 consumption.
6. The company is not inventory-conscious but it now finds that its inventory-carrying-charges are 26
percent per annum. They have also not been able to dispose off non-moving items or excess stock of
items consumed slowly, partly due to the management policy of trying to get very high prices for the
surplus and excess materials and also because all decisions for disposal had to be taken at the board
level. Another important reason for not disposing was due to Production Department's forecast year
after year that the stores will be consumed during the following year.
7. The company-sub-contracts heavily, manufacturing only 25 percent of the components at its own
works. By value 67 percent represent the sub-contracted components, and 33 percent manufactured
components. Now the Company is about to expand its works. By 1988-89, it expects to produce
about Rs. 200 lakhs worth components.
8. At present, the quality, delivery, and price of the sub-contracted components are not satisfactory.
Because of heavy rejections and irregular delivery, very large stock of sub-contracted components

Case Studies and Business Games 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 sup-
posed to be at the same level.
III. Inventory Ratios

Ratios Figures in lakhs unless otherwise specified
1986-87 1965-86 1984-85
1. ROR (-) 12.5 (-) 7.4 (-)3
2. Working Capital 135.5 116 68.7
3. Average Inventory:
3.1 Finished Goods 70 60 35
3.2 W.I.P. 180 156 133
3.3 General Stores 125 100 70
General Stores in Months
9.3 7.8 5.9
5. Increase in Sales over previous 13.6% 7.3% -
6. Increase In Inventory over pre-
vious year:
6.1 Goods 16.-6% 71.3% -
6.2 W.I.P. 13.3% 17.2% -
6.3 General Stores 25% 42.8% -
7. Turn Over Ratios:
7.1 R.M.I.T.O 1.28 1.54 2
7.2 F.G.LT.O 7.86 7.83 7.64
7.3 W.LP.LO 2.5 2.40 2.47

166 Materials Management

Methods for Calculation Ratios

Case Studies and Business Games 167

Modern Breweries Ltd. located at Delhi is engaged in the manufacture of alcoholic drinks. The
annual turnover is of the order of Rs. 360 lakhs. The company carries an inventory of about 1000 items.
One of the items under study here, is packing cartons made of paper board. These cartons are used for
packing and despatch of beer bottles.
The cartons are supplied by Ajit Trading Co. located at Saharanpur (V.P.). The supplies are by lorry
loads of 10000 cartons.
The following is the COST DATA:
Cost per Carton : Rs. 3.00 (including taxes, transport cost, etc.)
Cost of Holding : 5 Paise per cartons per month
Cost of Ordering : Rs. 200/- per order
Cost of Stock Out : Rs. 10,000 per month
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.
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

PRODUT: Paper Cartons Avg. Consumption : 15000 Cartons
Peak Period : 5th, 6th & 7th months

Procurement Period: 2 month 1 month =25000 5000 Cartons
Per month
Lorry Load: 10,000 Cartons Lean Period : 1 st and 2nd month
(5000 1000 per month)
Shut Down : 3rd month

Buffer Stocks :
1st Year

Purchase Order
Bal on Purchase Order
Order on
No. Qty. Cum. No. Qty. Reed. No. Qty. Cum. No. Qty Retd.
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: Policy

Buffer Stock:


Case Studies and Business Games 169
Store Bin Card

1st year IInd Year
Month No. Reed. Issue Ball in Mooll1 No. Reed. Issue gal in Remarks
Stock Stock
0.5. B.F.
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
6. 6.
7. 7.
8. 8
9 9.
10. 10.
11. 11.
12. 12.
c.s. Total

Average Inventory =________________pieces, ___________________ Rupees as %
to Cons. =
I Stock Holding Cost =

II Ordering Cost =

III Stock-out Cost =

IV (Received__Consumed) x Rs.3/- =

Total Rs.

Materials Management

Data for Use of Empire

Consumption Receipt of Orders


12000 1 & 2
28000 3 & 4
20000 5
15000 6
14QOO 7
14000 8 & 9
6000 10 & 11
6000 12

16000 13 & 14
25000 15 & 16
21000 17
17000 19 & 20
17000 21

Case Studies and Business Games 171

Digvijay Air Conditioner Manufacturing Company (DAMC) is situated in North India supplying Air
Conditioners throughout the country. The company has maximum sales in the northern part as it is more
popular than other brands.
From the sales of previous years it has been established that the sales of Digvijay Air Conditioners
follow a seasonal cyclic pattern which is similar to a sine wave. The market research department has found
that for this year the maximum sales during first half cycle will be 3000 units/month and minimum during
the lean period being 1000 units/month. The total average demand over the year will be2000 units/month.
You have been recently hired as materials manager of the company.
The company executive director has made it clear that he is very much interested in reducing the capital
locked in the inventory because of tight monetary situation.
After going through tile records you have found out that the major component of the air conditioner
is the Compressor unit, which costs Rs. 2000/- per piece. Inventory control of this can substantially reduce
the capital locked up. This compressor unit is being manufactured by M/s Compressors India Limited who
are world leaders in the field and supplied to DAMC at most competitive rates of Rs. 2000/- per piece.
You have decided to install an inventory model for control of stocks of the air compressors.
Formulate your policies and fill in the accompanying sheet. The additional information that may be helpful
to set up the model is given below:

Analysis of Lead Time
3 Months 10% of the time
4 Months 60% of the time
5 Months 30% of the time
Expenses incurred during previous year by stores department:
1.Salaries and wages of staff Rs.2,65,000/-
2.Depreciation/pilferage predundancy of goods Rs.25,000/-
3.Rent paid for the stores building Rs.2,1O,000/-
4.Interest rate charged by bank on capital invested. 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.

Digvijay Air Conditioner Manufacturing Company (DAMC)

Case Studies and Business Games 173
Week Order Quantity Quantity Total C= Con- Balance
Placed in Stores Received A+13 sumption in Stock
during (A) from sup- During E =C-D
Week (if plier (13) the Week
any) (D)

174 Materials Management
Calculation Sheet (DAMC)

A) Inventory Holding Cost
Average Capital locked up in holding inventory =
=Average Stock
x Price /Unit
=Average Stock x 2000/-
... Inventory holding cost = ICC x Average Capital Locked
(A) Rs .................................. .
B) Purchase Order Cost
(a) No. of Purchase orders placed ...................................... .
(b) Cost of placing a purchase order ....................... ........ .
(c) Total cost of placing purchase orders (a x b) ..... ......... .
.. (B) Rs.
(C) Stock out cost
Total No. of units not available =
(sum of all (- ) balances)
Cost of stock out per unit
Total stock out cost
Total Cost: D =A +B +C
= Rs.