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MATERIAL MANAGEMENT

ccem (Raipur)
Unit-1

Integrated materials functions: Integrated materials management, Organizational control, Materials planning &
budgeting, Codification & standardization, Source selection.

INTRODUCTION
Materials Management is simply the process by which an organization is supplied with the goods and services that it
needs to achieve its objectives of buying, storage and movement of materials. Materials Management is related to
planning, procuring, storing and providing the appropriate material of right quality, right quantity at right place in
right time so as taco-ordinate and schedule the production activity in an integrative way for an industrial
undertaking. Most industries buy materials, transport them in to the plant, change the materials in to parts, assemble
parts in to finished products, sell and transport the product to the customer. All these activities of purchase of
materials, flow of materials, manufacture them in to the product, supply and sell the product at the market requires
various types of materials to manage and control their storage, flow and supply at various places. It is only possible
by efficient materials management. The materials requirements planning, purchasing, inventory planning, storage,
inventory control, materials supply, transportation and materials handling are the activities of materials management.
They will be discussed in details in various chapters to follow.
About 20-25 years ago, there was no cut-throat competition in the market to sell the various consumer items
manufactured by different industrial undertakings and the availability of materials to manufacture these items was
not scarce. Therefore, materials management was not thought to be so important and its separate identity in the
organization was not felt. But today it has become an important management activity to streamline production.
Actually before the production begins it is necessary to ensure availability of all the types of materials needed for
production and its supply at the various production centers. Planning, purchasing and scheduling are the main
functions of materials management. It aims at
improved productivity. It is used to reduce the cost, which increases profitability and streamlines the production.
Apart from management of material cost and its supply it helps in its proper utilization, transportation, storage,
handling and distribution. The market research and forecasting both for sales of companys product and purchasing
of various materials required for producing the product are needed at the planning stage. Purchasing, procurement of
materials, transportation, storage, inventory control, quality control and inspection of materials and goods supplied
at various production centers before production are also managed as routine work. Materials handling, packaging,
warehouse

Meaning & definition

Materials management can deal with campus planning and building design for the movement of materials, or with
logistics that deal with the tangible components of a supply chain. Specifically, this covers the acquisition of spare
parts and replacements, quality control of purchasing and ordering such parts, and the standards involved in
ordering, shipping, and warehousing the said parts.
Material management is an approach for planning, organizing, and controlling all those activities principally
concerned with the flow of materials into an organization.
The planning and control of the functions supporting the complete cycle (flow) of materials, and the associated flow
of information. These functions include
(1) Identification, (2) cataloging, (3) standardization, (4) need determination, (5) scheduling, (6) procurement, (7)
inspection, (8) quality control, (9) packaging, (10) storage, (11) inventory control,(12) distribution, and (13)
disposal. Also called materials planning.

Scope of Materials Management

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MATERIAL MANAGEMENT

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The scope of Materials Management varies greatly from company to company and may include material planning
and control, production planning, Purchasing, inventory control, in-plant materials movement, and waste
management. It is a business function for planning, purchasing, moving, storing material in a optimum way which
help organization to minimize the various costs like inventory, purchasing, material handling and distribution costs.

Materials Management's scope:

The scope is vast. Its sub functions include Materials planning and control, Purchasing, Stores and Inventory
Management besides others.
Basically, under its scope are :
1.Emphasis on the acquisition aspect
2. Inventory control and stores management
3.Material logistics, movement control and handling aspect
4. Purchasing, supply, transportation , materials handling etc
5. Supply management or logistics management
6. All the interrelated activities concerned with materials
Materials management can thus also be defined as a joint action of various materials activities directed towards a
common goal and that is to achieve an integrated management approach to planning, acquiring, processing and
distributing production materials from the raw material state to the finished product state.

objectives of MM

The fundamental objectives of the Materials Management function, often called the famous 5 Rs of Materials
Management, are acquisition of materials and services:
1.The Right Quality
2. The Right Quantity
3 .The Right Time
4 . The Right Source
5. The Right Price
From the management point of view , the key objectives of MM are :
To buy at the lowest price , consistent with desired quality and service
1. To maintain a high inventory turnover , by reducing excess storage , carrying costs and inventory losses occurring
due to deteriorations , obsolescence and pilferage
2. To maintain continuity of supply , preventing interruption of the flow of materials and services to users
3. To maintain the specified material quality level and a consistency of quality which permits efficient and effective
operation

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MATERIAL MANAGEMENT

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4. To develop reliable alternate sources of supply to promote a competitive atmosphere in performance and pricing
5. To minimize the overall cost of acquisition by improving the efficiency of operations and procedures
6. To hire, develop, motivate and train personnel and to provide a reservoir of talent
7. To develop and maintain good supplier relationships in order to create a supplier attitude and desire furnish the
organisation with new ideas , products, and better prices and service
8. To achieve a high degree of cooperation and coordination with user departments
9. To maintain good records and controls that provide an audit trail and ensure efficiency and honesty
10. To participate in Make or Buy decisions
Materials Management thus can be defined as that function of business that is responsible for the coordination of
planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as to provide
service to the customer, at a pre-decided level at a minimum cost.

Functions of material mgmt

The broad Materials function has the following as identified and interlinked sub functions:
1. Materials planning and control: Materials required for any operation are based on the sales forecasts and
production plans. Planning and control is done for the materials taking into account the materials not available for
the operation and those in hand or in pipe line. This involves estimating the individual requirements of parts,
preparing materials budget, forecasting the levels of inventories, scheduling the orders and
2. Monitoring the performance in relation to production and sales: Purchasing: Basically, the job of a materials
manager is to provide , to the user departments right material at the right time in right quantity of right quality at
right price from the right source. To meet these objectives the activities undertaken include selection of sources of
supply, finalization of terms of purchase, placement of purchase orders, follow up, maintenance of relations with
vendors, approval of payments to vendors, evaluating, rating and developing vendors.
3. Stores: Once the material is delivered, its physical control, preservation , minimization of obsolescence and
damage through timely disposal and efficient handling, maintenance of records, proper locations and stocking is
done in Stores.
4. Inventory control: One of the powerful ways of controlling the materials is through Inventory control. It covers
aspects such as setting inventory levels, doing various analyses such as ABC , XYZ etc ,fixing economic order
quantities (EOQ), setting safety stock levels, lead time analysis and reporting.

Process of material mgmt:

In its process of materials management has such sub fields as inventory management , value analysis, receiving,
stores and management of obsolete , slow moving and non moving items. The various activities represent these four
functions:
Planning and control
Purchasing
Value analysis and

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Physical distribution

organizational control

The process of establishing and maintaining authority over and throughout an enterprise. The organizational control
process within a larger business typically requires the use of systems that assist a manager in analyzing considerable
amounts of data about how the business and its employees are functioning in order to make appropriate
administrative decisions.

Organizational Control Objectives

Simply put, organizational control is the process of assigning, evaluating, and regulating resources on an ongoing
basis to accomplish an organization's goals. To successfully control an organization, managers need to not only
know what the performance standards are, but also figure out how to share that information with employees. Control
can be defined narrowly as the process a manager takes to assure that actual performance conforms to the
organization's plan, or more broadly as anything that regulates the process or activity of an organization. The
following content follows the general interpretation by defining managerial control as monitoring performance
against a plan and then making adjustments either in the plan or in operations as necessary.
The six major purposes of controls are as follows:
I.
II.
III.

Controls make plans effective. Managers need to measure progress, offer feedback, and direct their teams if
they want to succeed.
Controls make sure that organizational activities are consistent. Policies and procedures help ensure that
efforts are integrated.
Controls make organizations effective. Organizations need controls in place if they want to achieve and
accomplish their objectives.

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IV.
V.

VI.

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Controls make organizations efficient. Efficiency probably depends more on controls than any other
management function.
Controls provide feedback on project status. Not only do they measure progress, but controls also provide
feedback to participants as well. Feedback influences behavior and is an essential ingredient in the control
process.
Controls aid in decision making. The ultimate purpose of controls is to help managers make better
decisions. Controls make managers aware of problems and give them information that is necessary for
decision making.

Many people assert that as the nature of organizations has changed, so must the nature of management controls.
New forms of organizations, such as selforganizing organizations, selfmanaged teams, and network organizations,
allow organizations to be more responsive and adaptable in today's rapidly changing world. These forms also
cultivate empowerment among employees, much more so than the hierarchical organizations of the past Some
people even claim that management shouldn't exercise any form of control whatsoever, and should only support
employee efforts to be fully productive members of organizations and communities. Along those same lines, some
experts even use the word coordinating in place of controlling to avoid sounding coercive. However, some
forms of controls must exist for an organization to exist. For an organization to exist, it needs some goal or purpose,
or it isn't an organization at all. Individual behaviors, group behaviors, and all organizational performance must be in
line with the strategic focus of the organization.

The Organizational Control Process

The control process involves carefully collecting information about a system, process, person, or group of people in
order to make necessary decisions about each. Managers set up control systems that consist of four key steps:
1.

2.

3.

4.

Establish standards to measure performance. Within an organization's overall strategic plan, managers
define goals for organizational departments in specific, operational terms that include standards of
performance to compare with organizational activities.
Measure actual performance. Most organizations prepare formal reports of performance measurements that
managers review regularly. These measurements should be related to the standards set in the first step of the
control process. For example, if sales growth is a target, the organization should have a means of gathering
and reporting sales data.
Compare performance with the standards. This step compares actual activities to performance standards.
When managers read computer reports or walk through their plants, they identify whether actual
performance meets, exceeds, or falls short of standards. Typically, performance reports simplify such
comparison by placing the performance standards for the reporting period alongside the actual performance
for the same period and by computing the variancethat is, the difference between each actual amount and
the associated standard.
Take corrective actions. When performance deviates from standards, managers must determine what
changes, if any, are necessary and how to apply them. In the productivity and qualitycentered
environment, workers and managers are often empowered to evaluate their own work. After the evaluator
determines the cause or causes of deviation, he or she can take the fourth stepcorrective action. The most
effective course may be prescribed by policies or may be best left up to employees' judgment and initiative.

These steps must be repeated periodically until the organizational goal is achieved.

material planning and budgeting

Production and manufacturing are terms used to describe a set of processes used for converting raw materials into
finished products. These raw materials, or inputs, undergo number of stages of conversion, with each stage using a
particular production, or manufacturing, process, and at each stage, the material(s) undergoes conversion and

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MATERIAL MANAGEMENT

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assumes a different form. The effective management of production and manufacturing must provide finished, or end,
products of the required quality, and in appropriate quantities to satisfy the demand for the products, at the desired
times and at a reasonable cost. Thus production and manufacturing planning and control functions are concerned
primarily with the aspects of quantity or volume, delivery or timing, quality and cost. Before going any further, we
must note the fine distinction between production and manufacturing.
Technically, manufacturing and production are the same, but whereas the term
manufacturing can be used for any kind of production, it is generally used in cases where discrete products are
produced. Such products are usually engineered products like automobiles, aircrafts, refrigerators, machine tools,
heavy, medium and light machines, televisions, radios and appliances, and manufacturing is the process of
transformation of raw materials into these discrete engineered products. These products are distinctly different from
bulk materials and products such as steel, fertilizer, chemicals, cement and pharmaceuticals. The important point
here is that material in various forms, such as ores, raw stock, raw materials in the form of bars, plates, sheets,
angles etc., purchased components and subassemblies and in-house manufactured component and subassembly, is
the essential input, and production of bulk materials and manufacturing of discrete products can only be carried out
effectively if, and only if, the requirements of various materials are adequately planned, budgeted and controlled.
Material planning and budgeting is the starting point and the most important activity of materials management. If the
planning of the requirements of various material inputs is either wrong or untimely, then the functions of
manufacturing planning and control are most adversely affected. Materials planning deals with a number of critical
Questions, which include the following:
i)whether to make a component/subassembly or an intermediate product, in house,
or buy from an external vendor/supplier?
ii)How much to order? Or how much to order every time an order is placed?
iii)When to order? Or how frequently to place orders for that material?
Moreover, the amount of order will depend on the stock, or inventory, in hand and on order. The elements of the task
of materials planning and budgeting for production of bulk materials and products differ (and at times quite
significantly) from that for the manufacture of discrete products. The procedures and algorithms used for planning,
budgeting and control are also somewhat different. In this unit, we will discuss the various aspects of materials
planning and budgeting in manufacturing and production. However, before we can take up the details of materials
planning and budgeting in manufacturing industries, and in continuous process industries engaged in the production
of bulk materials and products, we must briefly discuss the management of production and manufacturing. We must
also identify the links and interfaces of materials planning and budgeting with purchasing and stores, one handmaid
materials control, on the other. The material requirements planning algorithm will be discussed in detail in this unit.

How is codification / cataloguing done?

Codification / cataloguing is basically an identification system for each item of the inventory. There are often three
broad approaches to developing a suitable identification system :
1. Arbitrary approach:
As the name suggests ,this approach does not use any design for codification. Rather , as and when an item is
received by Stores in its receiving bay, a running and unique serialnumber is assigned to it. This number becomes
the code of the item for subsequent use at different stages. While this system is the easiest one to use, it does not
help in scientific management of inventory. For example, say a particular spare part of a machine is received in the

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MATERIAL MANAGEMENT

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stores and is assigned a running unique number 999XXX as its code. Then if the same item is received at any other
point of time the code number shall not be the same i.e. 999XXX as by that time a lot many other items might have
entered into the firm and might also have been assigned different running and unique code making it impossible to
assign a previous code to any item. Arbitrary approach is useable only where perhaps items are non-repetitive and
the inventory management need not be scientific.
2. Symbolic approach:
Also known as intelligent code system it assigns code in a manner that the same item is not allotted two different
codes and also a code, because of its design, can be used to tell many things about an item. The system uses either a
numeric codification system or an alphanumeric or mnemonic system. Under the numeric system, a set of numeric
code (length pre-decided) is assigned to each item where different parts of the code describe, of an item :
A.
B.
C.
D.
E.

Class
Subclass
Unique running number of that item
Location of storage
Suppliers' code etc.

Thus the code of this item shall be a 10 digit code, 2145098344 and it shall remain always so for this item. It shall
then be easy to communicate about this item among the concerned agencies. Similarly, there can be code using
alpha numeric value like AA223B234 with different alpha and numerical value describing some pre-decided
meaning. It is also called mnemonic system. Both numeric and mnemonic systems are symbolic systems as the
codes under it describe a symbol for identifying an item. Since this code has certain logic it is also called intelligent
code and this system is in wide use every where.
3. Use of drawing numbers:
In many firms using complex drawings through which part numbers etc are drawn, use their drawing numbers as
codes to identify an item. Since the drawing number for a firm remains unique , assigning a code on this basis
assumes a unique code for that item and hence confirms the requirement of unique identification for the item.
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)
l)
m)
n)
o)
p)
q)
r)
s)
t)
u)
v)

Process of codification:
Decide if the firm wants to go for arbitrary system, symbolic system or engineering drawing system
List the inventory items
Define the class of items such as (for example...) :
Abrasives
Bearings
Belt and beltings
Bolts, nuts & washers
Brooms & brushes
Cans & containers
Chemicals & reagents
Cloth, leather & rubber
Electricals
Gases
Glasswares
Oil & lubricants
Pipe & Pipe fittings
Photographic items
Safety items
Tools & tackles
Stationeries
Welding materials

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w)
x)
y)
z)

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Rolls
Refractory
Raw Materials
Building materials

Who does the codification?


Normally, it is the custodian who does the codification for the items he keeps in his inventory. However, in firms of
substantial sizes where good number of items are received on regular basis , codification is usually done by a team
consisting of representatives drawn from Stores, user department and Industrial engineering department. Still, for
Automatic procurement items the responsibility lies with the Stores department.
When codification?
Codification identifies an item. Also it acts as a communicating medium for an item among the different users of
that item in whatever way such as Stores, User department, Planning department, Finance, Purchasing etc.
Thus, as soon as the item enters into Stores (if item is a new one), it is codified. Once codified, the same code is
used in the cycle of procurement, throughout and forever.

Standardization

standardization is the process of developing and implementing technical standards. Standardization can help to
maximize compatibility, interoperability, safety, repeatability, or quality. It can also facilitate commoditization of
formerly custom processes. In social sciences, including economics, the idea of standardization is close to the
solution for a coordination problem, a situation in which all parties can realize mutual gains, but only by making
mutually consistent decisions. Standardization is defined as best technical application consensual wisdom inclusive
of processes for selection in making appropriate choices for ratification coupled with consistent decisions for
maintaining obtained standards. This view includes the case of "spontaneous standardization processes", to produce
de facto standards. The existence of a published standard does not necessarily imply that it is useful or correct. Just
because an item is stamped with a standard number does not, by itself, indicate that the item is fit for any particular
use. The people who use the item or service (engineers, trade unions, etc.) or specify it (building codes, government,
industry, etc.) have the responsibility to consider the available standards, specify the correct one, enforce
compliance, and use the item correctly... Validation of suitability is necessary.
Standardization is implemented greatly when companies release new products
or software to market. Compatibility is important for products to be successful; many devices coming out have USB,
Ethernet, or other standard types of connection. This allows consumers to use their new items along with what they
already own.By using standardization, groups can easily communicate through the set guidelines, in order to
maintain focus. The method is made to facilitate processes and tasks; this is why it interlocks with lean
manufacturing.In the context of social criticism and social sciences, standardization often means the process of
establishing standards of various kinds and improving efficiency to handle people, their interactions, cases, and so
forth. Examples include formalization of judicial procedure in court, and establishing uniform criteria for diagnosing
mental disease. Standardization in this sense is often discussed along with (or synonymously to) such large-scale
social changes as modernization, bureaucratization, homogenization, and centralization of society.In the context of
business information exchanges, standardization refers to the process of developing data exchange standards for
specific business processes using specific syntaxes. These standards are usually developed in voluntary consensus
standards bodies such as the United Nations Center for Trade Facilitation and Electronic Business (UN/CEFACT),
the World Wide Web Consortium W3C, the Telecommunications Industry Association (TIA), and the Organization
for the Advancement of Structured Information Standards (OASIS).

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In the context of customer service, standardization refers to the process of


developing an international standard that enables organizations to focus their attention on delivering excellence in
customer service, whilst at the same time providing recognition of success through a third party organization, such
as British Standards Institution (BSI). The International Customer Service Standard (TICSS) has been developed by
The International Customer Service Institute (TICSI) with the objective of making it the cornerstone global standard
of customer service. This standard has the status of an independent standard, managed by The International
Customer Service Institute.
Standards can be:

De facto standards which means they are followed by informal convention or dominant usage.
De jure standards which are part of legally binding contracts, laws or regulations.
Voluntary standards which are published and available for people to consider for use

There are at least four levels of standardization: compatibility, interchangeability, commonality and reference. These
standardization processes create compatibility, similarity, measurement and symbol standards. Standardization in the
context of supplies and materials management it covers the aspect of, any item of no use in the company must not be
bought or made. The make or buy also outlines the standardization process, where bolts can be used, screws might
substitute the bolts so finally that is a standard approach.

Types of standardization process:


Emergence as de facto standard: tradition, market domination, etc.
Written by a Standards organization:
In a closed consensus process: Restricted membership and often having formal procedures for due-process
among voting members
In a full consensus process: usually open to all interested and qualified parties and with formal procedures for
due-process considerations.
Written by a government or regulatory body
Written by a corporation, union, trade association, etc.
Selection of Source (Supplier) -------Purchase procedure (contd...)

'Sourcing' or 'Selection of source/s' is a major challenge for any Purchasing manager. Source of supply of required
materials is basically selection of a suitable supplier. The Purchasing manager has to ensure , getting the material /
service from the right source (one of 5 R).
Once the Indent (also called requisition or Material Procurement Requisition/ MPR) is received in the Purchase
department ,the concerned dealing person scrutinizes it , in respect of :
The complete specifications including drawings, if required

Consumption pattern
Stock in hand and dues in
Budget availability
Availability of all prescribed enclosures and certificates,
Estimates
Inspection guidelines, if any

On being fully satisfied that the next stage activities i.e. sourcing is now called for, the mode of selection of source ,
often called mode of tendering is decided. In many firms , if the number of items is not large then the sources are
known and on the basis of suppliers record the Purchase order can be placed. However, in government firms where
opportunities are supposed to be given to any eligible supplier, tendering is resorted to.Tendering is a process by

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which a potential source is contacted through a notice called Notice Inviting Tender (NIT). The NIT contains the
details of material / service required , the terms and conditions applicable for entering into an agreement with the
seller, offers made in response to NIT by the probable seller (Bidder) , for finally reaching the point of agreement
between the selected bidder and the buyer.
NIT is issued by the buyer and Tender is submitted by the interested bidders /
Tenderers
Depending upon various reasons, mainly emanating from the extent of knowledge about the existence of a source
(supplier), the mode of tendering is decided.
Different popular modes of tendering for selection of a supplier are as below:

Open Tender / Global Tender


Limited Tender Enquiry (LTE)
Single Tender
Rate Contract
DGS&D Rate Contract

Unit-2
Introduction to purchasing systems: Creative purchasing, Purchase systems, Price forecasting, Buying seasonal,
commodities, Purchasing under uncertainty, capital equipment purchase, International purchasing, Imports
substitution-prospects and retrospect, Public buying, Legal aspects in buying, Insurance buying, Buyer-seller
relationship and ethics.

'Purchasing System'

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A method used by businesses to buy products and/or services. A purchasing system manages the entire acquisition
process, from requisition, to purchase order, to product receipt, to payment. Purchasing systems are a key
component of effective inventory management in that they monitor existing stock and help companies determine
what to buy, how much to buy and when to buy it. A popular purchasing system is based on economic order quantity
models.Purchasing systems makes the purchasing process more efficient and helps companies reduce supply costs.
Computerized purchasing systems can cut companies' administrative costs, shorten the length of the purchase cycle
and reduce human error, thereby minimizing shortages. They can also simplify order tracking and make it easier to
manage purchasing budgets by quickly creating expenditure reports.

Purchasing is the function of buying Goods & Services from External Source to an Organisation.
Purchase department buys Raw Materials, Spare parts, services etc as Required by the company or
Organisation.
Purchase management is One of the most Crucial Area of the Entire Organisation. Thus, Needs Intensive
management.
Purchase is the Main Activity in Area of Material management.
Purchasing management is a department in an organization responsible for purchasing activities.
Purchase is Most Important Function in any Organisation.
Purchase management decides profitability of the Company.
Purchasing management also covers the areas of outsourcing and in-sourcing.
Purchasing management is the management of purchasing process, and related aspects in an organization.
Because of production companies purchase nowadays about 70% of their turnover, and service companies
purchase approximately 40% of their turnover.

It is Studied that 1% Saved in the Purchase function Improves the profit of the Company as much as 2 to 3% !!!
The purchasing management department ensures that all goods, supplies and inventory needed to operate the
business are ordered and kept in stock. It is also responsible for controlling the cost of the goods ordered, controlling
inventory levels and building strong relationships with suppliers.
Objectives Of Purchasing Management
I.
To purchase the required material at minimum possible price by following the company policies.
II.
To keep department expenses low.
III.
Development of good & new vendors (suppliers).
IV.
Development of good relation with the existing suppliers.
V.
Training & development of personal employees in department.
VI.
To maintain proper & up to date records of all transactions.
VII.
Participating in development of new material and products.
VIII.
To contribute in product improvement.
IX.
To take Economic "MAKE OR BUY" decisions.
X.
To avoid Stock- out situations.
XI.
To develop policies & procedure

Principles Of Purchasing Management OR (7 R'S)

Buying Material at right QUALITY.


In the right QUANTITY.
From the right SOURCE.
At the right PRICES.
Delivered at the right PLACE.
At the right TIME.
With right mode of TRANSPORT.

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Purchasing Cycle/ System OR Steps In Purchasing


Get Requirement from User Department.
Send the INQUIRY to the Vendors (Suppliers).
Get the QUOTATIONS from Vendors.
Make COMPARATIVE Statement.
NEGOTIATE; Fix the Price and Terms & Conditions.
Place the ORDER to the right Vendor.
FOLLOW up with Vendor.
RECEIPT & INSPECTION.
STORAGE & RECORD- KEEPING.
INVOICE & PAYMENT.

Purchasing Process

Purchasing Process includes as usual 11 main stages as follows:


1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Market survey
Requisitioning
Approving
Studying Market
Making Purchase Decision
Placing Orders
Receipting Goods and Services Received
Accounting Goods and Services
Receiving Invoices and Making Payment
Debit note in case of material defect
Purchasing Management Process

Purchasing Management Process consists usually of 4 stages:


1.
2.
3.
4.
5.

Purchasing Planning,
Purchasing Tracking,
Purchasing Reporting,
Negotiate
Purchasing Planning

THE IMPACT OF PURCHASING MANAGEMENT A large study based on 175 company surveys with a respond
rate of 22% performed by Carr and Pearson (2002) shows that the factors strategic purchasing and Purchasing
Management have a positive impact on the firms financial performance in both small and large firms. Carr and
Pearson (2002) also write that Purchasing Management and supplier involvement does affect the success of a new
product introduction. This study also shows that a link exist between implementation of strategic Purchasing
Management and achievements of a firms comprehensive goals. It is also stated in the report by Carr and Pearson
(2002) that it is believed that most firms recognize the importance of strategic purchasing, because they spend a
large percentage of their sales on purchased inputs. Carr and Pearson (2002) also finish their study with the words
Based on this study, management should better understand the importance of Purchasing Management, supplier
involvement, strategic purchasing and its relationships with firms financial performance.

Price Forecasting Techniques

An important part of anticipating both future price levels and the risk that anticipated prices will not be achieved is
developing strategies for forecasting prices. In general, there are two basic approaches to forecasting prices in grain

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markets: fundamental analysis and technical analysis. While they are often presented as substitutes or competitors
in price forecasting, the two can be complimentary. Most market analysts pay attention to both fundamental and
technical factors even though they may emphasize one over the other.
Fundamental Analysis
Fundamental price analysis is based on the notion that the underlying supply/demand conditions in a given market
ultimately determine price. Since the futures market is attempting to discover prices that will balance supply and
demand in some future time period, there is uncertainty in initially establishing an equilibrium price. The market
may be shocked by new information, resulting in traders changing their assessments of what the equilibrium price
will be in the future. Fundamental analysis is attempts to both anticipate changes in supply/demand information,
and to evaluate the direction and range of price movement resulting from new information. Fundamental analysis
may be simple (intuitive), or complicated (using quantitative statistical or mathematical models). In both cases,
analysts are attempting to assess price implications of economic variables including:
1)
2)
3)
4)
5)

seasonal use patterns


seasonal supply patterns
prices of substitute goods
prices of compliment goods
market structure

Technical Analysis
While fundamental price analysis often asks the question: "Where should the price be?" given economic conditions,
technical analysis asks the question: "How will we get there?" As such, technical analysis often deals with the
timing of pricing decisions within a given price range. While sophisticated mathematical models are often
employed with technical analysis, the only data used is past price history, volume traded, and in futures markets the
open interest (i.e., how many futures contracts are outstanding). As such, technical analysis is simply the analysis of
price trends -- by looking at past prices, volume, and open interest technical analysts attempt to identify buy and sell
signals based on underlying market emotion. The idea is to reduce the opportunity cost of buying too early or
selling too late.
There are literally an infinite number of ways to look at past prices, but some of the more common technical
indicators include:

1. Bar Charts
2. Lines of support and resistance
3. Consolidation planes (also called price channels)
4. Key reversals
5. Price Gaps and
6. Moving Averages
1. Bar Chart
On bar charts, price is plotted on the vertical axis and time (days or weeks) on the horizontal axis. Each time period
shows a vertical bar indicating high, low and closing price (settlement). The open, or first price of the time period,
is also often included.The most common time periods used in constructing bar charts are days, weeks, and months.
However, some short term futures traders construct bar charts using 5, 1`0, or 15 minute intervals. Through time, up

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and down trends develop, displaying the process of price discovery, and bar charts provide a way to identify these
trends.
2.

Trend line (lines of support or resistance)

As trends develop over time, bar charts can be enhanced to determine the exact nature of the trend. This is done by
constructing lines of support and/or resistance.
In up trends, support lines are drawn connecting the lowest of lows over a given time period. These lines are called
lines of support. As long as price action in succeeding trading days does not penetrate the up-trending line, it is
assumed that the market will continue to trend upward, and holding long positions (i.e., being a market buyer or a
keeper of a physical commodity) is justified. Once a day is encountered where price action penetrates the line of
support, it is assumed that the market trend is over, and prices are likely to move sideways or down, suggesting that
long positions in the market now face an increased likelihood of losing money.
In down trends, resistance lines are drawn connecting the highest of highs over some time period. When the
resistance lines are penetrated by some days price action, it is assumed that the downtrend is over and prices are
likely to get higher. At this point, short positions (i.e., initial sellers in the market) face increased price risk.
In both cases the lines are extended to and beyond the current date. One (or more) closes below a support line is a
"sell" signal. One (or more) closes above a resistance line is a "buy" signal. The close is the markets closing price if
the bar chart is plotted using days as the time interval, or the last price traded in the time interval if it is other than
days.
As with all technical analysis techniques, the selection of he time interval over which the lines of support and/or
resistance are constructed are extremely subjective, and affect the levels of support and/or resistance identified. This
is a significant limitation. The length of time over which the trend line is drawn greatly affects its slope and
sensitivity. In general, the more bars included in the construction of a trend, the more confidence one has that the
prices have changed direction when the trend is violated.
3. Consolidation Planes
When price congestion occurs in a sideways pattern, parallel horizontal lines are drawn from the highest highs and
lowest lows in the congestion area. The market signal is to sell at the upper end of the channel and buy at the lower
end of the channel as long as the pattern is maintained.A breakout up or down is indicated when a close occurs
outside of the congestion area. This is often interpreted as some important change in the underlying fundamental
relationships for the particular market being watched, but the actual fundamental data is not important to the
measurement of the price pattern.
4.

Key Reversal

A key reversal occurs on what is called an outside day, and indicates a reversal in the previous price trend. Outside
days are when the days high is higher than the previous days high, and the low is lower than the previous days
low. Many technicians also require that the closing price must be lower than previous days lowest price for a
bearish key reversal. A bearish key reversal means price are expected to go down. In other words, if the market had
been trending up, a bearish key reversal would be a sell signal based on the assumption that the market will now
trend down. If the market had been trending down, and the close is above the previous days high, a bullish key
reversal is recorded, and a buy signal is generated. A key reversal indicates a day of huge battling over fundamental
information. The closing price indicates who won the battle among buyers and sellers.
5. Gaps
Gaps reflect a strong change in supply/demand assessment due to new market information, or a change in the
general interpretation of existing information. A gap is when a given days high (low) is lower (higher) than the
previous days low (high). This can be interpreted two ways. One is that an important signal of short-term direction
has developed and prices will move away from the gap. In other words, if todays highest price is below yesterdays

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lowest price, prices are expected to continue deteriorating in the short run. However, many \traders believe that
gaps will almost always eventually be filled, and thus expect that at some point prices will turn and trade back
through the gap.
6. Moving Averages
Moving averages are used to smooth out daily price fluctuations so that an analyst might get a better idea of the
underlying market trend. They tend to be used two ways. First, a rather long term moving average is followed.
When the price crosses the moving average, a buy or sell signal is generated. For example, a trader might follow a
50-day moving average of corn prices (usually based on the closing prices). If prices are trending up, the moving
average will be below the price level. Once the price in a given day closes below the 50 day moving average a sell
signal is generated, and the trader would sell corn futures. The second way moving averages are employed is to
track a short and a longer moving average, and initiate positions when they cross. For example, a trader may track a
5-day and a 10-day moving average for corn. When the market is moving up, the 5-day moving average will lie
above the 10 day. If prices correct and start to move down, the 5 day moving average will respond quicker than the
10 day, and after a few days of lower prices will cross the 10 day average and then lie below it. When the shorter
average crosses the longer average, a trade signal is generated. If the 5-day crosses the 10-day from above, a sell
signal is generated. If the 5-day crosses the 10-day from below, a buy signal is generated.Shorter averages will be
more sensitive to trend changes but will also give many false signals in a sideways market. Moving averages work
best in well-defined trend markets.

Buying seasonal

Seasonality often plays a part in determining prices for commodities in regular cycles throughout the year. Normal
increases and decreases in supply and demand for particular commodities seem to occur every year in fairly
consistent patterns. Commodity seasonal patterns might appear to be an easy trading strategy for commodities, but
seasonal tendencies are just that tendencies.
Some Popular Commodity Seasonal Patterns
1.

2.
3.

Soybeans tend to move higher seasonally from February and peak in June. Much of the anxiety over crop
losses diminish once the crops are in the ground and this is wrapped up normally by early June. Prices tend
to drop during the summer if there are no major weather problems prolonged drought and major floods.
Grain prices tend to drop and bottom during harvest, which is around October.
Unleaded gas tends to move higher from February until May. This is due to commercial buying ahead of
the summer driving season, which begins on Memorial Day at the end of May.
Lean hogs have a strong seasonal tendency to move higher from late February until May. Hog inventories
usually drop during this period as packers buy ahead of the summer grilling season.

How To Trade Commodity Seasonal


Most commodities have a couple of strong seasonal tendencies every year. I do not recommend trading solely on
those seasonal patterns. I sometimes use them as a filter when I am trading commodities. A strong seasonal trend
may be the determining factor on whether I take a trade or pass on it. Many new commodity traders have been
burned by using a trading system that only uses seasonal patterns. You may have seen the claims that such and such
commodity moves higher 90% of the time during a certain two-week period every year. That may sound enticing,
but the laws of statistics will undoubtedly find those numbers if they search enough combinations. Commodity
seasonal patterns can play a very useful role in your trading. They are better used as a guide and they can often keep
you on the right side of the market. Remember, the seasonal pattern doesnt repeat every year, so it is not a foolproof
indicator just like everything else in trading.

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Capital Equipment

Definition: Equipment that you use to manufacture a product, provide a service or use to sell, store and deliver
merchandise. This equipment has an extended life so that it is properly regarded as a fixed asset. When deciding
when to purchase and register capital equipment on your books, there are two lines of thinking. The first is to
purchase and install the needed equipment at a point during the year where additional volume warrants the
expenditure, thereby assuring sufficient cash flow to handle the additional debt service or the outright purchase of
the equipment. The second method is to have the equipment purchased and installed at the beginning of the business
year or quarter closest to the time when you'll actually need the equipment, allowing time for training and working
out bugs before the equipment is placed into full production. The avenue you choose depends on your cash flow. If
you can service additional debt or purchase the equipment from operating expenses, then the latter method works
best. If your cash flow is tight, then choose the former method. Either way, capital equipment costs are accounted for
under the heading "capital."

PURCHASING CAPITAL EQUIPMENT

A Capital Equipment purchase is equal to or greater than $5,000 and has a useful life span of one or more years. For
additional information regarding capital equipment purchases, call the Capital Asset Administrator.

LEASE OR BUY

Equipment purchases usually involve a substantial financial commitment the purchase price of the equipment and
the cost to service and repair it. The primary reason to lease rather than buy an item is because the needed item is so
expensive that its direct purchase is not possible and other financing mechanisms are unavailable or more expensive
than leasing. In order to be considered for leasing, the item must have a value of at least $50,000 and must have
CEA approval.
If the buyer decides to lease the equipment, provisions should be made for upgrading the equipment, if needed.For
additional information see Leasing Policies and Procedures.

MAKING THE BUY

Once the decision has been made to purchase the equipment, the specification is prepared, the suppliers selected and
the RFQ/RFP is developed.

International Purchasing

Purchases of products of foreign origin and manufacture on federally sponsored agreements must be allowable in
accordance with the provisions of the Buy American Act. The Buy American Act also requires that purchases from
foreign vendors be shipped via U.S. flag ship carriers. Competitive bidding requirements, when applicable, must be
also be met. Written price quotations must be in English. To avoid problems associated with fluctuations in currency
exchange rates price quotations should be requested to be in U.S dollars with contractual payment terms for all
payments to be made in U.S. dollars in accordance with the quoted prices. The price quotation may be in the
appropriate currency, but prices must be converted to U.S. dollars at the current exchange rate on the date of the
price quotation on the requisition.
Such requisitions must include the cost of each item shown in both the foreign
currency and the U.S. dollars and specify whether the payment will be made in U.S. dollars or in foreign currency. If
the payment is to be made in foreign currency the standard policy is to estimate the amount of the purchase order in
U.S. dollars and issue the payment at the current conversion rate at the time the payment is made. Purchase orders
are always committed in U.S. dollars. The requisition should also include the payment requirements; e.g.,

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international draft or wire transfers. Wire transfer requests must include the complete name of the bank, the account
number and the bank telephone number. Exel Global Logistics, Inc. is the Office of Sponsored Program's preferred
customs broker who will clear the shipment with customs and forward it to Receiving for subsequent department
delivery. Freight, U.S. Customs duty, and brokerage charges are generally not committed against the purchase order
of any foreign purchase. Actual charges for these items will be paid upon receipt of the appropriate invoices.

Receipt of International Shipments

As with a purchase of goods, provide the foreign shipper the same shipping. Prepare and submit a requisition form
to Purchasing covering customs and shipping charges. The requisition form must be made out to the customs broker
clearing the shipment to cover all associated customs and shipping charges.

Duty-Free Entry

Requests for duty-free entry of scientific instruments or apparatus, if applicable, may be made. This should be done
as soon as the purchase order is issued because it may take several weeks to obtain approval. All documents are
available from either the university's customs broker, Exel Global Logistics, Inc., or the U.S. Department of
Commerce Business and Defense Services Administration & Treasury Department, Bureau of Customs. All
documents are to be completed and submitted directly to customs by the PI. Purchasing should also be advised that
duty-free entry is being requested.
In the event that the goods arrive prior to approval of duty free entry, the import tax may have to be paid in order to
clear the shipment through Customs. If duty free entry is subsequently granted, a credit for the duty paid may be
requested.

Import substitution policies

What are import substitution policies? They are policies that attempt to reduce foreign dependency of a country's
economy through local production of food and industrial products. Import substitution policies advocate replacing
imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign
dependency through local production of goods, mainly industrial products. Many Latin American countries
implemented import substitution policies with the intention of becoming more self-sufficient and less vulnerable to
adverse terms of trade. The import substitution strategy is often complemented with state-led economic development
through nationalization, subsidization of vital industries and agriculture. Such regimes are characterised by highly
protectionist trade policy. Many Latin American countries adopted import substitution policies from the 1930s until
around the 1980s. Some Asian countries, especially India and Sri Lanka, pursued such policies from the 1950s. One
of the arguments for import substitution is that all countries which have industrialized went through a stage of
import substitution in which investment in industry was directed to replace imports. All major developed countries
used interventionist economic policies to promote industrialization and protected industries until they had reached a
level of development when they were able to compete in the global market. This policy is also termed the infant
industry argument: those industries in their infancy should be protected till they grow up and are strong to withstand
competition.

Advantages and disadvantages


The major advantages claimed for import substitution are increases in domestic employment and resilience in the
face of global economic shocks such as recessions and depressions. The disadvantages are that import substitution
industries create inefficient and obsolete products as they are not exposed to international competition. Other
disadvantages include unemployment increasing internationally as World GDP decreases through the promotion of

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inefficiency. Countries that adopted import substitution policies faced many undesirable effects such as chronic
problems with the balance of trade and payments. Although import substitution was supposed to reduce reliance on
world trade, there was a need to import raw materials, machinery and spare parts. The more a country industrialized
the more it needed these imports and import substitution industrialization (ISI) was strongly biased against exports.
Trade protection and overvalued exchange rates raised domestic prices and made exports less competitive.
Consequently, import substitution industrializing countries were unable to export enough to buy the imports they
needed. The faster the economy grew, the more it needed imports; but exports could not keep up with the pace of
imports and so countries ran out of foreign currency. In response, governments restricted imports to essentials. The
currency was devalued to raise the price of imports and make exports more attractive. Government subsidized
industrial investments. Such spending chronically outpaced government revenue and these budget deficits were
usually covered by printing more money. The result was inflation which made domestic goods more expensive
which in turn reduced exports even further. Sri Lana experienced much of this during its import substitution
industrialising period in the 1960s and 1970s.

Past policies

Ideology has played an important role in the formulation of economic policies in the past. The inward looking
economic policies that the country adopted for several decades till liberalisation of the economy in November 1977
put the country back and also heaped many burdens on people, especially the poor. Ideological reasons still continue
and inward looking economic policies are advocated as better than the liberal export-led economic policies, for
nationalistic reasons. These inward policies are often couched in nationalistic terminology that makes them more
acceptable irrespective of their economic consequences. Labels in particular are a disservice to pragmatism.

Imports substitution-prospects and retrospect,

In retrospect, it is recognised that the inward economic policies pursued from the 'sixties till liberalisation was one
of the important reasons that put the country's economy on a slow mode of growth. The impracticability and ill
advisability of these possibilities were not clear at the time. Many an economist of the time viewed inward looking
economic policies to be the means of coping with the serious balance of payments problem and inadequacy of
foreign exchange. It was only later that everyone realised that a small trade-dependent economy had to adopt an
export-led economic strategy.

International experience:

East Asia

Countries of East Asia and South East Asia were more pragmatic and adopted export-led economic policies with the
minimum of import and exchange control policies. This was one of the important reasons for the wide differences in
economic performance between East and South Asian countries. The outward economic orientation was one of the
important reasons for the rapid economic development of countries like South Korea, Malaysia and Singapore. ISI
was rejected by most nations in East Asia in the 1960s. Some economists attribute the superior performance of East
Asia in the 1970s and 1980s to this difference in policies. East Asian policies rejected import substitution policies,
though they maintained high tariff barriers. The strategy followed by those countries was to focus subsidies and
investment on industries which would make goods for export, and not to attempt to undervalue the local currency.
This export promotion approach to industrialization in East Asian countries contrasts with the strategy of ISI
pursued by Sri Lanka.

Success and failure in import substitution

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While import substitution industrialisation was not successful, it must also be recognised that some import
substitution policies were a success and contributed to increasing the country's production and economic
development. These were in agriculture, where protection afforded to agriculture contributed to increased production
of rice and other food crops. It was, however, not only protective import control policies that resulted in food
production increasing. The import restrictions were complemented by guaranteed prices for farm produce, research,
extension services, marketing arrangements and subsidies in inputs.
This range of policies enabled the country to achieve impressive gains in food production. At the time of
independence when the country had a population of only 7 million, the country imported nearly half of her food
needs. This includes rice, many subsidiary food crops like chillies, onions, potatoes and poultry. There were also
high imports of sugar, wheat flour, milk and lentils (dhal). The latter category remains one where domestic
production is inadequate. Rice is perhaps the most spectacular success as the country is able to feed its near 21
million population with domestic rice and there has also been decreased consumption of imported wheat flour that is
being substituted by local rice. Per capita rice consumption has increased from less than 100 kilograms per capita to
about 115 kilograms per capita, while per capita wheat consumption has reduced. In several other commodities too
there has been significant substitution of local produce for imported ones. These include maize, potato, poultry
products. The important lesson to be drawn from this experience is that the price support given by import
substitution policies contributed much to the increase in production. However while such price support was
important and necessary, it was not sufficient. There were also several other support measures that make the import
substitution strategy work. Conversely there were crops where the lack of adequate resources, incentives and other
capacities where the import substitution strategy has not succeeded. Sugar production is a good example of this.
Although the country still imports about 80 percent of its milk requirements, there is evidence that the improved
prices and other incentives and institutional support is contributing to increased milk production.

Legal aspects in buying,

Insurance buying
Understanding and anticipating the legal impact of purchasing decisions is vital for every organization -- and
therefore vital for every purchasing professional. Yet, in most organizations, very little attention is paid to whether
purchasing staff truly understand the legal dimensions of purchasing. This program has been designed to lay a
foundation for an enhanced understanding of purchasing-specific legal issues. Moreover, participants will learn how
to carry out purchasing activities in a way that prevents problems from occurring. Specific attention will be paid to
contracts, agency law and the relationship between buyer and seller. We will explore and discuss in detail the impact
of the Uniform Commercial Code on supply chain management, freight issues and anti-competition laws that can
affect everyone in the supply chain.
PARTICIPANTS WILL LEARN:

How to deal with e commerce


How to avoid entering into a bad contract
Three methods to reduce the cost and liability of freight
What you need to know about the Uniform Computer Information Transaction Act (UCITA)
Selecting the best contract for different types of purchasing
Two key laws every buyer should know
How to handle unauthorized shipments
Ways of handling defective materials
The best way to get your materials delivered on time
WHO SHOULD ATTEND:
Associate Buyers
Buyers

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Transportation, Distribution and Non-Purchasing Executives


Managers responsible for the purchasing function
Engineers and Managers with Purchasing-Supplier interface

Insurance buying

Many nonprofit managers dread the insurance purchasing process. An insurer may demand a lot of information, but
then decline to offer a policy. The process may seem to waste valuable time and resources. Many nonprofit
managers dread the insurance purchasing process. Here are 10 suggestions to make the process effective and
efficient.However, insurance is an important risk management tool. Insurance protects against catastrophic losses,
stabilizes expenditure flow, preserves earnings and resources, and provides settlement money so that small claims do
not turn out to be big ones. Insurance gives your staff the peace of mind that they will be protected in the event that a
claim does arise.The suggestions below should make the insurance purchasing process effective and efficient.
Attention to detail ensures that the insurance policy covers your organization's risks, and that it is purchased at the
best possible price.Give the underwriter a reason to write the account. Each underwriter has basic underwriting
guidelines, but these guidelines do not, and cannot, address every situation that is likely to arise. Emphasize your
organization's good works, prevention and risk reduction programs, and professional operation. Give the underwriter
a reason to fit your organization into the guidelines, and to make an exception for your organization if necessary.
If you have a renewal quotation for an existing policy, say so. Give the underwriter a baseline from which to start.
Let him/her match or beat the other quotation. Use the other quotation to negotiate more favorable terms.Build in
time for an underwriting review. If you send the insurance application to the underwriter well in advance of the
desired coverage date, the underwriter has a chance to review the submission and ask questions. The lead time also
gives your organization a chance to understand the features of the insurance product, to solicit competing quotations,
and to compare competing terms.Complete the application! Every question on an application form is important to
the insurance company. An incomplete application will either be declined outright or sent back to your organization
for completion. A quick glance will save a lot of time in the long run.Attach all supporting information. An insurer
will consider its requested information to be important to accurate underwriting. List the enclosed items in your
cover letter and ensure that each item is in the package prior to mailing.Provide accurate and truthful information,
preferably in writing. False information may only be discovered by the insurer when you file a claim. By then, the
insurer is generally within its rights to deny coverage, and your organization is deprived of the protection that it
thought it had paid for.Anticipate questions and answer them up front. In consultation with your insurance agent,
provide any necessary explanation for the answers on the application and unique exposures that your organization
may have. In a single submission, give the underwriter sufficient information to evaluate the risk.Promptly respond
to requests for information. A prompt response not only saves time, but it highlights your organization's
professionalism and willingness to cooperate.
Negotiate quotation terms with respect. A clearly unacceptable quotation may result
from an honest mistake, unreasonable underwriting guidelines, or a misunderstanding about the risks involved in
your operations. While you should question the basis of the quotation and try to alter the terms, do so in a way that
will not alienate the underwriter. Give him/her a chance to act reasonably.Offer alternatives for unacceptable
quotation terms. If an insurance quotation is unacceptable, offer suggestions that will improve the terms. For
example, if the insurer refuses to cover an activity, offer to institute an insurer-approved risk management plan as a
condition of coverage and to accept a higher deductible. Show your organization's willingness to work with the
insurer to find a win/win solution.

Buyer-seller relationship and ethics

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Ethical Salesperson Behavior in Buyer-Seller


Relationships
Buyer attitudes and behaviors.
The results of this study confirmed several hypotheses showing that ethical salesperson behavior, or ESB, is a
quality that can differentiate salespeople and increase positive outcomes.
Think Point #1: What is ESB?
Before discussing the implications of ethical salesperson Behavior, or ESB, it is imperative to define the
Characteristics that comprise this sect of ethical behavior.
The following descriptors denote desirable attributes of ethical behavior in the buyer-seller relationship:
Honesty
Fair play
Full disclosure
Promoting the welfare of the customer
Providing factual communications
Selling only those products and services believed
to benefit the customer
Promising only what can be delivered
Treating customer information in a confidential
manner
Think Point #2: ESB influences buyer trust and commitment.
The study confirms the notion that ESB leads to buyer commitment and trust, two desirable Outcomes of a strong
sales relationship. As depicted in the empirical model, buyer trust andbuyer commitment bridge the gap between
other favorable outcomes in a positive buyer seller Relationship. Buyer trust is the primary result of ESB and is the
building block for buyer commitment. To gain buyer trust, real estate agents and other sales professionals must
demonstrate reliability and high integrity. Built on the foundation of trust, buyer confidence is increased by
observable behaviors including consistency, honesty, fairness, responsibility and benevolence. Because buyers will
feel less inclined to monitor the activities of ethical salespersons, they will perceive this buyer-seller relationship as
more valuable, saving them both time and anguish.
Think Point #3: ESB influences share-of-customer.
Share-of-customer refers to the amount of spending customers devote to a specific firm for a particular product.
Share-of-customer percentages translate into the economical benefits of repeat patronage and brand loyalty. While
the study did not indicate a direct relationship between ESB and share-of-customer, it was concluded that share-ofcustomer is indirectly influenced by ESB, through its positive relationship with buyer commitment. As buyer
commitment increases, their investments in the specific buyer-seller relationship based on anticipated future returns
also rises.
Think Point #4: ESB influences buyer communication.
Buyer communication refers to the transmission of both judicious and timely information by the buyer to the seller.
In a buyer-seller relationship, enhanced communication benefits both parties. Specifically, timely and honest
communication, initiated by the buyer, increases the success of the seller. The study shows that ESB indirectly
influences buyer communication through the channels of both buyer commitment and buyer trust. Buyers who trust
the ethics of a real estate agent or other professional salesperson feel more comfortable communicating openly. In
addition, buyers who are more committed to an agent or salesperson will tend to share more information as a means
for further developing the relationship.
Think Point #5: ESB influences positive word-of-mouth communications.
Positive word-of-mouth communication is an interpersonal interaction where buyers share positive business reviews
with their peers. These interpersonal communications carry more weight for future buyers, who often accept these

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recommendation with a high level of trust. ESB was found to indirectly influence positive word-of-mouth
communications through the avenue of buyer trust. Of all the positive outcomes, ESB is most significantly related
with an increase in positive word-of-mouth communications. The study confirms: buyers will more often
recommend salespeople that display ethical behavior.

Unit-3
Stores and warehousing: Stores management, Systems and procedures, Incoming material control, Stores accounting
& stock verification, obsolete, surplus and scrap management, Value analysis, Material handling, Transportation and
traffic management.

Stores Management

A professionally managed Store has a process and a space within, to receive the incoming materials (Receiving
Bay), keep them for as long as they are not required for use (Custody) and then to move them out of stores for use
(Issue).
In a manufacturing firm this process forms a cycle to maintain and run the activities of Stores.
The basic responsibilities of stores are to act as custodian and controlling agent for parts, supplies, and materials,
and to provide service to users of those goods. Typically and at times essentially, a Stores has to follow certain

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activities that are managed through use of various resources and are thus called Stores Management. The task of
storekeeping relates to safe custody and preservation of the materials stocked, to their receipts, issue and accounting.
The objective is to efficiently and economically provide the right materials at the time when it is required and in the
condition in which it is required. The basic job of the Stores Manager hence is to receive the goods and act as a
caretaker of the materials and issue them as and when Production demands it. Needless to say storekeeping activity
does not add any value to the product. In fact it only adds to the cost. The organization has to spend money on space
ie. expenditure on land, building and roads, equipment, machinery and other facilities provided such as electricity,
people i.e. salaries and wages, insurance, maintenance costs, stationary, communication expenses and the cost to
maintain the inventory etc. All of these get added to the organizational overheads and finally get reflected in the
costing of the finished product. However, it is an essential function in any manufacturing or marketing organization.
This basic reason has propelled the evolution of philosophies such as JIT, JIT II etc.
Thus , the basic functions , to manage a stores, carried out are:
1.
2.
3.
4.

Receiving of incoming consignments (goods)


Safe keeping of goods (Custody)
Disposal of undesirable goods
Inventory Management
Housekeeping and record maintenance

It all starts with a suitable Lay out design of stores. Depending upon the nature of items used for processing by the
organisation the lay out and type of stores are selected. For example , a process that requires use of raw materials ,
not costly enough, an open and nearby stores with truck / rail inside movement possibility can be adequate.
Similarly, for storing costly material, a closed and restricted type of stores shall be needed. However, irrespectiveof
the type and lay out , any Stores would have , as its starting activity , receiving and accounting of the incoming
goods. This part of Stores is known as Receiving Bay. Once the material has been received and cleared through
inspection and accepted for use, it needs safe custody till it's actually used. It calls for a separate physical storage
space , open or closed, as per need. It maintains all documents that are able to trace an item , show all its details and
preserve it up to its shelf life in the manner prescribed or till it is issued for use. This part of Stores is called
Custody. Thus the role of Custody is to receive and preserve the material and then to issue it to the user, as and
when needed. A stage comes when the material is needed for use. Stores thus releases the material from its custody
to the user department and the process is called 'issue of goods. It might also happen that after partial use , some
materials having useable value in future are returned to the stores and thus they also become part of the custody
again. In the long drawn process of preserving the materials till its use ,some materials might get obsolete and
unserviceable and may require removal from stores , in order to clear space for other incoming goods. This activity
is known as Disposal of goods for which auction etc is done.Since the material has a cost , the organisation would
definitely like to incur optimum cost on this account and thus there is a need to manage the materials within a stores
such that the total cost of maintaining materials remains optimum.
The materials , lying unused but have future economic value are said to form
inventory which needs professional handling. Inventory control / management thus is a vitally important aspect of
any stores function. One of the basic functions of stores is to account for every material received in Stores by
maintaining proper records of all the incoming, stored and outgoing materials so that proper accounting and audit
trail is maintained. Hence , record keeping is a vital function of stores . Of course , it also goes along the various
activities and with development in the information technology domain, the record keeping in stores too is through
electronic medium making the whole process smooth and efficient. Any Stores as such is a physical entity which
deals with material receipt , preservation and issue. Material handling therefore is another vital function. Just as Lay
out of a Stores is designed considering the nature of material Stores has to handle, material movement equipment
and implements also are important. Within a typical manufacturing organisation, its Stores is seen having Forklifts,

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Over head Cranes, Trolleys etc inside the Stores and trucks, Dumpers and Railway wagons as outside Stores
equipment to handle materials.
Any Stores system starts with planning the need for materials. It is assumed here that the need itself has been
forecast with a considerable degree of accuracy. The forecast also must be subjected to periodic review. The art of
storekeeping is largely that of optimizing the use of resources to meet actual needs in an efficient manner.
Efficiency of Stores function is measured by the number of times the stocks have turned over. That is how much
time material spends in the stores. The lesser time it spends the better it is. As money is a scarce resource , once it is
converted into materials, then only it is useful. This is the essence of stock turnover. Stores is a very broad word that
indicates a wide variety of materials stored such as chemical, metals, liquids, gases, spare parts, equipment, or
finished goods, ranging from engineering components to drugs and pharmaceuticals.
Each of these items will require a specific type of storage and their handling and preservation methods will vary
accordingly. There is a high degree of specialization required to store and handle these products and in many cases
special storage licenses need to be obtained from the Government, e.g., the storage of petroleum products or
explosive products. It is hence mandatory for Stores personnel to understand thoroughly all of these requirements
and implications The understanding of these principles is most important in the efficient practice of the art of
storekeeping.
The services rendered by Stores can be arranged into 5 broad activities:
1.
2.
3.
4.
5.

To make available a balanced and uninterrupted flow of raw materials, components, tools, equipment and
any other material needed to meet operational requirements
To provide maintenance materials, spare parts and general stores as requirements
To receive and issue finished products
To accept and store scrap and other discarded material as they arise
To effectively dispose of the unwanted materials

The interesting facet of the whole situation is that Demand comes bundled while supplies unbundled. That is
demand is usually from Production which will give Stores a BOM (Bill of Materials) and probably different
materials (which come from different suppliers) are required at the same time. While supply comes from different
suppliers from different regions which may or may not (in all possibility may not) come at the same time. Hence
balancing all these is a considerably demanding job, which is required to be performed by stores personnel.

Incoming Materials Control

Any organization , big or small, shall look for quality input (materials) from suppliers to have the desired output or
use. For this reason, it devises ways to control the incoming materials by having a check system on quantity , quality
and readiness for use.
Control on incoming materials is exercised through Inspection by the purchaser.
1.

Need For Inspection:

Inspection is an important aspect of Integrated Materials Management. It is an adjunct to the purchase function to
ensure that the incoming materials of right quality are procured for use. The word quality has numerous meanings.
The most appropriate meaning of quality in the present context is CONFORMANCE TO ORDERED
SPECIFICATION & FITNESS FOR USE, whether for products or services. Depending upon the nature, criticality
& value of items, inspection is conducted either at suppliers premises or at plant stores after receipt. There are
several ways of carrying out inspection
2.

Pre Dispatch Inspection :

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This is inspection before dispatch of material. Usually specified in the Purchase Order (PO) , the inspection is
carried out at suppliers premises (works). Supplier gives an Inspection Request (IR) to the inspection agency
mentioned in the PO. On receipt of IR, the inspecting officer visits the suppliers premises along with documents
necessary for inspecting such as copy of PO, drawing, specification etc. The following checks are conducted
depending on the nature of item:

Visual check
Dimensional check
Functional check
Physical testing such as hardness, pressure test, load test etc
Electrical and other on-bed testings such as High voltage test, Insulation resistance test etc.

The accepted materials are marked by stamping/punching/stickers/ seal/tag etc as a mark of acceptance, The
supplier is asked to deliver the same to the consignee as mentioned in the PO.

Stage Inspection / Final Inspection :

For critical items, it is required to conduct stage inspection of semi-finished items (such as castings, forgings etc) at
suppliers premises. In such cases, the supplier gives an interim Inspection Request to the inspection agency.During
stage inspection, sample is collected by the inspecting officer for Chemical analysis / Physical testing at either their
own facility or at 3rd party locations.On receipt of test results, conformance to specification is verified & clearance
is given to the supplier for further processing of the item. After readiness of the material in all respect & internal
checking, the supplier gives the final Inspection Request to the inspection agency. In some critical cases, joint
inspection by Indenter & Inspection is carried out at suppliers premises.

Document Inspection :

Sometimes and usually for very standard ,off the shelf items, inspection can be carried out through the verification
of supplier given certificates such as Material Test Certificate (MTC), Manufacturing Certificate (Mfg. TC),
Guarantee Certificate (GC) etc. After ensuring conformance of materials to the ordered specification
in all respect, Inspection Certificate (IC) is issued by the inspecting officer to the supplier.

Stores / Receipt Inspection :

Majority of items are inspected through this route. Materials are received in the receiving bays of Stores. Such items
are usually accepted based on visual examination & verification of documents. Materials in the receiving bay are
segregated into several categories, based on their quality control status and destination.
Procedures in receiving provide for storage and transport of material in each category.
The major categories are :

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Awaiting inspection This category consists of material that has been received and is awaiting inspection
before being moved into stock.
Acceptance upon certification This category consists of material that may be accepted pending
certification.
Rework In this category are materials that are defective and must be reworked.
Return This category contains materials that are defective and will be returned to the supplier for credit or
replacement.
Materials to be tested This category consists of materials which have been received and are awaiting
delivery to the using/testing department.
store Accounting and Verification

A Stores is a virtual money that can be encashed. However, this money needs to be properly counted or accounted
for. Stock accounting is thus a systematic way of assessing the money value of the items lying in stores as also the
items under transaction through stores. Transactions , in terms of receipts and issues are a regular feature in any
stores and therefore Stock accounting process , in most of the cases, concentrates only on the stock in hand, lying in
Stores.
The most popular methods of accounting are, FIFO i.e First In First Out and LIFO, Last In First Out.
FIFO and LIFO Methods as accounting techniques are used in managing inventory (Stock lying in Stores for future
use) and financial matters involving the amount of money a company has tied up within inventory of produced
goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost
flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting
purposes.
FIFO standing for first-in, first-out, implies that the oldest inventory items are recorded as sold first but do not
necessarily mean that the exact oldest physical object has been tracked and sold.
LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the
1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation,
but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to
FIFO. LIFO is only used in Japan and the U.S.The difference between the cost of an inventory calculated under the
FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which an entity's
taxable income has been deferred by using the LIFO method.

Store Verification & reconciliation:

For maintaining the continuous accountability of items under storage, it is essential to periodically verify the stock
of the items with respect to their storage record.The process of physically verifying the stock of items with respect to
the stock on record is known as stock verification. The correction of the record to take care of any observed
discrepancy in stock is known as reconciliation of stock. The periodicity of stock verification depends on the value
of the item and also nature of the item. High value & pilfer-able items are verified more frequently.

Consumption budget monitoring :

Each User department is allocated the Budget for the consumption of various commodities of items in the beginning
of the financial year. Issue of material to the user department is made after ensuring the availability of budget for
that department for that commodity.Once the issue of material is made the budget of the department is updated.
Once the budget is exhausted the user departments need to take additional budget provision or clearance of
competent authority to draw further material from Stores. This consumption budget monitoring is done to ensure
proper control on the expenditure and cost incurred by the user department.

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Definition of 'Obsolete Inventory'

Term that refers to inventory that is at the end of its product life cycle and has not seen any sales or usage for a set
period of time usually determined by the industry. This type of inventory has to be written down and can cause large
losses for a company.
Also referred to as "dead inventory" or "excess inventory".
Large amounts of obsolete inventory are a warning sign for investors: they can be symptomatic of poor products,
poor management forecasts of demand, and poor inventory management. Looking at the amount of obsolete
inventory a company creates will give investors an idea of how well the product is selling and of how effective the
company's inventory process is.
Inventory Management - eliminating obsolete stock
Stop 'hoarding'!
Don't allow your business to become collector! A lot of businesses find it very difficult to throw away products they
paid good money for. However, retaining obsolete stock just consumes even more of your valuable cash. Ridding
your business of obsolete stock promptly, will free up space and generate cashflow that can be used more
effectively.To eliminate obsolete stock, Core Logistics Consulting will create a tagging program to identify old stock
items. Our tagging program will help you to move these products into a quarantined area of your warehouse. Once
we have established the appropriate stock control parameters, our program will help you cut your losses and
liquidate any obsolete merchandise.Tagging of obsolete items is something that originated with Japanese
automakers. These companies are simply eliminating obsolete stock to make room for newer, more profitable
inventories. An effective inventory tagging program works for anything in your warehouse, not just consumable
inventories.We will show you how to conduct regular 'obsolete-item-tagging' programs in any area of your business
to help you more effectively manage aging inventory. Our Lean Inventory Management programs are guaranteed to
increase the effectiveness or your stock management operations.
The obsolete, surplus & scrap items can be put under the following categories.

1. Obsolete materials & equipments


2. Unserviceable equipment & machines
3. Deteriorate stock
4. Surplus stock
5. Scrap material

1. Obsolete Materials & Equipments:


Obsolete should be defined as materials, equipments or parts which are no longer usable in the service for which
they are purchased and which cannot be utilised safely or economically for any other purpose. Broadly, it can be said

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that spares for plants sold become obsolescent when the machines they are carried for go out of production or are no
longer available. Ordinarily, obsolescence arises on account of the following reasons:
(a) Adoption of standardization or elimination of non-standard varieties.
(b) Faulty planning leads to over stocking of inventory.
(c) Non-implementation of project/job.
(d) Changes in demand due to change in fashions and supply conditions and change in business policy.
(e) Purchasing wrong items results in non-utilisation of stores.
(f) Bad communication within the organisation as well as with suppliers.
(g) The sudden emergence of new technology or a design change.
(h) Excess purchasing, whether due to wrong forecast of requirement or to take advantage of quantity discount.

2. Unserviceable Equipments & Machines:


The unserviceable equipments and machines are those inventories which outlived their life. No amount of repairs,
renewals or replacements can bring them back to their usable life. Such equipments become irreparable and thus fit
only for disposal as scrap. Examples are crankshaft, connecting rods, bearing etc. of an engine. Replacement is taken
from stores on requisition and old ones are thrown into the scrap dump and sold by weight.

3. Deteriorate Stock:
Deterioration because of evaporation, spoilage, damage, moisture, rust or any other reason causing reduction in the
value of stock is known as deteriorated stock. It is a state or condition when with the lapse of time the usable value
of stores falls. For example, rust to iron, moisture to cotton over a period of time will reduce the economic value of
stocks.
4. Surplus Stock:
Surplus means such items which are more than the required quantity and cannot be consumed during a specific time
for certain reasons. These are the materials which can be consumed at some future time or that which is no longer
required for the job, for which it was purchased. Surplus materials arise from many reasons:
(i) When manufacturing operations are suddenly curtailed on account of design improvement etc.
(ii) When the project has been completed.
(iii) These stores may be in excess of the normal manufacturing and repairing requirements to the job concerned.
(iv) Excess purchase of stores due to wrong judgement at the procurement stage.
(v) When there is a change in the specification of size.

Surplus & scrap mgmt

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Definition
The technique of managing the funds of a company or financial institution with the aim of earning a return on the
available assets and creating more assets than liabilities (surplus). also called asset/liability management.
1. Extent to which generation of goods, services, and resources (such as capital) exceeds their consumption. Surplus
of resources is the bedrock on which capitalism is built.
2. Goods that are in excess of the requirement and cannot be returned to the vendor for credit, but are useful for
some purpose.
3. Remainder of an appropriation account after all expenditure.
4. Unusual situation in a government budget where revenue exceeds expenditure.
5. Alternative term for capital surplus.
6. Alternative term for retained earnings
Scrap consists of recyclable materials left over from product manufacturing and consumption, such as parts of
vehicles, building supplies, and surplus materials. Unlike waste, scrap can have significant monetary value.Scrap
metal originates both in business and residential environments. Typically a "scrapper" will advertise their services to
conveniently remove scrap metal for people who don't need it, or need to get rid of it.
Scrap is often taken to a wrecking yard (also known as
a scrap yard, junkyard, or breaker's yard), where it is processed for later melting into new products. A wrecking yard,
depending on its location, may allow customers to browse their lot and purchase items before they are sent to the
smelters, although many scrap yards that deal in large quantities of scrap usually do not, often selling entire units
such as engines or machinery by weight with no regard to their functional status. Customers are typically required to
supply all of their own tools and labour to extract parts, and some scrap yards may first require waiving liability for
personal injury before entering. Many scrap yards also sell bulk metals (stainless steel, etc.) by weight, often at
prices substantially below the retail purchasing costs of similar pieces. Scrap has been defined as the incidental
residue from certain type of manufacturing operations, such as turnings, boring, spurs, flashes etc. According to
ICMA (London), It is a discarded material having some value which is usually either disposed off without further
treatment i.e., other than the reclamation and handling or is introduced into the production processes in place of raw
materials. In contrast to wreckers, scrap yards typically sell everything by weight, rather than by item. To the scrap
yard, the primary value of the scrap is what the smelter will give them for it, rather than the value of whatever shape
the metal may be in. An auto wrecker, on the other hand, would price exactly the same scrap based on what the item
does, regardless of what it weighs.
Typically, if a wrecker cannot sell something above the value of the metal in it, they would then take it to the scrap
yard and sell it by weight. Equipment containing parts of various metals can often be purchased at a price below that
of either of the metals, due to saving the scrap yard the labor of separating the metals before shipping them to be
recycled. As an example, a scrap yard in Arcata, California sells automobile engines for $0.25 per pound, while
aluminum, of which the engine is mostly made, sells for $1.25 per pound.
Resources
Some of the biggest searches for scrapping is for scrap prices. Finding them throughout the internet can be tricky.
Sometime they are displayed as the market prices which are not the prices that recyclers will see at the scrap yards.
Other prices are ranges or older and not updated frequently. The rate of the scrap metal market is ever changing.
Some scrap yards' websites have scrap prices on them and are updated but sometimes it can just pay to call the scrap

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yard yourself. Scrap prices are reported in a handful of U.S. publications, including American Metal Market, based
on confirmed sales. Non-US domiciled publications, such as The Steel Index, also report on the US scrap price,
which has become increasingly important to global export markets. Scrap yards directories, like the iScrap App are
also important for recyclers to find facilities in the US & Canada allowing users to get in contact with yards within
minutes. With many resources online for recyclers to look at for scrapping tips, like on YouTube and Blogs,
scrapping is often referred to as a hands and labor intensive job. Taking apart and separating metals is important to
making more money on scrap. For tips like using a magnet to determine ferrous and non-ferrous materials, that can
help recyclers make more money on their metal recycling. When a magnet sticks to the metal, it will be a ferrous
material, like steel or iron. This is usually a less expensive item that is recycled but usually is recycled in larger
quantities of thousands of pounds. Non-ferrous metal do not stick to a magnet like copper, aluminum, brass, and
stainless steel. These items are higher priced commodities for metal recycling and are important to separate when
recycling them.
Risks
Great potential exists in the scrap metal industry for accidents in which a hazardous material, which is present in
scrap, causes death, injury, or environmental damage. A classic example is radioactivity in scrap; see the Goinia
accident and the Mayapuri radiological accident as examples of accidents involving radioactive materials, which
entered the scrap metal industry and some details of the behavior of contaminating chemical elements in metal
smelters. Many specialized tools used in scrap yards, such as the Alligator shear which cuts metal using hydraulic
force, can also be dangerous to untrained people.

Benefits of recycling scrap metals

According to research conducted by the US Environmental Protection Agency, recycling scrap metals can be quite
beneficial to the environment. Using recycled scrap metal in place of virgin iron ore can yield:[5]

75% savings in energy


90% savings in raw materials used
86% reduction in air pollution
40% reduction in water use
76% reduction in water pollution
97% reduction in mining wastes

Every ton of new steel made from scrap steel saves:

1,115 kg of iron ore


625 kg of coal
53 kg of limestone
Energy savings from other metals include:

Aluminum savings of 95% energy

Copper savings of 85% energy


Lead savings of 65% energy
Zinc savings of 60% energy
Metal recycling industry[edit]

The metal recycling industry encompasses a wide range of metals. The more frequently recycled metals are scrap
steel, iron (ISS), lead, aluminum, copper, stainless steel and zinc. There are two main categories of metals: ferrous

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and non-ferrous. Metals which contain iron in them are known as Ferrous where metals without iron are non-ferrous.
Common non-ferrous metals are copper, brass, aluminum, zinc, magnesium, tin, nickel, and lead.
Non-ferrous metals also include precious and exotic metals.
Precious metals are metals with a high market value in any form, such as gold, silver, and platinum group metals.
Exotic metals contain rare elements such as cobalt, mercury, titanium, tungsten, arsenic, beryllium, bismuth, cerium,
cadmium, niobium, indium, gallium, germanium, lithium, selenium, tantalum, tellurium, vanadium, and zirconium.
Some types of metals are radioactive. These may be naturally-occurring or may be formed as by-products of
nuclear reactions. Metals that have been exposed to radioactive sources may also become radioactive in settings
such as medical environments, research laboratories, or nuclear power plants.

Value analysis/ Value engineering

Value engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an
examination of function. Value, as defined, is the ratio of function to cost. Value can therefore be increased by either
improving the function or reducing the cost. It is a primary tenet of value engineering that basic functions be
preserved and not be reduced as a consequence of pursuing value improvements. In the United States, value
engineering is specifically spelled out in Public Law 104-106, which states Each executive agency shall establish
and maintain cost-effective value engineering procedures and processes."
Value engineering is sometimes taught within the project management or
industrial engineering body of knowledge as a technique in which the value of a systems outputs is optimized by
crafting a mix of performance (function) and costs. In most cases this practice identifies and removes unnecessary
expenditures, thereby increasing the value for the manufacturer and/or their customers.VE follows a structured
thought process that is based exclusively on "function", i.e. what something "does" not what it is. For example a
screw driver that is being used to stir a can of paint has a "function" of mixing the contents of a paint can and not the
original connotation of securing a screw into a screw-hole. In value engineering "functions" are always described in
a two word abridgment consisting of an active verb and measurable noun.(what is being done - the verb - and what it
is being done to - the noun) and to do so in the most non-prescriptive way possible. In the screw driver and can of
paint example, the most basic function would be "blend liquid" which is less prescriptive than "stir paint" which can
be seen to limit the action (by stirring) and to limit the application (only considers paint.) This is the basis of what
value engineering refers to as "function analysis".
Value engineering uses rational logic (a unique "how" - "why" questioning technique) and the analysis of function to
identify relationships that increase value. It is considered a quantitative method similar to the scientific method,
which focuses on hypothesis-conclusion approaches to test relationships, and operations research, which uses model
building to identify predictive relationships.
What is VA/VE?
VAVE: Value Analysis/Value Engineering is a systematic and organized procedural decision-making process. It has
been used in almost any kind of application. It helps people creatively generate alternatives to secure essential
functions at the greatest worth as opposed to costs. This is referred to as value. It is also known as Value Analysis,
Value Management, Value Planning, and a host of other names.

1.
2.
3.
4.

Typical Benefits of a VA/VE Project


Reduce piece cost and total cost up to 26% across the board savings
Improve operational performance 40-50%
Improve product quality between 30-50%
Reduce the manufacturing costs up to 30%

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6.
7.
8.

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Improved customer-supplier relations


Cost avoidance on future programs
Reduction in product variations
Who Should Use Aether's VA/VE Services?

If you are not happy with the current level of profitability on your products, or if you are looking for an innovative
way to drive cost out of your products and improve quality, or if you are looking to build meaningful relationships
with your key suppliers, then you should consider Aether's Value Analysis / Value Engineering services. Reducing
product cost has taken on many different looks - six sigma, lean manufacturing, design to cost and the most common
method is to demand price reductions from suppliers. Price demands have resulted in some success but have also
resulted in strained relationships with suppliers. And unhealthy supplier relationships will not allow you to optimize
your supply chain, product quality, or the long-term health of your company.
VA/VE is an innovative way of reducing product costs while simultaneously
strengthening the relationships with our key suppliers, and improving product quality. Improvement occurs both
internally to your organization as well as externally with your suppliers. It's a win - win situation for all involved.
VA/VE allows you to get price reductions from your suppliers while allowing them to remain profitable.Aether
Consulting brings years of VA/VE experience to your company. We can help you change the way you approach
product cost reduction, change the way you look at your supply base, and provide valuable results.Aether's VA/VE
solutions look at your products and supply chain from a unique perspective allowing for cost reduction, improved
quality, and meaningful supplier relationships. ether has partnered with OpEx to deliver VA/VE projects worldwide.

Material handling

Material Handling is the field concerned with solving the pragmatic problems involving the movement, storage,
control and protection of materials, goods and products throughout the processes of cleaning, preparation,
manufacturing, distribution, consumption and disposal of all related materials, goods and their packaging. The focus
of studies of Material Handling course work is on the methods, mechanical equipment, systems and related controls
used to achieve these functions. The material handling industry manufactures and distributes the equipment and
services required to implement material handling systems, from obtaining, locally processing and shipping raw
materials to utilization of industrial feedstocks in industrial manufacturing processes. Material handling systems
range from simple pallet rack and shelving projects, to complex conveyor belt and AutomatedStorae and Retrieval
Systems (AS/RS); from mining and drilling equipment to custom built barley malt drying rooms in breweries.
Material handling can also consist of sorting and picking, as well as automatic guided vehicles.The material
handling system (MHS) is a fundamental part of a Flexible manufacturing system since it interconnects the different
processes supplying and taking out raw material, workpieces, sub-products, parts and final products. Due to the
automated nature of the whole production process, the MHS must respond in concert with timeliness for all
requirements of the processes and systems.

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Material handling is the movement, storage, management and guard of materials, goods and products during all the
stages under manufacturing, distribution, consumption and disposal. Material handling is very diverse as it covers
racks, shelves, multifaceted conveyor belts and automated storage and retrieval systems.

Transportation and traffic management.

A transportation management system (TMS) is a subset of supply chain management concerning transportation
operations and may be part of an enterprise resource planning system.A TMS usually "sits" between an ERP or
legacy order processing and warehouse/distribution module. A typical scenario would include both inbound
(procurement) and outbound (shipping) orders to be evaluated by the TMS Planning Module offering the user
various suggested routing solutions. These solutions are evaluated by the user for reasonableness and are passed
along to the transportation provider analysis module to select the best mode and least cost provider. Once the best
provider is selected, the solution typically generates electronic load tendering and track/trace to execute the
optimized shipment with the selected carrier, and later to support freight audit and payment (settlement process).
Links back to ERP systems (after orders turned into optimal shipments), and sometimes secondarily to WMS
programs also linked to ERP are also common.

Licensing

Recently, these systems have been offered with many different types of licensing arrangements. These different
arrangements have given shippers who otherwise would not be able to afford sophisticated software the opportunity
to utilize TMS to better manage this vital function. The 4 primary offerings are:
1.
2.
3.
4.

On-premise licensing (traditional purchased license)


Hosted licensing (remote, Saas, Cloud)
On-premise hosted licensing (a blend of 1 and 2)
Hosted - TMS free of licensing (same as 2 but free with no license requirements)

Additionally, some software providers have either been acquired or merged with traditional supply chain
management consultancies and are now offering shippers "blended" managed and software services as an outsourced
process. Primary Tier 1 TMS providers are still independent, carrier and 3PL neutral, and ERP neutral. While ERP
providers are moving to improve their on-premise transportation management offerings by adding TMS modules to
their existing, implemented base, the advent of Software-as-a-Service or "SaaS" delivery has resulted in a surge of
emerging TMS providers. Independent TMS providers have an advantage in that their smaller size and specific focus
on transportation process automation enables them to be more responsive to shifting transportation needs. Moreover,
transportation is the core competency of the independent TMS provider whereas for large ERP providers,
transportation is not a top priority. This is why according to a survey of 400 transportation managers produced in
2012 by analyst firm Peerless Research Group, a plurality reported that load optimization/consolidation, electronic
communications, settlement, reporting and integration with other enterprise applications were prime objectives.
Shipping organizations are increasingly drawn to SaaS model TMS implementations due in large part to the low
level of up-front costs (in terms of hardware and IT resources) required to implement and integrate SaaS-delivered
TMS with industry standard ERP systems.

Functionalities

Transportation management systems manage four key processes of transportation management:


1.

Planning and decision making TMS will define the most efficient transport schemes according to given
parameters, which have a lower or higher importance according to the user policy: transport cost, shorter
lead-time, fewer stops possible to ensure quality, flows regrouping coefficient, etc.

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3.

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Transportation Execution TMS will allow for the execution of the transportation plan such as carrier rate
acceptance, carrier dispatching, EDI etc..
Transport follow-up TMS will allow following any physical or administrative operation regarding
transportation: traceability of transport event by event (shipping from A, arrival at B, customs clearance,
etc.), editing of reception, custom clearance, invoicing and booking documents, sending of transport alerts
(delay, accident, non-forecast stops)
Measurement TMS have or need to have a logistics key performance indicator (KPI) reporting function
for transport.

Various functions of a TMS include but not limited to:

Planning and optimizing of terrestrial transport rounds


Inbound and outbound transportation mode and transportation provider selection
Management of motor carrier, rail, air and maritime transport
Real time transportation tracking
Service quality control in the form of KPI's (see below)
Vehicle Load and Route optimization
Transport costs and scheme simulation
Shipment batching of orders
Cost control, KPI (Key performance indicators) reporting and statistics
Typical KPIs include but not limited to:
% of On Time Pick Up or Delivery Performance relative to requested
Cost Per Metric - mile; km; Weight; Cube; Pallet
Productivity in monetary terms, e.g. $/lb or $/shipping unit
Productivity in operational terms, e.g. shipping units/order or weight/load

However, all the above logistical functions need to be scrutinized as to how each parameter functions.

Unit-4
Value stream mapping
Value stream mapping is a lean management principle used to analyze and design the flow of materials and
information required to bring a product or service to a consumer. Pioneered by Henry Ford in the 1920s, perfected
by Toyota. At Toyota, it is known as "material and information flow mapping". It can be applied to nearly any value
chain.
1.
2.
3.
4.
5.

Implementation
Applications
Metrics
Hand drawn or software tools
Associated analysis methods
Implementation

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Planning and preparation. Identify the target process, product family, or service. Create a charter, define the
problem, set the goals and objectives, and select the mapping team. Socialize the charter with the leadership team.
Draw while on the shop floor a current state value stream map, which shows the current steps, delays, and
information flows required to deliver the target product or service. This may be a production flow (raw materials to
consumer) or a design flow (concept to launch). There are 'standard'[citation needed] symbols for representing
supply chain entities.

Assess the current state value stream map in terms of creating flow by eliminating waste.
Draw a future state value stream map.
Work toward the future state condition.
Applications

Value stream mapping has supporting methods that are often used in Lean environments to analyze and design flows
at the system level (across multiple processes).Although value stream mapping is often associated with
manufacturing,
it
is
also
used
in
logistics,
supply
chain,
service
related
industries,
healthcare,softwaredevelopment,productdevelopment,and administrative and office processes.
In a build-to-the-standard form Shigeo Shingo[10] suggests that the value-adding steps be drawn across the centre of
the map and the non-value-adding steps be represented in vertical lines at right angles to the value stream. Thus the
activities become easily separated into the value stream which is the focus of one type of attention and the 'waste'
steps another type. He calls the value stream the process and the non-value streams the operations. The thinking here
is that the non-value-adding steps are often preparatory or tidying up to the value-adding step and are closely
associated with the person or machine/workstation that executes that value-adding step. Therefore each vertical line
is the 'story' of a person or workstation whilst the horizontal line represents the 'story' of the product being created.

Metrics

A key metric associated with value stream mapping is lead time.


Hand drawn or software tools One common method to deepen one understands of a value stream is to draw a map.
In current-state mapping this is done while observing the actual value stream in situ. The value stream maps are
often drawn by hand in pencil; the mapping process is simple, real-time, and iterative, as this method allows for
simple correction. An effective way of working as a group is to cover a wall with paper, such as butcher paper, and
provide adhesive notes to each work team, ideally color-coding each group. Each group writes their tasks on
individual notes and applies them to the paper in sequence. Lines are drawn between the steps to indicate the work
flow. This way the tasks can easily be moved around as other steps come to mind. However, software tools can also
be used. A variety is available either as stand-alone products or stencils/add-ons to products. Hines and Rich (1997)
defined seven value stream mapping tools they are:
1.
2.
3.
4.
5.
6.
7.

Process Activity Mapping


Supply chain responsiveness matrix
Product Variety Funnel
Quality filter mapping
Forrester effect mapping
Decision point analysis
Overall Structure Maps

Value stream mapping is a lean tool that employs a flow diagram documenting in high detail every step of a process.
Many lean practitioners see value stream mapping as the fundamental tool to identify waste, reduce process cycle
times, and implement process improvement. Some organizations treat the value stream map as the hallmark of their
lean efforts.In analyzing value steam maps, it has occurred to me that some may have been created primarily as

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heuristic tools to teach lean concepts. It seemed as if the process improvement teams had focused on the method as
the end, rather than how to use the method as a means to achieve an end. The detail was overwhelming. In some
cases, the time spent creating the maps actually became a waste of time in itself, resulting in a negative return on the
process improvement effort.Dont get me wrong: Value steam mapping can be a crucial tool to document processes
and eliminate waste. Every process improvement initiative should begin with a clear understanding of current
performance and an idea of the waste minimization you can achieve.However, dont allow enthusiasm for lean to
lead you automatically to value stream mapping. In some cases, using value stream mapping would be like using a
top fuel dragster the fastest and most expensive car in the quarter-mile race, the best-of-the-best in technology,
drivers, and pit crews to take you to the mailbox at the end of your driveway.

Prepare for the High Cost of Participation

While value steam mapping can be an effective process improvement tool, the cost to use it can be high. Like racing
a top fuel dragster, value steam mapping requires the presence of highly skilled support team members who practice
frequently. Because of the need for considerable detail, team members will spend hours, even days, to develop a
comprehensive value steam map.
Unlike drag racing, where direct costs can be measured, value stream mapping involves the risk of opportunity costs
that are difficult to quantify. Simpler, more productive tools that are easier to learn might be available to make
describing the current process faster and more effective. Many organizations forget to consider these opportunity
costs for using value stream mapping.

Add Horsepower Incrementally

When management begins to appreciate the power of value steam mapping, a natural tendency is to want to jump in
and improve the most complex business processes. After all, the most complex processes can often provide the
highest potential return for process improvement efforts.
On the other hand, anyone who has raced top fuel dragsters did not start with top fuel. Starting with gas-powered
engines led next to alcohol engines and finally to top fuel.
I recommend a stepping up the ladder approach to value stream mapping. When first learning, control the
complexity of the project by limiting the size of the analysis and the need for cross-functional involvement. Begin
by evaluating and mapping a limited, simpler process within one area of the organization. Achieve some early wins.
Publish your results. Build your confidence in using the tool for process improvement.Advanced use of value steam
mapping should occur when competence, experience, and time for mapping are available and when the tool applies
to the situation. Examples of appropriate situations include:
You are addressing a process that requires participation across functional areas. Team members will need detailed
explanations of business practices outside their expertise.A less detailed process map will not reveal any obvious
opportunities for improvement. Sometimes the benefit really lies in the details.Buy-in is required from
management to fund improvements. To make the most of a business case presentation, a compelling picture can be
worth a thousand words.

Tune the Process of Ongoing Improvement

A dragster wins only when many components work well in unison. An improved, but overpowered engine can result
in tire shake. A strengthened transmission can result in excessive tire spin when starting off the line.
Improvements in only some parts of the drive train sometimes do not result in faster times.

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The analogy in designing process improvement is critical and meaningful. Value steam mapping helps you find and
eliminate waste. The approach often results in reduced business process cycle time.However, reduced cycle time
does not always deliver bottom-line economic improvements. In addition, improvement in one area of a value
stream does not always result in process improvement of the whole. If you are going to invest in a powerful tool
such as value stream mapping and you want a positive return on your investment, then new process measures are
required.Measure your process improvement projects based on actual performance. Dragster performance times are
measured in thousandths of a second, and there is always a winner.
To determine process improvement priorities for your organization, answer the following questions:
Does the project result in less work in progress as defined by fewer open tasks or less inventory?
Will the project allow you to reduce operating expenses as defined by reduced total spending at month end?
What does the project do to improve an organizational goal as defined by earned profit or by improved service?
Answer the questions with honest, quantifiable evaluations and you will be on your way to improving the
productivity of your value stream mapping efforts.

Unit-5
Inventory management: Inventory overview, JIT

What is Inventory Management?


Effective inventory management is all about knowing what is on hand, where it is in use, and how much finished
product results.Inventory management is the process of efficiently overseeing the constant flow of units into and out
of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the
inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy.
Competent inventory management also seeks to control the costs associated with the inventory, both from the
perspective of the total value of the goods included and the tax burden generated by the cumulative value of the
inventory.

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Balancing the various tasks of inventory management means paying attention to three key aspects of any inventory.
The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory, this means
understanding how long it takes for a supplier to process an order and execute a delivery. Inventory management
also demands that a solid understanding of how long it will take for those materials to transfer out of the inventory
be established. Knowing these two important lead times makes it possible to know when to place an order and how
many units must be ordered to keep production running smoothly.Calculating what is known as buffer stock is also
key to effective inventory management. Essentially, buffer stock is additional units above and beyond the minimum
number required to maintain production levels. For example, the manager may determine that it would be a good
idea to keep one or two extra units of a given machine part on hand, just in case an emergency situation arises or one
of the units proves to be defective once installed. Creating this cushion or buffer helps to minimize the chance for
production to be interrupted due to a lack of essential parts in the operation supply inventory.Inventory management
is not limited to documenting the delivery of raw materials and the movement of those materials into operational
process. The movement of those materials as they go through the various stages of the operation is also important.
Typically known as a goods or work in progress inventory, tracking materials as they are used to create finished
goods also helps to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously
low or is inflated to an unfavorable level.
Finally, inventory management has to do with keeping accurate
records of finished goods that are ready for shipment. This often means posting the production of newly completed
goods to the inventory totals as well as subtracting the most recent shipments of finished goods to buyers. When the
company has a return policy in place, there is usually a sub-category contained in the finished goods inventory to
account for any returned goods that are reclassified as refurbished or second grade quality. Accurately maintaining
figures on the finished goods inventory makes it possible to quickly convey information to sales personnel as to
what is available and ready for shipment at any given time.In addition to maintaining control of the volume and
movement of various inventories, inventory management also makes it possible to prepare accurate records that are
used for accessing any taxes due on each inventory type. Without precise data regarding unit volumes within each
phase of the overall operation, the company cannot accurately calculate the tax amounts. This could lead to
underpaying the taxes due and possibly incurring stiff penalties in the event of an independent audit.

What Are Common Components of an Inventory Management System?


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Inventory Software

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We carry inventory software for control and tracking of warehouse or point of sale inventory. Bundle our software
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Just in time (JIT)

Just in time (JIT) is a production strategy that strives to improve a business' return on investment by reducing inprocess inventory and associated carrying costs. To meet JIT objectives, the process relies on signals or Kanban
between different points, which are involved in the process, which tell production when to make the next part.
Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf.
Implemented correctly, JIT focuses on continuous improvement and can improve a manufacturing organization's
return on investment, quality, and efficiency. To achieve continuous improvement key areas of focus could be flow,
employee involvement and quality.
JIT relies on other elements in the inventory chain as well. For instance, its effective application cannot be
independent of other key components of a lean manufacturing system or it can "end up with the opposite of the
desired result." In recent years manufacturers have continued to try to hone forecasting methods such as applying a
trailing 13-week average as a better predictor for JIT planning; however, some research demonstrates that basing JIT
on the presumption of stability is inherently flawed.

Effects
A surprising effect of JIT was that car factory response time fell to about a day. This improved customer satisfaction
by providing vehicles within a day or two of the minimum economic shipping delay. Also, the factory began
building many vehicles to order, eliminating the risk they would not be sold. This improved the company's return on
equity. Since assemblers no longer had a choice of which part to use, every part had to fit perfectly. This caused a
quality assurance crisis, which led to a dramatic improvement in product quality. Eventually, Toyota redesigned
every part of its vehicles to widen tolerances, while simultaneously implementing careful statistical controls for
quality control. Toyota had to test and train parts suppliers to assure quality and delivery. In some cases, the
company eliminated multiple suppliers.
When a process or parts quality problem surfaced on the production line, the entire production line had to be slowed
or even stopped. No inventory meant a line could not operate from in-process inventory while a production problem
was fixed. Many people in Toyota predicted that the initiative would be abandoned for this reason. In the first week,

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line stops occurred almost hourly. But by the end of the first month, the rate had fallen to a few line stops per day.
After six months, line stops had so little economic effect that Toyota installed an overhead pull-line, similar to a bus
bell-pull, that let any worker on the line order a line stop for a process or quality problem. Even with this, line stops
fell to a few per week.The result was a factory that has been studied worldwide. It has been widely emulated, but not
always with the expected results, as many firms fail to adopt the full system.
The just-in-time philosophy was also applied to other segments of the
supply chain in several types of industries. In the commercial sector, it meant eliminating one or all of the
warehouses in the link between a factory and a retail establishment. Examples in sales, marketing, and customer
service involve applying information systems and mobile hardware to deliver customer information as needed, and
reducing waste by video conferencing to cut travel time.

Benefits
Main benefits of JIT include:

Reduced setup time. Cutting setup time allows the company to reduce or eliminate inventory for
"changeover" time. The tool used here is SMED (single-minute exchange of dies).
The flow of goods from warehouse to shelves improves. Small or individual piece lot sizes reduce lot delay
inventories, which simplifies inventory flow and its management.
Employees with multiple skills are used more efficiently. Having employees trained to work on different
parts of the process allows companies to move workers where they are needed.
Production scheduling and work hour consistency synchronized with demand. If there is no demand for a
product at the time, it is not made. This saves the company money, either by not having to pay workers
overtime or by having them focus on other work or participate in training.

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Increased emphasis on supplier relationships. A company without inventory does not want a supply system
problem that creates a part shortage. This makes supplier relationships extremely important.
Supplies come in at regular intervals throughout the production day. Supply is synchronized with
production demand and the optimal amount of inventory is on hand at any time. When parts move directly
from the truck to the point of assembly, the need for storage facilities is reduced.
Minimizes storage space needed.
Smaller chance of inventory breaking/expiring.

Problems Within a JIT system

Just-in-time operation leaves suppliers and downstream consumers open to supply shocks and large supply or
demand changes. For internal reasons, Ohno saw this as a feature rather than a bug. He used an analogy of lowering
the water level in a river to expose the rocks to explain how removing inventory showed where production flow was
interrupted. Once barriers were exposed, they could be removed. Since one of the main barriers was rework,
lowering inventory forced each shop to improve its own quality or cause a holdup downstream. A key tool to
manage this weakness is production levelling to remove these variations. Just-in-time is a means to improving
performance of the system, not an end.Very low stock levels means shipments of the same part can come in several
times per day. This means Toyota is especially susceptible to flow interruption. For that reason, Toyota uses two
suppliers for most assemblies. As noted in Liker (2003), there was an exception to this rule that put the entire
company at risk because of the 1997 Aisin fire. However, since Toyota also makes a point of maintaining high
quality relations with its entire supplier network, several other suppliers immediately took up production of the
Aisin-built parts by using existing capability and documentation.

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