Group 4

Term pepper presentation of

Material Production planning and control (ACC754)

Topic: Discuss comprehensively what you understand

by Material Handling,

NTRODUCTION AND IMPORTANCE

Material handling is a necessary and significant component of any productive activity. It is something that goes
on in every plant all the time. Material handling means providing the right amount of the right material, in the right
condition, at the right place, at the right time, in the right position and for the right cost, by using the right method.
It is simply picking up, moving, and lying down of materials through manufacture. It applies to the movement of
raw materials, parts in process, finished goods, packing materials, and disposal of scraps. In general, hundreds
and thousands tons of materials are handled daily requiring the use of large amount of manpower while the
movement of materials takes place from one processing area to another or from one department to another
department of the plant. The cost of material handling contributes significantly to the total cost of manufacturing.
In the modern era of competition, this has acquired greater importance due to growing need for reducing the
manufacturing cost. The importance of material handling function is greater in those industries where the ratio of
handling cost to the processing cost is large. Today material handling is rightly considered as one of the most
potentially lucrative areas for reduction of costs. A properly designed and integrated material handling system
provides tremendous cost saving opportunities and customer services improvement potential.
DEFINITIONS
There are many ways by which material handling has been defined but one simple definition is Material
handling is the movement and storage of material at the lowest possible cost through the use of proper method
and equipment.
Other definitions are:

Material handling embraces all of the basic operations involved in the movement of bulk, packaged,
and individual products in a semisolid or solid state by means of machinery, and within limits of a place
of business.

Material handling is the art and science of moving, storing, protecting, and controlling material

Material handling is the preparation, placing, and positioning of materials to facilitate their movement or
storage.

act of loading and unloadingand moving goods within e.g. a factory especiallyusing mechanical devices

handling - manual (or mechanical) carrying ormoving or delivering or working with something
Material handling is the movement, protection, storage and control of materials and products throughout
manufacturing, warehousing, distribution, consumption and disposal.

Material handling is the movement, protection, storage and control of materials and products throughout
manufacturing, warehousing, distribution, consumption and disposal. As a process, material handling
incorporates a wide range of manual, semi-automated and automated equipment and systems that support
logistics and make the supply chain work. Their application helps with:

Forecasting

Resource allocation

Production planning

Flow and process management

Inventory management and control

Customer delivery

After-sales support and service

A companys material handling system and processes are put in place to improve customer service, reduce
inventory, shorten delivery time, and lower overall handling costs in manufacturing, distribution and
transportation

OBJECTIVES OF MATERIAL HANDLING

The common hand shovel and the baskets were the only material handling tools, until some years ago, but now
due to increasing demand for sophisticated handling equipment, material handling system has been
revolutionized all over the world.
The main objective of the efficient materials handling is to decrease the costs. Materials handling equipment
does not come under the production machinery but is an auxiliary equipment which can improve the flow of
materials which in turn shall reduce the stoppages in production machines and thus increases their production.
In brief followings are the objectives:

(1) Cost reduction by:

(i) Decreasing Inventory level
(ii) Utilizing space to better advantage
(iii) Increasing productivity.
(2) Waste Reduction by:
(i) Eliminating damage to material during handling
(ii) Being flexible to meet specific handling requirements of different nature.
(iii) Making proper control over stock during in and out handling.
(3) Improve Working Conditions by:
(i) Increasing productivity per man-hour
(ii) Increase in machine efficiency through reduction of machine down time
(iii) Smoothing out workflow
(iv) Improving production control.
(4) Improve Working Conditions by:
(i) Providing safe working conditions
(ii) Reducing workers fatigue
(iii) Improving personal comfort
(iv) Upgrading employees/workers to productive work.
(5) Improve Distribution by:
(i) Decreasing damage to products during handling and shipping.

(ii) Improving location of storage facilities.

(iii) Increasing the efficiency of shipping and receiving.

LIMITATIONS OF AUTOMATED MATERIAL HANDLING SYSTEMS:

A good management practice is to weigh benefits against the limitations or disadvantages before contemplating
any change. Material handling systems also have consequences that may be distinctly negative. These are:
1. Additional investment
2. Lack of flexibility
3. Vulnerability to downtime whenever there is breakdown
4. Additional maintenance staff and cost
5. Cost of auxiliary equipment.
6. Space and other requirements:
The above limitations or drawbacks of adopting mechanized handling equipment have been identified not to
discourage the use of modern handling equipment but to emphasize that a judicious balance of the total benefits
and limitations is required before an economically sound decision is made.
Functions of Material Handling:
Following are the important functions of material handling:
(i) To select machines/equipment and plant layout to eliminate or minimize material handling requirements. To
select most efficient, safe and appropriate material handling equipment, which can fulfill material handling
requirement at minimum cost?
(ii) To minimize the material handling cost by way of:
(a) Minimization of movement of semi finished items during the production process.

(b) Planning movement of optimum necessary places in one unit.

(c) Minimization of distance moved.
(d) Increasing speed of material handling operation through mechanization.
(e) By elimination/ minimization of back tracking and duplicate handling.
(f) By utilization of gravity for material handling.
(g) To employ mechanical aids instead of manual labour to accelerate material movements.
Objectives of Material Handling:

PRINCIPLES OF MATERIAL HANDLING

The Key to Greater Productivity, Customer Service and Profitability

1, PLANNING PRINCIPLE
Definition: A plan is a prescribed course of action that is defined in advance of implementation. In its simplest
form a material handing plan defines the material (what) and the moves (when and where); together they
define the method (how and who).

All material handling should be the result of a deliberate plan where the needs, performance objectives and
functional specification of the proposed methods are completely defined at the outset.

PLANNING PRINCIPLE
Key Points

The plan should be developed in consultation between the planner(s) and all who will use and benefit from the
equipment to be employed.
Success in planning large scale material handling projects generally requires a team approach involving
suppliers, consultants when appropriate, and end user specialists from management, engineering,
computer and information systems, finance and operations.
The material handling plan should reflect the strategic objectives of the organization as well as the more
immediate needs.
The material handling plan should reflect the strategic objectives of the organization as well as the more
immediate needs.
The plan should document existing methods and problems, physical and economic constraints, and future
requirements and goals.
The plan should promote concurrent engineering of product, process design, process layout, and material
handling methods, as opposed to independent and sequential design practices.

2, STANDARDIZATION PRINCIPLE
Material handling methods, equipment, controls and software should be standardized within the limits of
achieving overall performance objectives and without sacrificing needed flexibility , modularity and
throughput.
Definition: Standardization means less variety and customization in the methods and equipment employed.

STANDARDIZATION PRINCIPLE
Key Points
The planner should select methods and equipment that can perform a variety of tasks under a variety of
operating conditions and in anticipation of changing future requirements.

Standardization applies to sizes of containers and other load forming components as well as operating
procedures and equipment.
Standardization, flexibility and modularity must not be incompatible

3, WORK PRINCIPLE
Material handling work should be minimized without sacrificing productivity or the level of service required of the
operation.
Definition: The measure of work is material handling flow (volume, weight or count per unit of time) multiplied
by the distance moved.
WORK PRINCIPLE
Key Points
Simplifying processes by reducing, combining, shortening or eliminating unnecessary moves will reduce work.
Consider each pickup and set-down, or placing material in and out of storage, as distinct moves and
components of the distance moved.
Process methods, operation sequences and process/equipment layouts should be prepared that support the
work minimization objective.

Where possible, gravity should be used to move materials or to assist in their movement while respecting
consideration of safety and the potential for product damage.
Process methods, operation sequences and process/equipment layouts should be prepared that support the
work minimization objective.

Where possible, gravity should be used to move materials or to assist in their movement while respecting
consideration of safety and the potential for product damage.

The shortest distance between two points is a straight line.

4, ERGONOMIC PRINCIPLE
Human capabilities and limitations must be recognized and respected in the design of material handling tasks
and equipment to ensure safe and effective operations.
Definition: Ergonomics is the science that seeks to adapt work or working conditions to suit the abilities of the
worker.

ERGONOMIC PRINCIPLE
Key Points
Equipment should be selected that eliminates repetitive and strenuous manual labor and which effectively
interacts with human operators and users.
The ergonomic principle embraces both physical and mental tasks.
The material handling workplace and the equipment employed to assist in that work must be designed so
they are safe for people.

5, UNIT LOAD PRINCIPLE

Unit loads shall be appropriately sized and configured in a way which achieves the material flow and inventory
objectives at each stage in the supply chain.
Definition: A unit load is one that can be stored or moved as a single entity at one time, such as a pallet,
container or tote, regardless of the number of individual items that make up the load.

UNIT LOAD PRINCIPLE

Key Points

Less effort and work is required to collect and move many individual items as a single load than to move many
items one at a time.
Load size and composition may change as material and product moves through stages of manufacturing
and the resulting distribution channels.
Large unit loads are common both pre and post manufacturing in the form of raw materials and finished
goods.
During manufacturing, smaller unit loads, including as few as one item, yield less in-process inventory and
shorter item throughput times.
Smaller unit loads are consistent with manufacturing strategies that embrace operating objectives such
as flexibility, continuous flow and just-in-time delivery.
Unit loads composed of a mix of different items are consistent with just-in-time and/or customized supply
strategies so long as item selectivity is not compromised.

6, SPACE UTILIZATION
Effective and efficient use must be made of all available space.
Definition: Space in material handling is three dimensional and therefore is counted as cubic space.

SPACE UTILIZATION
Key Points
In work areas, cluttered and unorganized spaces and blocked aisles should be eliminated.
In storage areas, the objective of maximizing storage density must be balanced against accessibility and
selectivity.
When transporting loads within a facility the use of overhead space should be considered as an option.

7, SYSTEM PRINCIPLE
Material movement and storage activities should be fully integrated to form a coordinated, operational system
which spans receiving, inspection, storage, production, assembly, packaging, unitizing, order selection,
shipping, transportation and the handling of returns.
Definition: A system is a collection of interacting and/or interdependent entities that form a unified whole.
SYSTEM PRINCIPLE
Key Points
Systems integration should encompass the entire supply chain including reverse logistics. It should include
suppliers, manufacturers, distributors and customers.
Inventory levels should be minimized at all stages of production and distribution while respecting
considerations of process variability and customer service.
Information flow and physical material flow should be integrated and treated as concurrent activities.

Methods should be provided for easily identifying materials and products, for determining their location
and status within facilities and within the supply chain and for controlling their movement.
Customer requirements and expectations regarding quantity, quality, and on-time delivery should be met without
exception.

8, AUTOMATION PRINCIPLE
Material handling operations should be mechanized and/or automated where feasible to improve operational
efficiency, increase responsiveness, improve consistency and predictability, decrease operating costs and
to eliminate repetitive or potentially unsafe manual labor.
Definition: Automation is a technology concerned with the application of electro-mechanical devices,
electronics and computer-based systems to operate and control production and service activities. It

suggests the linking of multiple mechanical operations to create a system that can be controlled by
programmed instructions.

AUTOMATION PRINCIPLE
Key Points
Pre-existing processes and methods should be simplified and/or re-engineered before any efforts at installing
mechanized or automated systems.
Computerized material handling systems should be considered where appropriate for effective integration
of material flow and information management.
All items expected to be handled automatically must have features that accommodate mechanized and
automated handling.
Treat all interface issues as critical to successful automation, including equipment to equipment,
equipment to load, equipment to operator, and control communications.

9, ENVIRONMENTAL PRINCIPLE
Environmental impact and energy consumption should be considered as criteria when designing or selecting
alternative equipment and material handling systems.
Definition: Environmental consciousness stems from a desire not to waste natural resources and to predict and
eliminate the possible negative effects of our daily actions on the environment.

ENVIRONMENTAL PRINCIPLE
Key Points
Containers, pallets and other products used to form and protect unit loads should be designed for reusability
when possible and/or biodegradability as appropriate.

Systems design should accommodate the handling of spent dunnage, empty containers and other byproducts of material handling.

10, LIFE CYCLE COST PRINCIPLE

A thorough economic analysis should account for the entire life cycle of all material handling equipment and
resulting systems.
Definition:

Life cycle costs include all cash flows that will occur between the time the first dollar is spent to

plan or procure a new piece of equipment, or to put in place a new method, until that method and/or
equipment is totally replaced.

LIFE CYCLE PRINCIPLE

Key Points
Life cycle costs include capital investment, installation, setup and equipment programming, training, system
testing and acceptance, operating (labor, utilities, etc.), maintenance and repair, reuse value, and ultimate
disposal.
A plan for preventive and predictive maintenance should be prepared for the equipment, and the
estimated cost of maintenance and spare parts should be included in the economic analysis.
A long-range plan for replacement of the equipment when it becomes obsolete should be prepared.
Although measurable cost is a primary factor, it is certainly not the only factor in selecting among
alternatives. Other factors of a strategic nature to the organization and which form the basis for
competition in the market place should be considered and quantified whenever possible.

CLASSIFICATION OF MATERIAL HANDLING EQUIPMENTS!

(i) Transportation Equipment or Devices:

These devices are useful only for horizontal movement or motion. These devices include trucks and other similar
vehicles. These vehicle are powered by hand, gasoline or electric power, and have the capability of transporting
material and manpower in a horizontal direction.
These also include variable path equipments and can be utilized so long as travelling surfaces are available and
the route is obstruction free. Thus these vehicles occupy the space intermittently and as soon as the work is
over the space is free for some other operation.
The simplest among these are wheel barrows and trucks. But these devices need large amount of manpower for
relatively small load. These involve easy portability, greater flexibility and low cost. When movement from one
work station to other is required. Tractors and trailers are the other popular modes of horizontal transportation.
Great flexibility is provided by these methods. Trailers can be left loaded and can be picked up later by other
different tractors. This is considered as one of the most convenient and important methods of material handling
inside the plant.
Skids can be used with lift trucks. These are the improvements over wheel barrows and hand trucks. For
horizontal transportation of commodities like natural gas, oil and water etc. pipelines and pumps can also be
used.
(ii) Lifting and Lowering Equipment or Devices:
These are meant for vertical transportation of material. Block and Tackle arrangement of lifting loads through
vertical distance is one of the oldest and simplest devices. It is still used today by moving men in hoisting
machinery into position. Which is another device used to lift loads vertically by winding rope or cable on a drum.
Cranes and Hoist are the common means of vertical movement.
The equipment is able to move material vertically and laterally in a space of limited length width as well as
height. If mounted on carriers like trucks and tractors etc. they can also move from one location to the other.
Hoists are power driven devices, often operated between fixed guiderails.

Two types of cranes i.e. pillar and overhead cranes are generally used for light duty jobs and in various
workshops (such as boundaries and power houses and chemical plants etc.) respectively. Hydraulic and electric
operated elevators also fall under this category of material handling devices.

(iii) Combination of Transportation and Lifting plus Lowering:

Simplest amount these devices are conveyors which move materials or people in either vertical or horizontal
direction between two fixed points. In conveyors, the transportation is affected by friction between materials
being transported by the belt.
These conveyors have the advantage that they largely save labour cost but have disadvantage that take up
considerable space and are relatively fixed and in majority of cases the investment is high. Other devices under
this category of combination devices are Chute, Lift Truck, Crane Truck, Auto Truck etc.

TYPES OF MATERIAL HANDLING EQUIPMENT

. As a process, material handling incorporates a wide range of manual, semi-automated (conventional
Traditional) and automated (Computer Aided) equipment and systems that support logistics and make the supply
chain work. Their application helps with:

Material handling equipment is divided into two major types: the conventional and the computer aided. As its
name implies, conventional material handling equipment includes devices that run through manual power and
those that runs with the aid of a more conventional mechanism. On the other hand, computer aided material
handling equipment features more technologically advanced mechanism. Devices that are included in this type
of material handling equipment are those that are connected and controlled by computers.
Conventional Material Handling Equipment
Conventional material handling equipment are non-automated devices that are run by traditional motorized
system. Conventional material handling equipment is divided into three sub-categories, namely bulk material
handling, storage equipment and industrial trucks.

1. Storage Equipment are equipment that are used mainly for storing products, components and other materials.
These are mostly non-automated equipment with simple mechanism. This equipment allows the materials to sit
around the facility without causing any delay or unwanted accidents. It helps in keeping the working area well
organized and hazard-free. Examples of storage equipment are pallets, sliding racks, shelves, frames, bins
and storage cabinets for gas cylinders and the likes.
2. Bulk Material Handling are equipment used for storing, handling and transporting bulk materials. This
equipment can handle loose materials such as chemicals, foods, powdered minerals and others. Examples of
bulk material handling equipment are stackers, bulk containers, silos, conveyors, reclaimer and grain elevators.
3. Industrial Trucks are motorized vehicles that are used to move and transport products, goods and materials.
These trucks can run through manual or electrically powered mechanism and can be used for different
applications. Examples of industrial trucks are pallet trucks, forklift, side loader, platform trucks, hand trucks,
walkie stackers, cranes and order pickers.

Computer Aided Material Handling Equipment

We can refer to this type as the new generation material handling equipment. Computer aided material handling
equipment are devices that are enhanced by the latest technological applications. These equipment are highly
automated, thus these equipment can automatically adjust its settings and functions according to the changes in
the system and the process. Computer aided material handling equipment are divided into three sub-categories
namely robotic delivery system, computer controlled conveyor system and automated guided vehicles (AGV).
1. Robotic Delivery System is a very versatile type of computer aided material handling equipment. These are
automated equipment used for material storage, retrieval and transporting, as well on assembly work and other
applications. These robots can move backward and forward and can carry multiple loads at the same time. This
system was first introduced 30 years ago and with the help of the latest technology, this system has improved
greatly, making it a fundamental tool for logistics, warehousing and other industries. Examples of robotic delivery
system are the mechanized cherry picker, the UNITX and Aethon's ARD among others.
2. Computer Controlled as its name suggests, is a more technologically advanced conveyor system. This type
of conveyor system continuously communicates with the central computer control system so it can be routed
through the track network. These conveyor systems have scanner that can optically read markers that are
situated into different zones. These are used to move, transport materials, faster and easier and with less human
intervention. Examples of computer controlled conveyor system are those that are used in manufacturing,
assembly and production.

3. Automated Guided Vehicles (AGV) are material handling equipment that are used to move or transport goods,
parts and materials between workstations, work centers and other material handling machines. These are small,
individually powered vehicles that are guided by power cables that are placed under the floor. Other times, AGV
are guided by optical guidance system, which more advance and therefore expensive that is why only large
industries used this system. AGV can be controlled by central computers or on-board computer control.
Examples of Automated guided vehicles are unit-load AGV, tow-type AGV and fork truck among others.
Computer Aided Material Handling Equipment in Action
Pros and Cons of Using Material Handling Equipment
Both types helped greatly in improving the quality and quantity of employees productivity, as well as minimizing
errors and accidents. Although both types can perform well accordingly to the specific applications the
equipment is assigned to, both types also have their advantage and disadvantages.
PROS:

Lessen manual labor.

Less shipping errors.

Minimal damage on goods and materials.

Less shipping and production costs.

Lessen employees compensation claims therefore allows you to save more in the long run.

CONS:

Require fast data tracking and processing.

Require reliable and fool-proof inventory management system.

Require more free floor spaces so that equipment can move properly.

Buying your own material handling equipment may require you to raise bigger funds or initial capital.

Require you to set aside funds for maintenance and repair.

ADVANTAGES AND DISADVANTAGES OF AUTOMATION

Is automation good or bad? There are arguments on both sides of this issue. On one hand the cost of
production on a per item basis is generally lower, on the other hand it is often said that automation takes jobs
from people. The following is from the first chapter of my book:
Human beings have been making things for many thousands of years. Originally most products were made on
an individual as-needed basis; if a tool was required it was fashioned by hand and in turn used to make more
tools. As time passed, more complex techniques were developed to help people accomplish fabrication and
production tasks. Metalworking technology, weaving looms, water-driven grinding mills and the development of
steam and gasoline engines all contributed to a greater ability to make various products, but things were still
generally made one at a time by craftspeople skilled in various techniques. It was only after the industrial
revolution and common use of electrical energy and mechanisms that manufacturing of products on a large
scale became commonplace.
Some disadvantages of automation are:
Technology limits. Current technology is unable to automate all desired tasks. Some tasks cannot be easily
automated, such as the production or assembly of products with inconsistent component sizes or in tasks where
manual dexterity is required. There are some things that are best left to human assembly and manipulation.
Economic limits. Certain tasks would cost more to automate than to perform manually. Automation is typically
best suited to processes that are repeatable, consistent and high volume.
Unpredictable development costs. The research and development cost of automating a process is difficult to
predict accurately beforehand. Since this cost can have a large impact on profitability, it is possible to finish
automating a process only to discover that there is no economic advantage in doing so. With the advent and
continued growth of different types of production lines, however, more accurate estimates based on previous
projects can be made.
Initial costs are relatively high. The automation of a new product or the construction of a new plant requires a
huge initial investment compared to the unit cost of the product. Even machinery for which the development cost
has already been recovered is expensive in terms of hardware and labor. The cost can be prohibitive for custom
production lines where product handling and tooling must be developed.

 A skilled maintenance department is often required to service and maintain the automation system in proper
working order. Failure to maintain the automation system will ultimately result in lost production and/or bad parts
being produced.
A few advantages of automation are:
Replacing human operators in tasks that involve hard physical or monotonous work.
Replacing humans in tasks performed in dangerous environments such as those with temperature extremes or
radioactive and toxic atmospheres.
Making tasks that are beyond human capabilities easier. Handling heavy or large loads, manipulating tiny
objects or the requirement to make products very quickly or slowly are examples of this.
Production is often faster and labor costs less on a per product basis than the equivalent manual operations.
Automation systems can easily incorporate quality checks and verifications to reduce the number of out-oftolerance parts being produced while allowing for statistical process control that will allow for a more consistent
and uniform product.
Economic improvement. Automation can serve as the catalyst for improvement in the economies of enterprises
or society. For example, the gross national income and standard of living in Germany and Japan improved
drastically in the 20th century, due in large part to embracing automation for the production of weapons,
automobiles, textiles and other goods for export.
Automation systems dont call in sick!
Overall, the advantages would seem to outweigh the disadvantages. It can be safely said that countries that
have embraced automation enjoy a higher standard of living than those that have not. At the same time, a
concern is often aired that automating tasks takes jobs from people that used to build things by hand.
Regardless of the social implications, there is no doubt that productivity increases with the proper application of
automation techniques.

REFERENCES
Frank Lamb
Author of Industrial Automation: Hands On
Founder, AutomationPrimer.com. Feb 27, 2016

Smriti Chand, Material Handling

Feb 3, 2016
Kulwice, R. A (ed.), (1985), Material handling Hand Book,
2nd edition, Wiley-interscience.
Matson, J.O, Swaminathan, S.R, mellichamp, J.M, knowledge-Based Material Handling
Equipment selection, proc.of the 1990 international industrial engineering conference,
212-217, (1990).

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Purchasing and Procurement

PURCHASING AND PROCUREMENT

Purchasing and procurement is used to denote the function of and the responsibility for
procuring materials, supplies, and services. Recently, the term "supply management" has
increasingly come to describe this process as it pertains to a professional capacity.
Employees who serve in this function are known as buyers, purchasing agents, or supply
managers. Depending on the size of the organization, buyers may further be ranked as
senior buyers or junior buyers.

HISTORY
Prior to 1900, there were few separate and distinct purchasing departments in U.S.
business. Most pre-twentieth-century purchasing departments existed in the railroad
industry. The first book specifically addressing institutionalized purchasing within this
industry was The Handling of Railway SuppliesTheir Purchase and Disposition, written by
Marshall M. Kirkman in 1887.
Early in the twentieth century, several books on purchasing were published, while discussion
of purchasing practices and concerns were tailored to specific industries in technical trade
publications. The year 1915 saw the founding of The National Association of Purchasing
Agents. This organization eventually became known as the National Association of
Purchasing Management (NAPM) and is still active today under the name The Institute for
Supply Management (ISM).
Harvard University offered a course in purchasing as early as 1917. Purchasing as an
academic discipline was furthered with the printing of the first college textbook on the
subject, authored by Howard T. Lewis of Harvard, in 1933.
Early buyers were responsible for ensuring a reasonable purchase price and maintaining
operations (avoiding shutdowns due to stockouts). Both World Wars brought more attention
to the profession due to the shortage of materials and the alterations in the market. Still, up
until the 1960s, purchasing agents were basically order-placing clerical personnel serving in
a staff-support position.
In the late 1960s and early 1970s, purchasing personnel became more integrated with a
materials system. As materials became a part of strategic planning, the importance of the
purchasing department increased.
In the 1970s the oil embargo and the shortage of almost all basic raw materials brought
much of business world's focus to the purchasing arena. The advent of just-in-time
purchasing techniques in the 1980s, with its emphasis on inventory control and supplier
quality, quantity, timing, and dependability, made purchasing acornerstone of competitive
strategy.

By the 1990s the term "supply chain management" had replaced the terms "purchasing,"
"transportation," and "operations," and purchasing had assumed a position in organizational
development and management. In other words, purchasing had become responsible for
acquiring the right materials, services, and technology from the right source, at the right
time, in the right quantity.
Only in small firms is purchasing still viewed as a clerical position. When one notes that, on
average, purchasing accounts for over half of most organizations' total monetary
expenditures, it is no wonder that purchasing is marked as an increasingly pivotal position.

FACTORS FOR PURCHASING

The importance of purchasing in any firm is largely determined the four factors: availability of
materials, absolute dollar volume of purchases, percent of product cost represented by
materials, and the types of materials purchased. Purchasing must concern itself with
whether or not the materials used by the firm are readily available in a competitive market or
whether some are bought in volatile markets that are subject to shortages and price
instability. If the latter condition prevails, creative analysis by top-level purchasing
professionals is required.
If a firm spends a large percentage of its available capital on materials, the sheer magnitude
of expense means that efficient purchasing can produce a significant savings. Even small
unit savings add up quickly when purchased in large volumes. When a firm's materials costs
are 40 percent or more of its product cost (or its total operating budget), small reductions in
material costs can increase profit margins significantly. In this situation, efficient purchasing
and purchasing management again can make or break a business.
Perhaps the most important of the four factors is the amount of control purchasing and
supply personnel actually have over materials availability, quality, costs, and services. Large
companies tend to use a wide range of materials, yielding a greater chance that price and
service arrangements can be influenced significantly by creative purchasing performance.
Some firms, on the other hand, use a fairly small number of standard production and supply
materials, from which even the most seasoned purchasing personnel produce little profit,
despite creative management, pricing, and supplier selection activities.

THE ROLE OF PURCHASING

There are two basic types of purchasing: purchasing for resale and purchasing for
consumption or transformation. The former is generally associated with retailers and
wholesalers. The latter is defined as industrial purchasing.
Purchasing can also be seen as either strategic or transactional. Also, the words "direct" and
"indirect" have been used to distinguish the two types. Strategic (direct) buying involves the

establishment of mutually beneficial long-term relationship relationships between buyers and

suppliers. Usually strategic buying involves purchase of materials that are crucial to the
support of the firm's distinctive competence. This could include raw material and
components normally used in the production process. Transactional (indirect) buying
involves repetitive purchases, from the same vendor, probably through a blanket purchase
order. These orders could include products and services not listed on the bill of materials,
such as MRO goods, but are used indirectly in producing the item.
Some experts relate that the purchasing function is responsible for determining the
organization's requirements, selecting an optimal source of supply, ensuring a fair and
reasonable price (for both the purchasing organization and the supplier), and establishing
and maintaining mutually beneficial relationships with the most desirable suppliers. In other
words, purchasing departments determine what to buy, where to buy it, how much to pay,
and ensure its availability by managing the contract and maintaining strong relationships
with suppliers.
In more specific terms, today's purchasing departments are responsible for:

coordinating purchase needs with user departments

identifying potential suppliers

conducting market studies for material purchases

proposal analysis

supplier selection

issuing purchase orders

meeting with sales representatives

negotiating

contract administration

resolving purchasing-related problems

maintenance of purchasing records

These functions obviously entail no insignificant amount of responsibility.

As the role of purchasing grows in importance, purchasing departments are being charged
with even more responsibilities. Newer responsibilities for purchasing personnel, in addition

to all purchasing functions, include participation in the development of material and service
requirements and related specifications, conducting material and value-analysis studies,
inbound transportation, and even management of recovery activities such as surplus and
scrap salvage, as well as its implications for environmental management.
In the 1970s and 1980s purchasing fell under the rubric of "materials management." Many
corporations and individual facilities employed executives who held the title "materials
manager," responsible for purchasing and supply management, inventory management,
receiving, stores, warehousing, materials handling, production planning, scheduling and
control, and traffic/transportation. Today, the term materials management has expanded to
include all activities from raw material procurement to final delivery to the customer, to
management of returns; hence, the newer title supply chain management.
As purchasing personnel became even more central to the firm's operations they became
known as "supply managers." As supply managers, they are active in the strategic-planning
process, including such activities as securing partnering arrangements and strategic
alliances with suppliers; identification of threats and opportunities in the supply environment;
strategic, long-term acquisition plans; and monitoring continuous improvement in the supply
chain.
A study by found that strategic purchasing enables firms to foster close working relationships
with a limited number of suppliers, promotes open communication among supply chain
partners, and develops a long-term strategic relationship orientation for achievement of
mutual goals. This implies that strategic purchasing plays a synergistic role in fostering
value-enhancing relationships and knowledge exchange between the firm and its suppliers,
thereby creating value. In addition, supply managers are heavily involved in cross-functional
teams charged with determining supplier qualification and selection, as well ensuring early
supplier involvement in product design and specification development.
A comprehensive list of objectives for purchasing and supply management personnel would
include:

to support the firm's operations with an uninterrupted flow of materials and services:

to buy competitively and wisely (achieve the best combination of price, quality and
service);

to minimize inventory investment and loss;

to develop reliable and effective supply sources;

to develop and maintain healthy relations with active suppliers and the supplier
community;

to achieve maximum integration with other departments, while achieving and

maintaining effective working relationships with them;

to take advantage of standardization and simplification;

to keep up with market trends;

to train, develop and motivate professionally competent personnel;

to avoid duplication, waste, and obsolescence;

to analyze and report on long-range availability and costs of major purchased items;

to continually search for new and alternative ideas, products, and materials to
improve efficiency and profitability; and

to administer the purchasing and supply management function proactively, ethically,

and efficiently.

DETERMINING REQUIREMENTS
In progressive firms, purchasing has a hand in new product development. As a part of a
product development team, purchasing representatives have the opportunity to help
determine the optimal materials to be used in a new product, propose alternative or
substitute materials, and assist in making the final decision based on cost and material
availability. Purchasing representatives may also participate in a make-or-buy analysis at this
point. The design stage is the point at which the vast majority of the cost of making an item
can be reduced or controlled.
Whether or not purchasing had an impact on a product's design, the purchasing agent's
input may certainly be needed when defining the materials-purchase specifications.
Specifications are detailed explanations of what the firm intends to buy in order to get its
product to market.
Generally specified is the product itself, the material from which it is to be made, the process
for making it, minimum levels of quality, tolerances (a range in which a specified
characteristic is acceptable, e.g., an outer diameter must be a certain size, 25 millimeters),
inspection and test standards, and a specific function the product must perform.
If the product requires a standardized component, the specifications are easily
communicated by specifying a trade or brand name. However, a custom part can complicate
the situation considerably; if incorrectly manufactured, such a product can severely damage
a relationship, resulting in unnecessary costs and possible legal action. It is the buyer's

responsibility to adequately communicate the specifications to the supplier so that there is

no misunderstanding.

SUPPLY SOURCING
Part of the sourcing decision involves determining whether to purchase a part from an
outside supplier or produce the part internally. This is typically known as a make-or-buy
decision. If the buyer chooses to purchase the part externally, then he must find qualified
suppliers who are willing to make and sell the product to his or her firm under the specified
conditions.
Buyers have a number of places to go to locate sources of supply, some obvious and some
indirect. The most obvious sources would include the Yellow

Figure 1
Determining Requirements

Pages, other purchasing departments, and direct marketing. Purchasing departments

typically have a number of trade publications to which they subscribe, such as Purchasing,
Iron Age, andPurchasing World, which are filled with advertisements for a multitude of
suppliers. Also, being a subscriber usually puts the buyer's name on a mailing list so that
flyers, postcards, and other varieties of direct marketing find their way into the purchasing
department's hands.
Other sources of supply include manufacturer directories and trade registers. The best
known of these is Thomas' Register of American Manufacturers, frequently referred to
simply as the Thomas Register. With 125,000 trade and brand names, 151,000 U.S. and
Canadian company listings, and 6,000 catalogs, it is a valuable tool for buyers. Practically
every purchasing department has access to this source, either through the 34-volume book
series or CD-ROMs.
Suppliers also may be found at trade exhibits, in supplier catalogs, or via recommendations
from other knowledgeable sources, such as salesmen and engineers. Probably the most
important and frequently used source will soon be the World Wide Web; countless firms
maintain Web pages and are listed in online catalogs and directories.

Many firms find themselves in a situation where a suitable supplier cannot be found. In this
situation, the firm is forced to develop a supplier. Supplier development is sometimes
referred to as "reverse marketing," which entails finding the supplier with the most potential
for success and providing the resources necessary for the supplier to manufacture the
needed product. This could include training in production processes, quality, and
management assistance, as well as providing temporary personnel, tooling, and even
financing.
When the product being purchased is fairly standard and readily available, most firms
choose to utilize the competitive bidding process of supplier selection. This involves little or
no negotiation. A request for bids is sent to a limited number of qualified suppliers asking for
a price quote for the product, given the terms and conditions of the contract. The contract
generally goes to the lowest bidder. For government bid requests, the contract legally must
go to the lowest bidder qualified to fulfill the contract.

NEGOTIATION
When competitive bidding is not the appropriate mechanism for reaching the purchasing
department's objectives, the buyer turns to the process of negotiation. This does not indicate
a second-choice alternative, since the negotiation process is more likely to lead to a
complete understanding of all issues involved between the supplier and the purchasing firm.
This improved understanding can greatly reduce the number and impact of unseen
problems that may arise later.
A number of circumstances dictate the use of negotiation. When a thorough analysis is
required to solve a difficult make-or-buy decision, or when the risks and costs involved
cannot be accurately predetermined, negotiation should be used. Also, when a buyer is
contracting for a portion of the seller's production capacity rather than a product, negotiation
is typically appropriate.
Other circumstances where negotiation is favored include: when early supplier involvement
is employed, when tooling and setup costs represent a large percentage of the supplier's
costs, when production is interrupted frequently for change orders, or when a long time is
required to produce the purchased products.
If successful negotiation is to occur, the buyer must have a reasonable knowledge of what is
being purchased, the process involved, and any factors that may affect cost, quality, delivery,
and service. A thorough cost and/or price analysis is essential. The negotiating buyer must
also know the strengths and weaknesses of the negotiating supplier, as well as his own.
Also, in light of today's global marketplace, strong cultural awareness is a must. Through
proper preparation and some negotiating skill, the purchasing agent should be able to

secure a contract that fulfills his/her company's needs and is adequately beneficial to the
supplier as well.

SUPPLIER MANAGEMENT
After locating proper suppliers and securing contracts, it then falls to the purchasing function
to monitor and control the suppliers' performance until the contracts are fulfilledand
beyond, if further business is to be conducted. All purchasing organizations need some
vehicle for assessing supplier performance. Many firms have formal supplier-evaluation
programs that effectively monitor supplier performance in a number of areas, including
quality, quantity delivery, on-time delivery, early delivery (just-in-time users do not like early
deliveries), cost, and intangibles.
For some firms, consistent supplier performance results in certification. Supplier certification
generally implies (or in some cases formally asserts) that the supplier has been a part of a
formal education program, has demonstrated commitment to quality and delivery, and has
proven consistency in his processes. Frequently, organizations are able to take delivery from
certified suppliers and completely bypass the receiving inspection process.
The buyer is also responsible for maintaining a congenial relationship with the firm's
suppliers. If the buyer is an unreasonable negotiator, and does not allow the supplier to
make an adequate profit, future dealings may be endangered. The supplier may refuse to
deal with the buyer in the future, or the supplier may greatly increase the price of a product
the buyer could not obtain elsewhere. Also, relations can become strained when the buyer
consistently asks for favored treatment such as expediting or constantly changing a
particular order's delivery schedule.

E-PURCHASING AND E-PROCUREMENT

The Internet and e-commerce is drastically changing the way purchasing is done. Internet
use in buying has led to the terms "e-purchasing" or "e-procurement." Certainly,
communication needed in competitive bidding, purchase order placement, order tracking,
and follow-up are enhanced by the speed and ease afforded by establishing online systems.
In addition, negotiation may be enhanced and reverse auctions facilitated. Reverse auctions
allow buying firms to specify a requirement and receive bids from suppliers, with the lowest
bid winning.
E-procurement is considered one of the characteristics of a world-class purchasing
organization. The use of e-procurement technologies in some firms has resulted in reduced
prices for goods and services, shortened order-processing and fulfillment cycles, reduced
administrative burdens and costs, improved control over off-contract spending, and better
inventory control. It allows firms to expand into trading networks and virtual corporations.

Criteria for e-purchasing include:

Supporting complete requirements of production (direct) and non-production (indirect)

purchasing through a single, internet-based, self-service system.

Delivering a flexible catalog strategy.

Providing tools for extensive reporting and analysis.

Supporting strategic sourcing.

Enhancing supply-chain collaboration and coordination with partners.

SEE ALSO: Distribution and Distribution Requirements Planning ; Quality and Total Quality
Management ; Supply Chain Management
R. Anthony Inman

FURTHER READING:
Burt, David N., Donald W. Dobler, and Stephen L. Starling. World Class Supply
Management: The Key to Supply Chain Management. Boston, MA: McGraw-Hill Irwin, 2003.
Caridi, Maria, Sergio Cavalieri, Giorgio Diazzi, and Cristina Pirovano. "Assessing the Impact
of e-Procurement Strategies Through the Use of Business Process Modelling and
Simulation Techniques." Production Planning and Control 15, no. 7 (2004): 647661.
Chang, Yoon, Harris Markatsoris, and Howard Richards. "Design and Implementation of an
e-Procurement System." Production Planning & Control 15, no. 7 (2004): 634646.
Chen, Injazz J., Antony Paulraj, and Augustine A. Lado. "Strategic Purchasing, Supply
Management, and Firm Performance." Journal of Operations Management22 (2004): 505
523.
Inside Supply Management: Resources to Create Your Future. Tempe, AZ: Institute for
Supply Management.
Mehra, Satish, and R. Anthony Inman. "Purchasing Management and Business
Competitiveness in the Coming Decade." Production Planning and Control 15, no. 7 (2004):
710718.
"Procurement Head Reveals Keys to Achieve World-Class Status." Supplier Selection &
Management Report 5, no. 2 (2005): 14.

User Contributions:

Simon Peter
Oct 28, 2011 @ 3:15 pm

What is contribution of purchasing in an organization?

2

Stephen Ecwinyu
Oct 28, 2011 @ 3:15 pm

It is an amazing summarised article, able to bring out basic but key issues; factors affecting
procurement and new strategic roles. How can i access other procurement articles from you.
Thanks.
Stephen E.
3

ausi nkoba
Nov 22, 2011 @ 2:02 am

types of procurement strategies used in uganda and their contibution to corporate strategy

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