purchasing

PURCHASING and MATERIALS MGT

Raw Materials, Parts, and In-process WareHousing

Receiving and Inspection

Production

Finished Goods Warehousing

Inspection, Packaging, And Shipping

Materials Management Purchasing

Production Control

Warehousing and Inventory Control

Shipping and Traffic

Physical materials flow Information flow

Customers

Suppliers

Purchasing Management

Maintain data base of available, qualified suppliers Select suppliers to supply each material Negotiate contracts with suppliers Act as interface between company and suppliers Provide training to suppliers on latest technologies

Mission of Purchasing

Develop purchasing plans for each major product or service that are consistent with operations strategies:

Low production costs Fast and on-time deliveries High quality products and services Flexibility

purchasing & ITS OBJECTIVES

Purchasing is the activity that decides which suppliers to use, negotiates contracts and determines whether to buy locally Objectives of Purchasing Support the operational needs and requirements of purchasing customers

Manage the purchasing function efficiently and effectively

Select, develop and maintain sources of supply

OBJECTIVES OF purchasing

Objectives of Purchasing Develop strong relationships and interact closely with other functional groups

Support a companys goals and objectives

Develop integrated purchasing strategies that enhance company strategies

Purchasing Process
Material Requisition Request for Quotations Select Best Supplier Purchase Order Receive and Inspect Goods
From any department, to purchasing From purchasing, to potential suppliers Based on quality, price, lead time, dependability From purchasing, to selected supplier From supplier, to receiving, quality control, warehouse

purchasing stages
2. Evaluate Potential Supply Sources

1. Materials Need Identification 3. Source Selection

5. Supplier Performance Measurement & Continuous Management

4. Release & Receipt of Material

Need identification

Purchase Requisition & Traveling Purchase Requisition Re-order Point System Stock Checks Cross-Functional Teams

Reducing the time for need identification

purchase requisition

Supply source evaluation

Routine purchases and new purchases Source evaluation begins with list of suppliers For new items, Preferred list of suppliers would be better Preferred list of suppliers have exhibited capabilities in product design, commitment to quality, cost, management commitment, technical ability, delivery performance Final evaluation might require a visit to suppliers plant and facilities

source selection

After supplier evaluation, supplier has to be selected Two selection methods - Competitive bidding & Negotiation

Competitive bidding

Competitive bidding circumstances

is

effective

under

following

Volume is high enough to justify this method of business

Specifications are very clear to seller i.e. they are not complex to understand

Adequate number of qualified sellers exist in the market

Adequate time is given and available to suppliers to evaluate the requests for bids Buyer doesnt have preferred supplier for that item

negotiation

Face-to-face negotiation is best under these circumstances

When any of the criteria mentioned for bidding is missing. Ex. when the specifications are very complex or when the item is new
When the buyer requires early supplier involvement When the supplier requires long period of time to develop and produce the items. When the purchase is being done on multiple performance factors like price, quality, delivery, product support

Release & receipt of material requirements

This involves physical transmittance requirements to the supplier.

of

purchase

PURCHASE ORDER (PO) is the most common form EDI is the highly used mode of transmitting the PO

purchase order

Supplier performance measurement

This is necessary in order to

improve buyer-seller relationships give supplier, feedback, so that performance improves

have quantitative data collected which comes in handy at times

collect data even if it is one time purchase from a supplier

INVENTORY MANAGEMENT TECHNIQUES

Strategic Role of Inventory

1. 2. 3. 4. 5.
6.

Organisation Goals and Customers Needs Measure of Organisation Performance Impact of Inventory on Organisation Performance Conflicting Goals of Inventory Inventory Strategy in Support of Organisation Performance Measurement of Inventory Costs

Supplier

Company

Co.W/house

Distributor

FG FG RM WIP Inventory Inventory Inventory Inventory (Stores) (Warehouse) Consumption Uncertainty Processing Uncertainty

FG Channel Inventory

FG Retail Inventory

C O N S U M P T I O N

Forecast Chain Mgt.

Inventory Classifications
Inventory

Process stage

Number & Value

Deman d Type

Other

Raw Material WIP Finished Goods

A Items B Items C Items

Independent Dependent

SPARES Maintenance Repair Operating

TYPES DEFINITION
1. Production Inventories: These are of 2 types a) those purchased from the market like raw materials, spare parts and components; and b) special parts or components manufactured in ones own company and kept in stock for use. 2. MRO Inventories or Maintenance, Repairs and Operating Supplies: Bought-out materials required for maintenance of the production process but which do not form part of the finished product.

3. Work-in-progress or In-process Inventories:

Semi-finished products usually found on the factory floor in various stages of production.
4. Finished Goods: End product for sales to customers.

PRIMARY CAUSES OF INVENTORIES

1. Faulty Sales Forecasting 2. Rigid Production Batch Quantities 3. Bureaucratic Time-consuming Purchase Procedures 4. Orders on Unreliable Suppliers 5. Delays in Imports and Clearance of Imported Cargoes 6. Wrong Transportation Modes

7. Poor Coordination between Sales, Production and Materials Departments

PURPOSE & FUNCTION OF INVENTORY

Inventory is created for two general purposes, i.e. Protection and Economy. Inventory has four basic functions: 1. The Lot-size Inventory 2. Fluctuation Inventory 3. Anticipation Inventory

4. Transportation Inventory

The Functions of Inventory

Provide a stock of goods to meet anticipated customer demand and provide a selection of goods Decouple suppliers from production and production from distribution Allow one to take advantage of quantity discounts

The Functions of Inventory

(Continued)
To provide a hedge against inflation To protect against shortages due to delivery variation To permit operations to continue smoothly with the use of work-inprocess

Disadvantages of Inventory
Higher costs

Item cost (if purchased) Ordering (or setup) cost

Costs of forms, clerks wages etc.

Holding (or carrying) cost

Building lease, insurance, taxes etc.

Difficult to control Hides production problems

IMPACT ON PROFITABILITY
Holding inventories is often very expensive. More inventories mean more costs and this has a direct impact on the profitability of any organisation.

Inventory turnover:
If a company keeps inventories equal to one months consumption, it means that the inventory turnover is 12 times, i.e. the entire inventory is being used up and replaced 12 times a year. If it keeps inventories equal to six months consumption, on an average, it means that the total inventory turnover is two times.

INVENTORY TURNOVER
The inventory turnover rate is a quick guide to the mileage obtained from money, tied up in inventories. The method to calculate it is simple:
1. Annual accounts shows inventories (i) at the beginning of the year (ii) at the close of the year Average inventory holding Material consumed during the year Average inventory as number of months consumption = 624x12 Inventory turnover rate Rs. 6.20 lakhs Rs. 5.80 lakhs Rs. 6.00 lakhs Rs. 24.00 lakhs 3 months 4 months

2. 3. 4. 5.

DETERMINING STOCK LEVELS

There are various levels of stocks:

1. Deficiency Level: Stock inadequate to meet needs.

in

hand

is

2. Exhaust Bin Level: Stocks are exhausted.

3. Buffer Stock or Minimum Stock Level

4. Danger Warning Level 5. Re-order Level or Provisioning Level: The point at which the order has to be placed. 6. Maximum Stock Level: Maximum quantity to be stocked at any one time.

METHODS OF CONTROLLING STOCK LEVELS

1. FIXED QUANTITY SYSTEM: Order are placed at fixed stock level. 2. FIXED TIME SYSTEM: Order are placed at constant intervals of time. 3. IMPREST STOCK CONTROL: Involves the determination of a maximum level for the bin and a periodical inspection, but not fixed, of stock levels in the bin. The bin is then topped up to the maximum level.

METHODS OF CONTROLLING STOCK LEVELS

4. OPEN ACCESS BINS The operators help themselves to the stocks without having to make records.

5. TWO BIN SYSTEM In this system, two bins are kept having different levels. When the first bin is exhausted, it means that it is time for replenishment. The second bin is reserve stock.

SELECTIVE INVENTORY CONTROL

Selective Inventory Control can be divided into eight types. They are :
Classification Criteria

1.

A-B-C (Sometimes nick-named : Always Better Control).

H-M-L (High Medium Low)

Annual value of consumption of the items concerned. (It has nothing to do with the unit of value of the item.)
Unit price of material. (This is the opposite of A-B-C and does not take consumption into account.)

2.

3.
4. 5. 6. 7. 8.

V-E-D (vital, Essential and Desirable)

S-D-E (Scarce, Difficult to obtain Easy to obtain) G-O-L-F (Government, Ordinary, Local, Foreign) F-S-N (Fast moving, Slow moving and Non-moving) S-O-S (Seasonal, Off-seasonal) X-Y-Z

By the critical nature of the component or material with respect to production.

Purchasing problems in regard to availability. Source of material. Issues from stores Seasonality. This applies especially to commodities. The inventory value of items stored.

Classifying Items as ABC

% Annual $ Usage
100 80 60

Class A B C

% $ Vol 80 15 5

% Items 15 30 55

40
20

A
B
0 50

C
100 150

% of Inventory Items

SELECTIVE INVENTORY CONTROL

A-B-C ANALYSIS
Annual Consumption limits Classification No. of items Items per cent Total value of items Rs. million Percent value

Above Rs. 5,000 Between Rs.1,000 and Rs. 4,999 Below Rs. 1,000

A B C

77 194 1571 1842

4.2 10.5 8.53 100.00

2.57 0.38 0.17 3.12

82.2 12.2 5.6 100.00

SELECTIVE INVENTORY CONTROL

A
1. Tight control on stock levels 2. Only exact requirement to be procured. Always have more than one source. Centralise procurement. 3. Individual postings in stores card and in terms of charging out cost to consumption. 4. Continuous check on schedules and revision where called for.

B
Moderate control More or less on exact requirement. Reduce lead times. Individual postings.

C
Loose control. On estimated usage.

Collective postings or preferably none at all. Hardly any check required.

Broad check on schedule revisions.

5. Very low buffer stock or if possible, none at all.

Exact requirements To be worked out.

No restriction or fairly large safety stocks.

SELECTIVE INVENTORY CONTROL Continued

A
6. Regular expediting and follow-up. 7. Very strict consumption control by laying down standards and norms. 8. Material planning should be very accurate especially in regard to forecasts.

B
Some follow-up Consumption control is highly desirable. No follow-up necessary.

Though consumption control is desirable, Much attention need not be bestowed. Rough estimates would be satisfactory An annual review.

Past consumption may be taken as Basis

9. Concerted effort at cost Moderate attempts reduction through modern would be sufficient. techniques like value analysis. Efforts should be more at import substitution if the item is an imported one.

SELECTIVE INVENTORY CONTROL

Procedure of using A-B-C and V-E-D
Classes A items B items C items V items Constant control and regular follow up Moderate stocks High stocks E items Moderate stocks Moderate stocks Moderate stocks D items Nil stocks Very low stocks Low stocks

SELECTIVE INVENTORY CONTROL

XYZ and ABC can be used in conjunction and the method of control will be as follows:
Class of items A items X items A critical analysis must be done in an effort to reduce stocks Consumption and stock should be reviewed frequently Steps should be taken to dispose of surplus stocks Y items Attempts must be made to convert Z category Further action in control may not be necessary Controls should be tightened Z items Items are within control Can be reviewed twice a year Can be reviewed annually

B items

C items

SELECTIVE INVENTORY CONTROL

We can also merge FSN and XYZ classifications as given below:
Class of items X items F items Tight inventory control Normal inventory control Can reduce Clerical labour by increasing stocks S items Reduction of stock to very low level Low level of stocks Low level of stocks N items Quick disposal of items at optimum price. Should be disposed as early as possible Can afford to dispose at lower prices

Y items

Z items

OPTIONAL Or COVERED BY EA

Holding, Ordering, and Setup Costs

Ordering costs - associated with costs of placing order and receiving goods Holding costs - associated with holding or carrying inventory over time Setup costs - cost to prepare a machine or process for manufacturing an order Stock Out CostsCost of not meeting Demand

COST OF INVENTORY
1. Purchasing or Ordering Cost
i) Total number of purchase orders issued. ii) Payroll costs of the entire purchase department, inventory control section and the receiving and inspection section. iii) Stationery and supplies iv) Rents and office maintenance expenditure and overheads like telephone, telegrams, etc. v) Receiving and inspection costs.

COST OF INVENTORY
2. Inventory Carrying or Holding Cost
i)
ii) iii) iv)

Interest on the capital locked up on the materials stocked.

Rentals for space occupied by the stores and taxes payable. Insurance premia on the goods Obsolescence

v)
vi)

Shrinkage
Evaporation

COST OF INVENTORY
vii) Deterioration or spoilage

viii) Personal, Payroll costs involved in the functioning of the stores-department.

ix) Overheads like electricity, water, maintenance, costs, etc., incurred in the functioning of the stores department.

Cost of Inventory
3) Set-up Cost

Clean-up costs Re-tooling costs Adjustment costs

Cost of Inventory
4) Stock Out Cost

Lost Sale Lost Customer Lost Opportunities

INDICATORS OF EFFICIENT PERFORMANCE

1. Inventory Turnover Ratio
a)

Overall: Sales to inventory ratio

Sales at sales value = ---------------------------Total average inventory

The average inventory is obtained by adding up all the monthend inventory figures and dividing the total by 12. The total inventory means raw materials, stores etc., WIP and finished goods.

b) Manufacturing materials: Inventory as number of days of consumption

= Actual inventory of mfg. materials ---------------------------------------- x 365 Total consumption for the year

This can be separately calculated for raw materials, spare parts, components, etc.

INDICATORS OF EFFICIENT PERFORMANCE

c) Work-in-process: Inventory in terms of days of production at production cost Actual WIP inventory = ---------------------------------------------Production at product cost for the year

b) Finished goods: Inventory in days of sales at cost = Actual finished goods inventory -------------------------------------- x 365 Total yearly sales at cost

INDICATORS OF EFFICIENT PERFORMANCE

2. Other Management Ratios

a) Service level ratio
= No. of demands met in time ----------------------------------- x 100 Total no. of demands received

b) Stock out index

=

No. of items not met in time ------------------------------------ x 100 Total no. of demands received

INDICATORS OF EFFICIENT PERFORMANCE

c) Inventory carrying cost index

= Total cost of holding inventories -------------------------------------- x 100 Average value of inventory

d) Spare parts index

= Value of spare parts inventory -----------------------------------Value of capital goods

TYPES OF SPARE PARTS

1. Maintenance Spares
These are required for a regular replacement of parts which wear out or those which are to be replaced after specific periods of service.

2.

Insurance Spares

These are also called emergency spares or capital spares.

3.

Repairable or Rotable parts

The word rotable has originated from the air force. The part is removed from the aircraft after a specified number of hours of use or on its failure. It is sent to the repair workshop where it is tested and repaired or overhauled. After it is certified as okay, it is brought back into stock to be again reused on the aircraft.

Overall Generic Strategies

1.
2.

Low Cost Operations

Quick Response

3.

Differentiation

Inventory Support for Overall Strategy

Low Cost
Inventory Characteristic s Minimize inventory throughout the chain to hold down costs

Response Differentiation
Develop responsive system, with buffer stocks positioned to ensure supply Minimize inventory in the chain to avoid obsolescenc e