MATERIALS MANAGEMENT

Presented by Prof. S. N. Ray Head MBA (Day) Deptt. Indian Instt. of Social Welfare & Business Management Kolkata

McNally Bharat Engineering Co. Ltd. 11th, 12th, 15th, 16th and 17th October, 2007

Session # 1
CONCEPT EVOLUTION OF MM
11th October, 2007

Period One : The Early Years (1850-1900)

Greatest interest in and development of purchasing during the early years occurred after the 1850s growth of the American railroad. By 1866, Pennsylvania Railroad had given the purchasing function departmental status, under the title of Supplying Department. Comptroller of the Chicago and Northwestern Railroad wrote the first book exclusively about the purchasing function. Handling of Railway Supplies Their Purchase and Disposition, in 1987. Period Two : Growth of Purchasing Fundamentals (1900-1939) In 1905 the second book devoted to purchasing. Book on Buying contained 18 chapters, each written by a different author.

Purchasing gained importance during World War-I of its role in obtaining vital war materials. Harold T. Lewis noted that from World War-I to 1945, gradual if uneven recognition development of the importance of sound procurement to company operation. Period Three : War Years (1940-1946) World War-II introduced a new period in purchasing history. The membership of the National Association of Purchasing Agents increased from 3,400 in 1934 to 5,500 in 1940 to 9,400 in the autumn of 1945.

Period Four : The Quiet Years (1947-Mid 1960s)

Bruce D. Henderson, also commented about the state of affairs facing purchasing. He noted that purchasing was a neglected function in most organizations because it was not important to mainstream problems. Procurement is regarded as a negative function can handicap the company if not done but can make little positive contribution. Postwar period saw the development of the value analysis technique, pioneered by General Electric in 1947. GEs approach concentrated on the evaluation of which materials or changes in specifications and design would reduce overall costs. Emphasis during the postwar years and throughout 1960s was on satisfying consumer demand and the needs of a growing industrial market.

Period Five : Materials Management Comes of Age (Mid 1960s Late 1970s)
Vietnam War, resulted in upward price and material availability pressures. During the 1970s, firms experienced widespread material problems related to oil shortages and embargoes. The role of purchasing throughout the age of materials management was notable. Purchasing managers emphasized multiple sourcing competitive bid pricing and rarely viewed as a value-added partner. Period Six : The Global Era (Late 1970s - 1999) Global competitors from the Pacific Rim and Europe captured world markets from American firms. These firms emphasized quality at a lower cost in order to capture market share.

Individual-country-based organizational structure favored by most U.S. firms during the 1960s and 1970s became inadequate for competing in global markets.
Technological innovation spread rapidly around the world. World Wide Web emerged ability supported taking a global view of purchasing to achieve maximum performance benefit. Period Seven : Integrated Supply Chain Management (2000 and Beyond) It is possible to reach three conclusions about the new era Reshaping of purchasings role in the modern economy is underway Overall importance of the purchasing process is increasing Purchasing must continue to become more integrated with customer requirements, as well as with operations, logistics, human resources, finance, accounting, marketing, and information systems

Session # 2 & 3
INTEGRATED APPROACH TO MM
11th October, 2007

MATERIALS MANAGEMENT INTRODUCTION The word materials is synonymous with civilization.

The evolution of man is known by the material they used.

Stone Age Bronze Age Steel Age Plastic Age Nuclear Age Electronic Age

Material management can be defined as the function responsible for

Coordination of planning Sourcing

Purchasing
Moving Strong & controlling in an optimum manner so as to provide a predecided service to the customer at a minimum cost. Scope of achievement We live in materials and grow on profits says Japanese Management Expert.

ACTIVITIES OF MATERIALS MANAGEMENT

The functions of materials management are Materials planning & programming

Purchasing & subcontracting

Inventory control Store keeping & warehousing

Codification, standardisation & variety reduction

Transportation & material handling Inspection & quality control

Cost reduction through value analysis

Disposal of surplus materials / scrap / obsolete materials.

Distinguished characteristics of project purchase Materials management for project in the business is related to managing and directing materials, time, personnel, transport & costs to complete a particular project in an orderly, economical manner and to meet established objectives in time, rupees and technical results. In a project There is a specific start and a specific end point There is a well defined objective The endeavour is unique and not repeatative

The project usually contains costs and time schedule to produce a specified result or product.

BASIC APPROACH
The alphabetical result approach to materials management for a project.

Mind your Ps
Plan for the proper utilisation of the companys fund. Procure the most effective materials and service

Put a way to efficiently receive, inspect & utilise storage facilities at site.
And Qs Quality is important from workmanship to final product. raw materials through

Quality must be controlled to ensure the right quantity at right time.

Using the Rs Record with accuracy all transactions Reports must be made to ensure satisfaction of objectives and customer service. With a basis of the Cs

Cost must be considered not only as the initial expense but as the ultimate factor.
Communication must ensure that there is no information gap and duplication of effort.

Coordination of all materials management functions.

Cooperation among all areas of the business.

Session # 4
BASIC PRINCIPLES OF PROCUREMENT
11th October, 2007

Right Quality Right Quantity

Right Price
Right Source Right Time Right Place of Delivery Right Transport

VENDOR SELECTION PRINCIPLES & BEST PRACTICES

Session # 1

VENDOR EVALUATION TECHNIQUES

12th October, 2007

Session # 2

PROCEDURE Searching Stage Selection Stage Negotiation & Trial Order Rating & Experience Stage DEVELOPMENT OF NEW SOURCES IS NECESSARY For import substitution To incorporate functional improvement To reduce the overall cost of the product To avoid the monopoly situation Due to delay of delivery by existing vendors.

When capacity of existing vendor is limited.

To ensure availability from more than one source.

VENDOR DEVELOPMENT AND INVENTORY CONTROL

Definition
Why vendor development or significance of it Types of supplier development How vendor development

Types of supplier development Standard items from established suppliers, e.g., steel mills for alloy steel, large chemical industries for petroleum products, manufacturer of aluminium. Proprietory item suppliers, e.g., Bearing, Grinding Wheels, etc.

Govt. Policy determines supplier, e.g., MMTC.

Items procured from Dealer, Stockist. Procurement of near similar or standard items conversion to original desired or non-standard items. and

Non standard items on medium or large suppliers. Non standard items on small scale suppliers. Off-loading of process, I.e., after carrying out some operations on raw materials in house, balance operations are off-loaded. Ancillary suppliers develop suppliers as ancillaries wherein the substantial portion of the production would be lifted by the purchaser.

How vendor development Suppliers Who are my immediate suppliers ?

What are my true requirement ?

How do I communicate my requirements ? Can my suppliers measure and meet my requirements ? How do I inform them of changes in my requirements ? Vendor Behaviour Vendor behaviour can be defined as the behaviour that a vendor displays in a dynamic market, searching for buyers, marketing goods and services.

Procedure
Searching stage Selection stage Negotiation & trial order Rating & experience stage Monitor and upgrade performance of existing vendor.

Develop a common concern.

While searching following points are to be considered for vendor

Sound business sense and attitude.

A good track record in supplying the market in which the buyer operates.

A sound financial base.

A suitable technical capability with modern facilities.

A total quality orientation. Cost effective management. Effective purchasing acquisition and control. Good morale among the work force. Effective logistical arrangement. A customer service mentality. Mainly the variables which determine the choice of supplier are : 1. Quality 2. Quantity 3. Timing 4. Service 5. Price

While searching following points are to be considered for buyer :

Appreciate the vendors problems and help them to perform their part of obligations.
Vendors views to be respected instead of talking to them in the language of legal terms.

Treat the vendors as equal to that of customers as the goodwill of the vendor is not less important that customers in actual practice.
Vendors must be treated as persons equally responsible for achieving the target. Periodical meeting with all the vendors to iron out the difficulties. Be generous in arranging payment without feeling of doing a courtesy. Initiate appropriate rewarding schemes for prompt suppliers and encourage for continuous defect-free supplies. Gain the confidence of the vendors by consistent and sound business ethics extending uniformly to all the vendors. Lastly establish a relation of Mutual Trust.

Techniques of Vendor Development Selection of Items

Criticality Technology Availability Economy

Notifications in Media

Trade Directories, etc.

Response from Vendors Analyse Criteria Select Vendors Sample Order Lab / Field Test Not Accepted Reject Accepted Make Contract

Method of Appraisal Preparation and issue of a questionnaire Checking returned questionnaire Verifying statements of short listed suppliers

Visiting suppliers premises after inspection

Verification of solvency ratios Current ratio = Current assets

Current liabilities
Return on Capital Employed = Vendor Rating Categorical Plan Weighted Point Plan Cost-Ratio Plan Profit Capital employed x 100%

Vendor Rating a) Price Rating = P = Lowest Price (X initial) x 10 Vendor Price (Y initial)

Data for price shall be collected from vendors initial offers.

b) Delivery Rating = D = P O Delivery (X) Actual Delivery (Y) x 50

Data for delivery shall be collected from vendors challan

Ref Transporters Consignment Note, as follows : Delivery as per P O = X days from P O Date

Actual Delivery

Y days from P O Date

c) Quality Rating = Q =

Accepted Quantity (X) Inspected Quantity (Y)

x 40

The Data for quality shall be collected from Inspection Report.

In cases, a, b and c, if Y X, then the weightage value 10, 50 and 40 respectively are to be considered as maximum value.
Minimum qualifying marks in our organization has been suggested as below : Price Rating Delivery Rating Quality Rating Total points if 90 75 90 50 75 : : : : : : 05 25 20 Type A Type B Type C

Session # 3
ETHICS IN PROCUREMENT MANAGEMENT
12th October, 2007

Framework of Ethical Behavior

Perceived ethical issue confronts buyer Organizational environment Variables affecting buyers ethical perspective Personal experiences Judgment rendered by buyer Industry environment Cultural environment

Buyer behavior

Types of Unethical Purchasing Behavior

Esciprocity Personal Buying Accepting Supplier Favors Sharp Practices Financial Conflicts of Interest

SMI Professional Code of Ethics

Supply Management Institute (formerly the National Association of Purchasing Managers (NAPM)) is the organization representing the purchasing profession. SMI officially adopted its initial Standards of Conduct. Standards of Conduct specifies three guiding principles of purchasing practice : 1) Loyalty to company, 2) justice to those with whom a buyer deals, and 3) faith in the purchasing profession.

Code of Ethics 1. Consider, first, the interest of your company in all transactions and carry out and believe in its established policies.

2. Be receptive to competent counsel from your colleagues and be guided by such counsel without impairing the dignity and responsibility of your office.

3. Buy without prejudice, seeking to obtain the maximum value for each dollar of expenditure.

Supporting Ethical Behavior Developing a Statement of Ethics Top-Management Commitment Closer Buyer-Seller Relationships

Ethical Training
Developing Consistent Behavior Internal Reporting of Unethical Behavior

Preventive Measures
Example : A firms policy limit a buyers authority awarding purchase contracts amounts of $ 10,000. Contracts greater than $ 10,000 then require a managers signature. Must justify the selection decision based on sound purchasing criteria obtaining the final sign-off. This provides a system of checks and balances and reduces the possibility of unethical supplier selection.

Sources of U. S. Purchasing Law Written law Common law

Administrative law

Session # 4
LEGAL ASPECTS OF PROCUREMENT
12th October, 2007

The Sale of goods Act, 1930 The Negotiable Instruments Act, 1881

The Central Sales Tax Act, 1956

The Indian Contract Act, 1872 The Partnership Act, 1932 The Sales Tax Acts and Rules of various States The Companies Act, 1956 The Arbitration Act 1948 (Arbitration & Conciliation Act, 1998)

The Sale of goods Act, 1930 Sale Agreement to sale Goods Contract of Sale of Goods

A contract may provide for a) Immediate delivery of goods or immediate payment or both b) Delivery or payment by installments or both at a future date

The Price : a) may be fixed ; or b) may be left to be fixed in a manner agreed upon ; or c) may be determined in the course of dealing between the two parties or d) may be fixed after valuation by a third party
If the price is not fixed as per a) or b) or c) or d) the buyer shall pay to the seller a reasonable price.

Conditions and warranties Effects of a contract

Transfer of title
Delivery Rights of unpaid seller Agency Definition of agent

a person employed to do any act for another, or to represent in dealings with third persons

Termination of agency If the principal revokes his authority or If the agent renounces the business of the agency or If the business of the agency is completed or If either the principal or the agent dies. Arbitration

Session # 1
INVENTORY MANAGEMENT / FORECASTING TECHNIQUES
17th October, 2007

TYPE OF INVENTORY
Inventory

Direct Inventory

Production Inventory

WIP Inventory

Finished Inventory

Goods

1. Raw Materials 2. Components 3. Special parts for finished products

Indirect Inventory (MRO Inventory) (Maintenance, Repairs & Operating Supplies) e.g., Petrol, Oil, Lubricating Oil, M/c and Repair Parts, Jigs, Tools, etc. These are not part of finished product but required for maintenance of the production process.

CLASSIFICATIONS 1. A-B-C (sometimes called : Always Better control)

CRITERIA Annual value of consumption of the items concerned. (It has nothing to do with the unit value of the item) Unit Price of material. (This is opposite of A-B-C and does not take consumption into account) By the critical nature of the component or material with respect to production. Purchasing problems in regard to availability.

2. H-M-L (High, Medium, Low)

3. V-E-D (Vital, Essential & Desirable) 4. S-D-E (Scarace, Difficult to obtain, easy to obtain)

CLASSIFICATIONS 5. G O L F (Govt., ordinary, local, foreign) 6. F S N (Fast moving, Slow moving & Non-moving) 7. S-O-S (Seasonal, Off-seasonal) 8. X-Y-Z

CRITERIA Source from which the material is obtained.

Issues from stores.

Seasonality. This applies specially to commodities. The inventory value of the items stored.

Session # 2
E-COMMERCE LOGISTICS

Session # 3
PROJECT MANAGEMENT & GLOBAL SOURCING CASE ANALYSIS
17th October, 2007

PROCESS OF GLOBAL SOURCING

World wide wev Search for product and suppliers MBE AGM Purchase

Catalogue Test Drives

Vendor communication & negotiation

Order product

Delivery of consignment Ramsey Australia Credit suppliers account

KEY___ Electronic Highway of Internet ----- Physical Highway E-Cash - Emergency cash of cyberspace available to buyer for Global procurement through Internet.

Test and inspection passed

Pay by card E-cash

THANK YOU