MATERIAL MANAGEMENT

(BUMA-312)

ADDIS ABABA MEDICAL AND BUSINESS

COLLEGE
INSTITUTE OF DISTANCE EDUCATION
Materials Management (BUMA-312)

CHAPTER ONE:

CONCEPTS AND MEANINGS OF MATERIALS

MANAGEMENT
Contents
1.0 Objectives of the Unit
1.1 Introduction
1.2 Definition and Scope
1.2.1 Materials Planning and Control
1.2.2 Purchasing
1.2.3 Stores and Inventory Control
1.3 Advantages in Integrated Materials Management Concept
1.3.1 Better Accountability
1.3.2 Better Coordination
1.3.3 Better Performance
1.3.4 Adaptability to EDP
1.3.5 Miscellaneous Advantages
1.4 Review Questions
1.5 Summary

1.0 OBJECTIVES OF THE UNIT

After completing this unit students should be able to:
 define the meaning, concept and scope of materials management
 understand the functions of materials planning and control
 understand and explain the advantages in integrated materials management
1.1 INTRODUCTION

1
Materials Management (BUMA-312)

In view of the complex nature of the materials management function and its important
contribution to the overall company objectives, many organizations have found it desirable to
organize and prepare rules/policy covering all aspects of materials management. The
responsibility for analysis of requisitions, sending out enquiries, analysis of quotations,
placements, placement of purchase orders, expanding and controlling inventory levels, lie
entirely with materials management.

1.2 DEFINITION AND SCOPE

We can define materials managements as the function responsible for the coordination of
planning, sourcing, purchasing, moving, storing and controlling materials in an optimum
manner so as to provide a pre-decided serve to the customer at a minimum cost.

From the definition it is clear that the scope of materials management is vast. We can broadly
identify the following function.

1.2.1 Materials Planning and Control

Based on the sales forecast and production plans, the materials planning and control is done.
This involves estimating the individual requirements of parts, preparing materials budget,
forecasting the levels of inventories, scheduling the orders and monitoring the performance
in relation to production and sales.

1.2.2 Purchasing

This includes selection of supply, finalization of terms of purchase placement of purchase

orders, follow-up, maintenance of smooth relations with suppliers, approval of payments to
suppliers, evaluating and rating suppliers.

1.2.3 Stores and Inventory Control

This involves physical control of materials, preservation of stores, minimization of
obsolescence and damage through timely disposal and efficient handling, maintenance of
stores records, proper location and stocking. Stores is also responsible for the physical

2
Materials Management (BUMA-312)

verification of stocks and reconciling them with book figure. The inventory control covers
aspects such as setting inventory levels, ABC analysis, fixing economical ordering quantities,
setting safety stock levels, lead time analysis and reporting.

1.3 ADVANTAGES IN INTEGRATED MATERIALS MANAGEMENT CONCEPT

Organizations which have gone in a big way for the integrated materials management usually
enjoy the following advantages.
 Better Accountability
 Better Coordination
 Better performance
 Adaptability to EDP
 Miscellaneous advantages

1.3.1 Better Accountability

Through centralization of authority and responsibility for all aspects of materials function, a
clear cut accountability is established. Various user departments can solve their problems
with regard to materials to one central point so that action can be taken immediately. This
helps in evaluating the performance of materials management in an objective manner.

1.3.2 Better Coordination

When a central materials manager is responsible for all functions, the department under the
materials manager create an identity which is common. This results in better support and
cooperation in the accomplishment of the materials function. The user departments also find
that they have to approach one department for discussing and solving their materials
problems. This creates an atmosphere of trust and generally better relations between the user
departments and the materials management department.

1.3.3 Better performance

3
Materials Management (BUMA-312)

As all the interrelated functions are integrated organizationally, greater speed and accuracy
results in communication. Need for materials is promptly brought to notice by materials
planning. Purchase department is fed with stock levels and order status stores and inventory
control departments. All this calls for judicious decisions leading to lower costs, better
inventory turnover, reduced stock- outs, reduced lead times and a general reduction in paper
work.

1.3.4 Adaptability to EDP

The centralization of the materials function has made it possible to design data processing
systems. All information with regard to materials function is centralized under the integrated
materials management function. This has facilitated the collection, and analysis of data,
leading to better decisions. Advanced and efficient electronic data processing systems can be
economically introduced under an integrated set-up.

1.3.5 Miscellaneous advantages

Under a central materials manager, a team spirit is inculcated. This results in better morale
and cooperation. The opportunities for growth and development are better in an integrated
set-up. An individual under such a set-up is not confined to any one function alone, and he
gets, over a period, exposed to broader aspects of the materials function.

1.4 REVIEW QUESTIONS

1. define materials managements
2. mention the principal activities in stores and inventory control
3. briefly describe the concept of better coordination in material management

1.5 SUMMARY
 Materials managements can be defined as the function responsible for the
coordination of planning, sourcing, purchasing, moving, storing and controlling
materials in an optimum manner so as to provide a pre-decided serve to the customer
at a minimum cost.

4
Materials Management (BUMA-312)

 The scope of materials management include:

 Materials Planning and Control
 Purchasing Stores and
 Inventory Control

CHAPTER TWO
PURCHASING
Contents of the unit
2.0 Objectives of the Unit
2.1 Introduction
2.2 Prime Function of Purchasing
2.3 Goals of Purchasing Function
2.4 Objectives of Purchasing Department
2.5 Links of Purchasing With Other Organizational Function
2.6 Procedures, Types and Systems of Purchasing Activities
2.7 Vendor Rating and Evaluation
2.7.1 Relevance of Good Suppliers
2.7.2 Need for Vendor Evaluation
2.7.3 Advantages of Vendor Rating
2.7.4 Categorical Plan
2.7.5 Weighted Point Plan
2.8 Make or Buy Decisions
2.8.1 Decision Problems
2.8.2 Decision Making Under Risk
2.8.3 Decisions under Uncertainty
2.9 Vendor Development
2.10 Review Questions
5
Materials Management (BUMA-312)

2.11 Summary

2.0 OBJECTIVES OF THE UNIT

By the end of this unit students should be able to:
 Understand the meaning, objectives and importance of purchasing in material
management
 Recognize links of purchasing with other organizational function
 Learn the procedures, types and systems of purchasing activities
 Understand the importance of vendor rating and evaluation in material management
2.1 INTRODUCTION
Purchasing has come to stay as the most important function of materials management. The
moment a buyer places an order he commits a substantial portion of the finance of the
corporation which affects the working capital and cash flow position. He is a highly
responsible person who meets various salesmen and thus can be considered to have been
contributing to the public relations efforts of the company. Thus, the buyer can make or mar
the company's image by his excellent or poor relations with the vendors.

2.2 PRIME FUNCTION OF PURCHASING

For an organization, purchasing is a window to the outside world. The prime function of
purchasing is that of being sensitive to the external supply market situation and also of
feeding back this information to the other functions of the organization. However, it is
usually understood to be to get the right quantity of material of the right quality at the right
time, at the right place, from the right source and at the right cost.

Quite often it is not understood, by even top executives, that a considerable profit potential
exists in the purchasing activity. In fact, it has been qouted that 20-30% of the company's
profits can come from savings generated in the purchasing department. Suppose a company's
output volume is is Rs.20 crores and the cost component of material is say 50% (that is Rs.
10 cores for materials). If the profit margin is taken as 15%, the gross profits will be Rs. 3
crores. With a 20% increase in the output volume, the profits will increase by Rs.0.6 crores.
The same increase in profits can be achieved by 6% savings in the purchase costs. This
6
Materials Management (BUMA-312)

example is given to illustrate that there is a lot more potential in reducing the purchasing
costs as compared to increasing the sales turnover. Moreover, the increased savings in
purchasing require only one or more two purchasing executives doing a proper study and
analysis of the external market. Whereas an increase in sales volume usually means an
increased capital outplay on equipment, an increased sales and marketing expense through
increased advertising and promotional expenses, and much more leg work by the salesman.
All this means more efforts, expenses and risks. Compare this with the efforts required in
generating equal profit contribution from the purchasing department and one will realize that
the latter does not require such enhanced management effort and risk. A point to be noted is
that the cost of materials in the production cost of an item, on an average, in the Indian
manufacturing industry takes a lion's share of almost 65%. For some industries this
component could be even higher. This only highlights the importance of the attention needed
for the purchasing activity.

2.3 GOALS OF PURCHASING FUNCTION

The basic objective of the purchasing function is to ensure continuity of supply of raw
materials, sub-contracted items and spare parts and at the same time reduce the ultimate cost
of the finished goods. In other words, the objective is not so much to procure the raw
materials at the lowest price but to reduce the cost of the final product. For ensuring this,
there are a large number of well known parameters such as:
 right price,
 right quality,
 right contractual terms,
 right time,
 right source,
 right material,
 right place,
 right mode of transportation,
 right quantity and right attitude.
All these have to be considered jointly.

7
 Materials Management (BUMA-312)

1. Right price
It is primary concern of any manufacturing organization to get an item at the right price. But
right price need to be the lowest price. The 'tender system' of buying is normally used in
public sector organizations but the objective should be to identify the lowest ‘responsible’
bidder and not the lowest bidder. The technique of 'learning curve' also helps the purchase
agent to determine the price of items with high labor content. The price can be kept low by
proper planning and not by 'rush buying. Price negotiation also helps to determine the right
prices.

Fig 2.1
Purchase parameters
Right place of Right Right quality
delivery price material Rejections and
communicati value specification
on analysis
standardizati
Right source on
Vendor rating Right quantity
Right attitude EOQ and
purchasing Training
research inventory
SWOT analysis models
material intelligence
Right contracts
legal aspects

Right Time
Re-order point Right Price
Right Negotiation
transportation lead time analysis
learning curve
Cost analysis of
transportation and
logistics

2. Right Quality
Right quality implies that quality should be available, measurable and understandable as far
as practicable. In order to determine the quality of a product, sampling schemes, as discussed

8
Materials Management (BUMA-312)

in the chapter on incoming materials inspection, will be useful. The quality particulars are
normally obtained from the indents, and experience indicates that a substantial portion of the
indents prepared by the user departments are invariably incomplete.
3. Right time
For determining the right time, the purchase manager should have lead time information for
all products and analyze its component for reducing the same. Lead time is the total time
elapsed between the recognition of the need of an item till the item arrives and is provided
for use. Obviously, this covers the entire duration of the materials cycle and consists of:
 pre-contractual administrative lead time,
 manufacturing and transporting lead time, and
 inspection lead time
Since the inventory increases with higher lead time, it is desirable to analyze each component
of the lead time so as to reduce the first and third components which are controllable. While
determining the purchases, the buyer has to consider emergency situations like floods,
strikes, etc. He should have 'Contingency plans' when force majeure calluses become
operative, for instance, the material is not available due to strike lock-out, floods, and
earthquakes. However, rush purchase should be restored to only in exceptional cases.

4. Right source
The source from which the material is procured should be dependable and capable of
supplying items of uniform quality. The buyer has to decide which item should be directly
obtained from the manufacture. Aspects such as source selection, source development and
vendor rating are discussed in detail in the next chapter on buyer-seller relationships. In
emergencies, open market purchases and Bazaar purchases are restored to.

5. Right Quality
The right quantity is the most important parameter in buying. Concepts, such as economic
order quantity, economic purchase quantity, fixed period and fixed quantity systems, will
serve as broad guidelines. But the buyer has to use his knowledge, experience and common
sense to determine the quantity after considering factors such as:

9
Materials Management (BUMA-312)

 Price structure,
 discounts,
 availability of the item,
 favorable reciprocal relations, and
 make or buy consideration
The buyer has to adopt separate policies and procedures for capital and consumer items. He
should be able to distinguish between indigenous and international purchasing procedures.
He should be aware of the legal and contractual aspects in international practices.

2.4 OBJECTIVES OF PURCHASING DEPARTMENT

The objectives of the purchasing department can be stated as follows:
1. To ensure availability of proper quantities of materials for smooth functioning of the
production department
2. To procure materials at reasonably low costs (not necessarily low prices) for the company
3. To ensure supply of quality materials
4. To select the proper source/s of supply in order to ensure the above points (1,2 and 3)
5. To keep abreast of various substitute materials available in the supply market, their prices
and utility to the organization; to pass or discuss such information with the various other
department of the company such as Design, Production, Sales Finance etc.
6. To study or research possible substitutes for the raw materials and bought out component
parts; for this, the technique of Value Analysis/ Value Engineering will be useful.
7. In order to ensure the continuity of quantity and quality of the supplied raw materials (at
competitive prices), to develop new vendors and maintain good relations with existing
vendors. Vendor relations vendor monitoring or vendor evaluation and development of
new vendors is an integral part of the purchasing executive's job.
8. To develop good procedures and systems for the purchasing department, so that the
various purchasing objectives do not remain personalized but become institutionalized.
9. To coordinate with other functional departments as much as possible. For this purpose, it
becomes integration between different departments as much possible. For this purpose, it

10
Materials Management (BUMA-312)

becomes essential for the purchasing executives to keep in touch with the various
functions of the company such as Design, production, Sales Finance etc.

2.5 LINKS OF PURCHASING WITH OTHER ORGANIZATIONAL FUNCTION

Purchasing has important links with most of the organizational functions. The production
planning and control or materials control sections might have a say in the inventory of raw
materials and bought out parts, but the purchasing executive has a first hand knowledge of
the market situation for the supply of these items. For instance
(1) Is there going to any shortage in the near future?
(2) How will the shortage escalate the prices?
(3) Are there any good substitutes available?
(4) Will there be an industrial relations problem in the important supplier's company and
how will this affect the company's production?
(5) Which supplier can supply better quality material and better quality component parts
at the same or less price?
(6) Which are the potentially good vendors who could be developed into reliable suppliers
and loyal partners sharing the concerns in the business? All such information regarding the
outside marker is of much important parts which are incorporated into its own products, the
purchasing manager will have to play a role which can perhaps, be described as 'External
manufacturing manger'.

Increasing the sales does not always result in increasing profit. Sometimes increase in sales
may mean a decrease in profits, because with an increase in volume, the cost of input
materials may also rise. This is where the purchasing department’s feedback information is
useful. It can apprise the management of what an increase in sales activity will entail. The
marketing/sales and purchasing departments have to work hand- in-hand in order to take care
of such situations. Purchasing is as much in contact with the external market as the sales
department is. The sales department may be concerned with the customer market, whereas
the purchase department may be looking at the supply marker. In fact, both are looking at the

11
Materials Management (BUMA-312)

external environment and therefore, exchanging of notes between the two departments is
important to the organization.

Management of supply: An integrated approach

However, the Purchasing manager is not always the final decision-making authority
regarding the quality, Quantity, time or cost of the materials. It may be so in some
organizations and not so in many others. What we said earlier emphasizes the integrated
approach towards the management of supply of materials by being sensitive to the internal
and external environment, and being one of a team of decision-makers for the input
materials.
 The Purchasing manager should serve as a link for the various internal departments
and external environment.
 He should be an advisor, informer to various departments and a consolidator of
various conflicting objectives/opinions inside and outside the company. Often this is
misunderstood to mean that the purchasing executive should have an authority over
all the segments of the function of procuring the input materials. Such authority may
not exist in most of the cases.
 A purchasing executive has to produce results by advising and coordinating his
activities with that of various other internal departments and the external market.

2.6 PROCEDURES, TYPES AND SYSTEMS OF PURCHASING ACTIVITIES

Naturally, purchasing necessitates formalized systems and procedures for ease of operation
and accountability. Formal procedures have to be laid down in initiating purchase, selecting
suppliers, placing purchase orders, follow-up, receiving materials and so on. In this chapter
we will deal with various systems that are used in a purchase department.

We can classify the systems in the following manner

1. Pre-purchase system
2. Ordering system
3. Post-purchase system

12
Materials Management (BUMA-312)

The salient features in each of the systems mentioned are as follows:

1. Pre-Purchase
The pre-purchase activities consist of initiating the purchase through:
 requisites,
 requirement programs,
 selection of suppliers,
 obtaining quotations and evaluating them

a. Requisition. The department concerned, in need of a material, usually presents a

completed requisition form. Requisition may be made by any one in the concerned
department. However, it has to be countersigned by a senior officer. In any organization only
a limited number of officers are empowered to countersign the requisition as it amounts to
authorization of the expenditure. Purchase department must have the list of such officers so
as to check the validity of the purchase requisitions. Normally, there is a delegation of
authority in authorizing a requisition. This is expressed in terms of the financial limits up to
which an officer can authorize a requisition.

b. Traveling requisitions This document is widely used for requisitioning items that are
required frequently in bulk quantities over a long period. The traveling requisition is prepared
as shown in Exhibit 10.2. It travels from the requisitioning department to the purchase
department often. During each stage a purchase order is initiated. Factors, such as
specifications and supplier details, are written permanently and provisions for entering date,
quantity required names of requisitioner and authorizer are available.

c. Enquiries many organizations often invite suppliers to quote rates for supply of materials.
For this purpose a standard format is used which is similar to a purchase order in all respects
except that words such as "This is only a request for quotation" or "this is not a purchase
order" are printed so as to ensure that the supplier does not construe the request for quotation
as a firm order.

13
Materials Management (BUMA-312)

2. Ordering System
Having selected the supplier and the rates agreed, the buyer places the purchase order on the
supplier, expressing the terms and conditions. The purchase order once accepted becomes a
binding contract. The details that are normally furnished in a purchase order are listed below.

a. Purchase order reference number (which will be quoted in all subsequent follow-up
measures pertaining below
b. Description of the materials and detailed specification
c. quantity required and delivery schedule
d. Price and discount
e. Shipping instructions
f. Location where the materials are to be shipped (usually the name and address of the
buyer),
g. Signature of the materials manager who can authorize the purchase order, and
h. Detailed terms an conditions (as a common practice these are printed at the back of the
purchase order).
3. Post- Purchase System
This includes follow-up procedures, receipt and checking invoices
a. Follow- up procedure, Follow-up implies commitment of time and money and
therefore it has to be selective. Certain priorities could be established for follow-up.
Only 'Critical' items require continuous follow-up. Depending upon the movement,
items can be classified into fast moving and slow moving.
For fast moving items, follow-up can be initiated whenever the stock level depletes
to one month's consumption.
For slow moving items also similar norms can be established. It has to be noted that
these are exceptional follow-up measures.
b. Receipt. A systematic record of the consignments received, carrier details and
descriptions are to be maintained in chronological sequence, to help in quick
identification of materials so that inspection can be arranged prior to acceptance.

14
Materials Management (BUMA-312)

Many organizations have a separate central receiving section for this purpose. As
mentioned earlier, a copy of the purchase order is sent to the central receiving section
for recognizing purpose.
c. Involve checking. The supplier normally sends the invoice for the materials supplied
for payment. It is essential that this involve is matched against the receipt details,
quantity accepted and rejected so that payments can be made which will keep in funds
planning mentioned earlier, a copy of the purchase order is sent to the buyer's finance
department.
A close coordination between the finance and materials management department is
necessary.

2.7 VENDOR RATING AND EVALUATION

2.7.1 Relevance of Good Suppliers
The vendors are considered as the best intangible assets of any organization. Hence both new
and established vendors are coming for a critical review of their plant capacities, financial
conditions performance, particularly in today's recessionary situation. The material executive
has to follow a selective policy and choose only those suppliers that are suitable to his needs.
The main objective of purchasing is to have to least two suppliers for each item.

The material executive has to cater not only the immediate requirements, but also the future
requirements of the organization. Hence the material executive:
 cannot rest content with selecting or developing a source for immediate need.
 has to cultivate the source, so that he may be able use it effectively for future needs.
 must have a clear idea of rating the vendors and improve the relations with vendors.
 cannot afford to cultivate all the sources he comes across. He has to follow a
selective policy to pick and choose those that are suitable to his needs.
Rating the suppliers helps to choose the best vendor and also improves the buyer-seller
relations, on an objectives basis. It is also inconceivable for any organization to exist in
business with out vendors as a matter of fact, the corporate strategy of many
organizations is to have at least two sources, for any item. Sometimes the suppliers also

15
Materials Management (BUMA-312)

serve as public relations officers of the buying company, if the relations between them
are good.

2.7.2 Need for Vendor Evaluation

A true measurement of an effective purchasing department is obtained by the quality of
reliable vendors selected for supplying goods and services. The purchaser's primary interest
lies in getting for his company the best value of money from his suppliers. This implies that
he should be in a position to assess and rate their performance against what is expected from
an ideal supplier in the prevailing socio-political and economical environment. The absolute
standard is difficult to define with any degree of exactness, but mathematical models are
available to evaluate the performance of the supplier be built between the two. It will be
appreciated that the principle of vendor rating has no meaning, if there is only a single
source. Further, the time and cost spent in the appraisal should be related to the importance of
the material of service required.

2.7.3 Advantages of Vendor Rating

An efficient vendor rating system obtains the best vendor for the organization, which saves
time and money, as well as the best value of the money spent on purchases. The purchasing
executive can be made a victim of false propaganda of being dishonest or biased in his
dealings with the suppliers. Therefore, if he has sufficient data to support his transactions, his
position will be vindicated. The image of the purchasing executive will be improved both
within his organization, and amongst his suppliers, if he adopts a scientific vendor rating
system.
 A major advantage of vendor rating is that, it rates the entire performance of the
vendors and is not guided by a tunnel vision. This also gives the purchaser additional
information on the capabilities of the vendor with regard to known-how, testing,
transport, contractual willingness, etc. and he can use them to his advantage, when
ever he has a particular need.
16
Materials Management (BUMA-312)

 The primary use of vendor rating is to objectively compare the performance of

vendors and improve the relation with better performers.
 The ratings can also be used as a feedback to the vendors for improving their product.
 To inculcate a competitive sprit, the scores of other vendors may be mentioned, after
properly disguising their identities.
 Vendor rating has also been used as an important mechanism to allocate the share of
business amongst a large number of suppliers. Decisions to disqualify or backlist or
discriminate the existing suppliers can be arrived at on an objective basis, through
vendor rating.
 Vendor rating not only enables the organizations to know the performance of their
suppliers, but also gives an idea as to how much they ‘out perform’ their competitors
with regard to price, quality, lead-time, split shipment, service, technical assistance,
meeting emergency, adhoc requirements, etc.

Implementation of the scientific vendor rating scheme has to be done very carefully. From
the organization’s side, a lot of computational effort of a confidential nature is required, after
choosing the characteristics. Identification of characteristics, collection, compilation, analysis
with previous feedback, etc., costs money and hence the periodicity of the rating calculation
should be so chosen as to optimize the returns.
Many organizations usually follow a half-yearly rating for regular purchase items. Unless the
suppliers are informed and convinced of the system, the rating could become dysfunctional.
Unless the vendor supplies the materials in the quantities contracted and according to the
schedule, the buying organization will be at a loss for to lack of materials. Therefore
adherence to quantity and schedules is an important factor. This performance can be split into
one measure for adhering to the time schedule and another to quantity schedule. The rating
adherence to tome schedule can be go by working to the ration of number of deliveries in the
period. The rating adhering to quantity schedule is obtained as the ratio of the number of
correct lot sixes delivered, to the total number of scheduled deliveries.

17
Materials Management (BUMA-312)

The actual price can be compared with the standard price and the rating can be measured
from this. In this case, we have to give credit to those vendors who accept delayed payments,
since in effect they are partly bearing the organization’s working capital problems.
Depending upon the needs of the organization, the weights of the above parameters vary
from the relatively rough approach of asking the buyer departments to rate the suppliers on
some agreed factors, to developing sophisticated index number of performance with suitable
weights using computers. It is possible to increase the number of parameters to any length,
but the above ones are the standard parameters. We shall now discuss some of the vendor
rating schemes in a comprehensive manner. The check list and characteristics must over all
types of purchases and the weights for the factors must be flexible to allow for changing
market condition.

2.7.4 Categorical Plan

The categorical plan is a sample of all vendor rating schemes. It relies heavily on the
judgment and experience of the decision maker. The purchaser maintains a list of his
suppliers and their products. The vendor performance is reviewed periodically by an
evaluation committee comprising of all representatives. Depending upon the performance,
the vendor is given a plus point, neutral or minus. The performance trends over a period of
time are built up and the vendor with increasing trend of plus points is chosen. A
preponderance or pluses or minutes needs notification to suppliers with comments. On the
basis of experience and periodical meetings, a list of factors can be established on the
supplier’s performance in each area and each factor is given a grading as ‘never’, ‘seldom’,
‘usual’, ‘always’ etc. This system though non-quantitative, provides a means of systematic
record keeping on performance criteria.

2.7.5 Weighted Point Plan

This method was first drawn by the general electric USA. According to this scheme, he
suppliers are rated against three factors, namely quality, price and delivery schedule. These
factors are given relative weightages out of 100 points, depending on market conditions.
Here again, perfect coordination between quality control, user and purchasing department is
18
Materials Management (BUMA-312)

necessary to develop the weightages of these factors. The quality rating is obtained as the
difference percent between the lowest price and the net price and then multiplying by the
weightage. The performance of a supplier on the service factor is gauged by the percentage
of delivery promises kept. The above weighted ratings are added to get a composite rating of
100 points and the others less than that. In a sophisticated scheme, these areas are further
subdivided and the ratings are continually updated. The main drawback in this system is
allotting the weightage factors, for these have to be subjective and sometimes even arbitrary.

Cost Ratio
This method relates to identifiable purchasing and receiving costs to the value of shipment
received from respective suppliers. The higher the ratio of costs to shipments, the lower the
rating applied to the supplier, quality, delivery, service, and price are the usual categories to
which costs are allocated, after subdividing each factor into various elements. The respective
cost ratios are suitably combined with the vendors’ quoted price, to determine the net cost.
Here the vendor performance is reviewed periodically by an evaluation committee
comprising of representatives from all departments involved with purchasing.

Eavston’s Vendor Selection

The suppliers’ past performance is utilized in the choice of vendors and the basic steps in this
method are as follows: The vendor’s on the approved list are ranked on the basis of the
buyer’s subjective evaluation. The first satisfactory vendor, meeting or exceeding all the
standards is accepted initially. If none of the vendors on the approved list meet all standards,
then the minimum standard is relaxed till a vendor is chosen. It presupposes hat standards of
acceptability for every criterion is formed to fir in order to take decisions.

Forced Decision Matrix

The attributes of rating – like price, quality, service, reliability the suppliers, lead-time of
supply, etc- are identified first. Then these factors are compared between themselves, like
quality and price. If price is considered more important than quality by the evaluation
committee, then a weightage of one is given to price and zero to quality. The quality is

19
Materials Management (BUMA-312)

compared with each form of a table or matrix. Similarly each factor is compared in turn with
each of the others and their relative weightages are recorded. Weightages given the different
attributes are added up for each attribute and divided by the total number of comparisons, to
give the attribute weightage coefficient for each attribute.

After this, the next step is to compare the suppliers in pairs respect of each attribute giving
the superior supplier a weightage of 1 and the other 0. These results are tabulated and the
supplier a weighage coefficient is thus obtained by multiplying for each attribute and for each
supplier. These are then added up to give the total weightage and this is ranked for the
appropriate decisions on the vendors. The weightages can be suitably built for a large number
of suppliers and evaluators.

Key Questions approach

Somerby Dowst outlines the key questions to ask about suppliers, relating this to a
newspaperman’s needs to answer the pivotal words in building a story; who; what; where;
how and why. When it comes to knowing his supplier better, getting a perspective of their
strength and weakness buyers can put to good use those same keywords. The trick is simply
to device as many questions as possible around these words. By the time you have answered
them all, you have a very good picture of what the supplier is and what he can for your
company as a customer.

The questions may develop like this:

 Who is the supplier? Are his suppliers”
 Who are his customer”
 What are his products and offering?
 What is his financial ability? What is his technical ability?
 What is his management ability? What service facilities does he offer?
 What price is he quoting? What discount does he give on volume purchase?
 When can be fulfilling the contractual agreements?
 When does he expect payment?

20
Materials Management (BUMA-312)

 Where is located? How is the product manufactured?

 How well can be control quality?
 Why can’t he conform to our quality specifications and so on.
This way the questions are built around the keywords. When we attempt to answer them,
other subsidiary questions will come up; so that by the time these questions are all
answered our knowledge of the supplier will have definitely improved. In order that the
questions cover all aspects of supplier evaluation, it is suggested here that the original
question be framed around the following factors:
 management,
 Manufacturing financial, technical service and other factors.
The secondary questions will identify important sub factors under each of these main
factors, so that in the end a balanced prospective of the supplier will emerge.

Spare Suppliers Evaluation

The Boeing company developed this program in 1965 with due emphasis on the management
factor. For major subcontracts, a source selection board identified and weighs the criteria and
sub criteria, which will be used in the evaluation. The supplier has to provide a
comprehensive management plan, which includes:
 plan of management
 organization of management,
 cooperate structure and
 relationship plan of assignment of personnel and management controls.

A source selection survey is then conducted, during which the supplier management,
effectiveness is also evaluated. Through discussions with the supplier’s management and a
summarized report is drawn up on:
 the company organization and staffing structures for the contact,
 planning and program control of the project,
 its integration with existing work and on the approaches to the project the know how
available and past performance.

21
Materials Management (BUMA-312)

Periodically, purchase department rates the supplier’s management performance as excellent,

good, fair, door or not acceptable, using these survey and team reports.

Criteria and sub criteria in source selection

Depending on the nature of the procurement the source selection board establishes the
criteria and sub criteria as a initial step in the factors, engineering, management, finance,
material, manufacturing quality and reliability in general and each of these main factors have
sub factors for example the main factor management has the following sub factors (a) plan of
management,
(b) organization of management,
(c) corporate structure and relationship,
(d) plan of assignment of personnel and
(e) management controls.
In the Boeing plan, each main factor is assigned relative weights or points. These points are
then relatively distributed to their respective sub factors. The suppliers are awarded due
points on each of the sub factors and a rating for the main factor established.

IBM quality rating system

The IBM rating system uses quality costs as the basis for rating suppliers. The formula for
the vendor quality rating is:
VQR = Desire cost of inspection
Actual cost of inspection

The costs incurred in inspecting acceptable material is the desired cost, the cost of inspecting
rejected materials being excluded from it. The actual cost of inspection includes cost incurred
in inspecting acceptable as well as rejected material plus costs associated with extra handling
of rejected material. Inspection cost is obtained by multiplying cost is found by multiplying
the number of documents to process the rejected material by a standard rate.

This system has many advantages, which are outlined below

22
Materials Management (BUMA-312)

(a) factors of costs used are well understood by the suppliers,

(b) all rating factors are brought down to a common basis- cost- and can therefore be
combine even if the factors themselves are different,
(c) some minor defects are allowed, so long as the quality requirements are clearly met, (d) it
establishes a long-range goal of what a "good" supplier should supply,
(e) no complicated weighting factors are required,
(f) when cent per cent inspection is required, it provides for equitable rating,
(g) when cent percent inspiration is required, it considers the inspection costs,
(h) the same data can be used to find out which supplier cost the company more and which
items require more inspection time. Based on the information, inspection methods may be
improved and attention directed towards the costly suppliers.

The IBM system on quality rating is useful, when there are a large number of suppliers
vending several products. The inspection information is fed directly into the computer (or
accounting machine), which computes the ratings and summarizes the information is various
ways, like types of defects, part number, supplier code, final product, etc, for further analysis.
The Bendix vendor rating system is also similar to the IBM quality system.

The plan is intended for small lots and all vendors are subjected to the same treatment,
usually cent percent inspection for small lots or representative samples is done to find out the
defective ones. The lots amounts ratings give the vendor quality rating, this moving average
is used to smoothen out the poor performance against past performance. Quality trend charts
for rejects and discrepancy percentage and for moving averages are maintained for outside
suppliers. Similarly, trend charts for rework and scrap costs for items produced within are
kept, to help analysis for failure, prevention and appraisal costs, to achieve optimum quality
costs. The Avcorad plan has an elaborate management information system on quality and
hence is useful to all departments. With the quality plan, other parameters are included to rate
the vendors.

The Bell quality rating system

23
Materials Management (BUMA-312)

Lot quality index (LQI), gives an assessment of all lots received against lots rejected, by
disposition and category, as the company attaches greater importance to quality. The LQI is
given by: LQI - X/L, where
L = Total number of lots received during the period
X = (L1 x 1.00 + (L2 x 2.10) + ( L3 x 2.90) + L4 x 3.10) + (L5 x 3.90)
L1 = Number of lots acceptable as received
L2 = Number of lots rejected by sampling inspection but labelled.
L3 = Number of lots rejected and dispositioned, rework at supplier's
end
L4 = Number of lots rejected and dispositioned, returned not usable
and
L5 = Number of lots rejected and dispotioned, rework at Bell
Helicopter company.

Production and operations management

Economic liberalization, therefore, competition with the multinational corporations, prices
and, therefore, costs to be kept low. Hence, there is an increasing emphasis, even in Indian
organizations, on lean production that is, with minimal possible inventories of materials. This
business imperative should put a damper on the speculative inventory, if any.

2.8 MAKE OR BUY DECISIONS

The purchase function would be incomplete if we do not make a mention of make/buy
analysis. To put it briefly, a company should buy a component instead of making it:

a. If it costs less rather than the manufacture the component internally.

b. If the return on the necessary investment to be made to manufacture the component is not
attractive enough.
c. If the company does not have the requisite skilled manpower to make the component
d. If it feels that manufacturing internally will mean additional labor problem

24
Materials Management (BUMA-312)

e. If adequate managerial manpower is not available to take charge of this extra work of
manufacture
f. If the component to be manufactured shows much seasonal demand or upswings and
down swings of demand resulting in a considerable risk of maintaining inventories of it,
also if the raw material for the component faces much seasonal fluctuations, which makes
the manufacture of the product more risky for the buying company.
g. If there is no difficulty in transporting the component from the supplier to the buying
company.
h. If the process of making the product is confidential or is patented
i. If the same component is not needed year-in and year-out and there is much risk of
technological obsolescence discouraging investment in capital equipments to
manufacture the component internally.

Make or buy is a strategic decision, and therefore, much short-term as well as long-term
thinking about various cost and other aspects needs to be done.

Thus, the role of the purchasing executive is as challenging as it is demanding because it

requires an understanding of various functions within the company, a sensitively to feel the
market, the regour to do a detailed analysis of the market forces now and later, the capacity
to be a tough yet humane bargainer and negotiator, and excellent interpersonal skills to
integrate conflicting viewpoints of a number of people with different objectives.

2.8.1 Decision Problems

The materials manager in any organization has to decide on the right quality of material, the
right price, the right quantity, the right source, and the right time for the purchase. In this
process, he can make use of decision analysis, for analyzing the various classes of decisions.

The essential feature of all purchase decision making problems are:

 recognition of the existence of several possibilities,
 prediction of the pay-off of each one of the strategies,

25
Materials Management (BUMA-312)

 assessment of the order of preference of the strategies.

Depending upon the information available, the decision problems can be classified as
certainty, risk and uncertainty. Decision making under certainty conditions deals with a
situation which arises when the buyer knows clearly what outcome will occur definitely.

2.8.2 Decision Making Under Risk

This situation occurs when there are a number of states or nature of alternatives and the
decision maker can predict the probability of occurrence of these. It is possible for him to
quantity the pay-offs for the alternative courses of action. For example, let us take a critical
spare part those consumption is zero per week in 10 percent of cases, one per week in 50
percent cases, two per week in 30 percent cases and three per week in the remaining 10
percent of the cases. These percentages obtained from past data are called the probability of
occurrence. If past data is not available, an expedition cost of Rs. 1000 per unit is incurred. If
a part is kept unit per week, we have to find the optimum buying strategy.

The states of nature are that, the requirements can be zero or one, two or three units in a
week, respective probabilities. The strategies are as follows:
Stock zero, requirement is zero, without any cost;
Stock zero but the requirement is two, then expenditure of Rs. 2000 is incurred. If stock one,
requirement zero then we incurred an expenditure of Rs. The following Matrix (Table 2.1.)
gives the variation of expected total cost by the weighted average of probabilities with the
cost. A strategy of stocking two spares giving minimum cost is obtained,

Table 2.1 pay-off matrix

Stock Probability of requirement Expected

26
Materials Management (BUMA-312)

Number total cost

(Rs)
0 - 1000 2000 3000 1400
1 300 - 1000 2000 530
2 600 300 - 1000 310
3 900 600 - 480

Standard deviation is a statistical measure to obtain the risk, particularly for regularly
consuming items. It is defined as the square root mean squares of the individual's deviation
from the average deviation, which is useful to measure risks, fix up the consumption norms
and to determine safety stocks in inventory policies.

2.8.3 Decisions under Uncertainty

When the buyer is unable to predict the probabilities of occurrence of the different
alternatives, the uncertainty situation is faced. This may further be compounded and turned
into a conflict situation, if there is an opponent to defeat the buyer. The uncertainty situation
should not be confused with a total ignorant view, as the buyer will always have some
knowledge, which is not sufficient to calculate their probabilities. Analytical tools are
available to take care of the idiosyncrasies of the decision maker and the culture of the
organization. Let us now illustrate the buying under uncertainty with an example.

Pay-off table
The necessity for a special kind of new apparatus is expected to continue either for four or
five years, but the probabilities cannot be estimated, as due to technological advancement,
the machine will be replaced after four or five years. Two types of apparatus "A" and "B"
are available, these consist of an important part and this part will need a complete overhaul in
either the fourth or fifth year. The relevant costs in rupees are given in Table 3.2 as follows:

Table 3.2 cost of machinery

27
Materials Management (BUMA-312)

Types of cost Apparatus A Apparatus B

Capital cost Rs. 50,000 Rs. 75,000
Operating cost
per year Rs. 10,000 Rs. 5,000
Maintenance
P2
expenses (Rs) P1 P3 P4
year 1 2000 2000 2000 1000
Year 2 20,000 2000 1000 1000
Year 3 3000 3000 1500 1500
Year 4 7000 3000 10,000 2000
Year 5 2000 7000 1000 10,000

Two sets of figures are given in Table 40.2 for each apparatus, depending upon whether
overhauling is done in the fourth or fifth year. Under two conditions of requirements and
overhauling uncertainties the problem is to decide as to which machine should be purchased.
For simplicity, we have omitted factors such as salvage values, depreciation, present value,
cost of capital, etc. and this example may be modified suitably if they are given.

For apparatus "A" life 4 years and overhauling 4 years, the initial cost is Rs. 50,000.
Operating cost for 4 years is Rs. 40,000 Maintenance expense is Rs. 2000, Rs 2000 Rs. 7000
or Rs. 14,000. Total cost Rs. 1,04.000 and average cost per year is 26,000. The cost table for
all combination P1 with p3 and P4 P2 with P3 and P4, P2 with P3 andp4 etc, is made in Table
40.3.

28
Materials Management (BUMA-312)

Life in years 4 5 4 5 4 5 4 5
Maintenance A P1 P1 P2 P2 P1 P2 P1 P2
Maintenance B P3 P3 P4 P4 P3 P3 P4 P4
Average cost A 26,000 23,000 25,000 23,400 26,000 23,200 25,000 23.400
Average cost B 27,130 22,900 27,130 22,900 25,130 23,100 25,150 23,100
Difference A 0 300 0 500 870 100 0 300
B 1130 0 2230 0 0 0 150 0

The operating costs comprising power, raw materials input costs and maintenance costs will
escalate over the years, the probability of breakdown increasing due to parts getting worn out
with usage. The tax life of an asset, defined as the number of years over which its capital
costs are amortized varies from physical life and depends on the type of facility. Tax laws
permit a life of 10 to 20 years for the purpose of depreciation. The economic life on the
contrary, recognizes time and cost dimensions. It is defined as the service life of an asset,
which will minimize the average cost per period of service.

Reasons for make/buy

The following factors contribute to the reasons for making an equipment:
 Cost studies indicate that it is cheaper to make the plan rather than buy
 Making the equipment fits the company's culture, know-how and tradition.
 Idle capacity of the existing plant is available to make the machinery and absorb the
overhead
 Direct supervision is necessary for making the complex equipment.
 Making it will facilitate control of part changes, deliveries and inventories.
 The part difficult to transport is made.
 The design of the part or processing the item is confidential.
 The buyer does not want to depend upon a single outside source of supply.
 Depreciation indirectly produces a part of the company's cash in follow, since it is
allowed as an expense on a company's account and reduces taxes.

29
Materials Management (BUMA-312)

Depreciation accounting sets a pattern for recovering the capital invested and it relates to the
cost of owning a machine to its output. A portion of the earning derived from the operation
of a machine is set aside, in keeping accounts towards the cost of replacement.
Pay-back period approach
Any capital investment is made with the hope that, there will be adequate returns on the
investment and the amount invested can be recouped in the course of economic life of the
equipment. The payback period gives in number of years, the time taken to return.

Selection of vendors
1. The production capabilities of the vendor
 Capacity to manufacture the required product in desired quantities
 Possibility of future explanation in capacity
 The understanding or the knowledge of the vendor regarding the buying company and
its needs
2. The financial soundness of the company
 The vendor company's capital structure
 Whether it belongs to a larger group of companies; wheather is a private limited or a
public limited company
 The profitability record of the company in the past
 Expansion plans of the company in the future
3. Technical capabilities (these are mostly regarding the quality capabilities
 Whether the available machines are capable of the required quality of materials?
What are the future plans of the vendor?
 Whether there are enough technical skills (skilled manpower) available with the
vendor
 Whether there is proper research, design and development facility available with the
vendor?
 What is the record of the vendor in filling the orders of other buying companies in the
same business?
 What has been the consistency in the quality produced by the vendor?

30
Materials Management (BUMA-312)

 Whether the vendor has appropriate storage and warehouse facilities to retain the
quality of the produced product?
 Whether proper quality control procedures are being followed in the vendor
company?
4. Other considerations:
 What are the working conditions in the vendor company?
 How are the industrial relations in the vendor company?
 Whether there is any possibility of disruption of the supply of materials in terms of
quantity and or quality due to human relations problem in the vendor company?

While getting this information the purchasing executive should take the help of his
colleagues in production, engineering, quality control, industrial relations, finance and other
functional areas so as to get a proper evaluation of the potential supplier.

2.9 VENDOR DEVELOPMENT

It has to do with creating or making new vendors (and not selecting out of the already
established ones in the market). This is a continual and an important activity of the
purchasing manager. Traditionally one of the reasons for developing new vendors is to build
more competition in the supply market (eliminating monopoly or oligopoly). The company
can then buy materials from a number of sources. Another traditional reason for such
multiple source buying (and, therefore, also for vendor development) is to spread the risk of
non-availability of shortage of input materials over a number suppliers. In case, one of the
supplier's employees go on strike (or if there is an explosion or fire in the supplying
company), the other supplier's can be relied upon to compensate for the shortage.
However, international standards are premised on the thinking that single buying provides
some advantages which multiple source buying does not. One of the obvious advantages of
single source buying is that of close rapport between the two companies and the loyalty
established with the supplier. This good will might yield benefits in a number of ways in
times of difficulties or crisis for the buying company. Also, the supplying camp any might

31
Materials Management (BUMA-312)

even do some information gathering work for buying company and therefore, keep it
appraised of the recent market trends (what may be termed as "intelligence" information).
Reliability, lack of uncertainty, quick and faithful response to the needs, therefore, a general
improvement in quality and reduction in inventory and purchase related costs are the long-
term benefits for both organizations. However, the present Indian situation is far away from
such world class thinking. In the present socio-economic milieu prevailing in our country,
where trust and concern are found somewhat wanting, the Indian companies seem to find
more advantages in multiple-source buying. But still the choice between single source or
multiple sources of both spreading risk, building competition and at the same time
establishing a good rapport. Vendor development involves helping or building up the vendor
by various means such as:
1. Lending money for part of his capital equipment, working capital requirement, etc
2. Lending technical help by making company engineers and technicians available problem
3. Help in R & D, by again lending technical help to not only to establish the company, but
also to help improve its products and services on a continuous basis
4. Guaranteeing him a certain amount of business (this is particularly needed during initial
stages of setting up the vendor

2.10 REVIEW QUESTIONS

1. Write down the basic objectives of the purchasing function
2. Mention at least five objectives of the purchasing department
3. Purchasing has important links with most of the organizational functions. Explain
how purchasing form links with other organizational functions
4. discuss the elements and major tasks in post- purchase system
5. discuss the significance of vendor evaluation and explain the major advantages of
vendor rating

2.11 SUMMARY

32
Materials Management (BUMA-312)

 The prime function of purchasing is that of being sensitive to the external supply
market situation and also of feeding back this information to the other functions of the
organization.
 The basic objective of the purchasing function is to ensure continuity of supply of raw
materials, sub-contracted items and spare parts and at the same time reduce the
ultimate cost of the finished goods.
 Purchasing has important links with most of the organizational functions. The
production planning and control or materials control sections might have a say in the
inventory of raw materials and bought out parts, but the purchasing executive has a
first hand knowledge of the market situation for the supply of these items
 Purchasing necessitates formalized systems and procedures for ease of operation and
accountability. Formal procedures have to be laid down in initiating purchase,
selecting suppliers, placing purchase orders, follow-up, receiving materials and so on.
 Purchasing system is classified in to three categories:
1. Pre-purchase system
2. Ordering system
3. Post-purchase system
 A true measurement of an effective purchasing department is obtained by the quality
of reliable vendors selected for supplying goods and services.
 The primary use of vendor rating is to objectively compare the performance of
vendors and improve the relation with better performers.
 The ratings can also be used as a feedback to the vendors for improving their product.

33
Materials Management (BUMA-312)

CHAPTER THREE
CORPORATE POLICY AND MATERIALS MANAGEMENT
Contents
3.0 Objectives
3.1 Introduction
3.2 General Corporate Policy
3.3 The Concept of MBO
3.4 Scope
3.5 Policy Manual
3.6 Marginal Costing
3.7 Checking Your Progress
3.8 Summary
3.0 OBJECTIVES
By the end of this unit students are expected to:
 Be acquitted with the concept of corporate policy and its function in material
management
 Understand the nature of the materials management policy, function and its
important contribution to the overall company’s objectives

3.1 INTRODUCTION

34
Materials Management (BUMA-312)

A clearly defined materials management and corporate policy enables the spelling out of
authority and responsibility. It also helps to identify the prerogatives of the materials
management to avoid confusion that may arise in inter-departmental activities. Within the
materials management area, it facilitates uniform and consistent action in various activities.
Procedures and systems get standardized, leading to greater overall efficiency.

3.2 GENERAL CORPORATE POLICY

Corporate policies are laid down in order to achieve the corporate goals that the organization
has set for itself. The process is explained in fig 3.1

Figure 3.1

Opportunities

Weakness Corporate objective Strength

Threats

Corporate polices

Marketing policies Other department

polices Material
management policy

Effectiveness areas

Time bound goals in

effectiveness areas

Many Organizations have multiple goals. Needless to add, these goals must be measurable,
result-oriented, specific, realistic and attainable in a time span. Some of the important goals
are to:

35
Materials Management (BUMA-312)

1. Achieve a specific net profit.

2. Achieve a specific sales target
3. Increase the capacity utilization
4. Obtain a fixed return on investment
5. Maximize shareholder's earnings, and
6. Improve the corporate image

Based on the corporate goals, broad policies are laid down in order to attain them within a
define time span. The top management therefore expects that each department must work
towards the organizational objectives. In fact, they expect individual departments to directly
contribute to the objectives through well defined policies and plans of action.

3.3 THE CONCEPT OF MBO

Management by objectives (MBO) is a tool which is increasingly used by many
organizations. W.J Reddin defines MBO as "the establishment of effectiveness areas and
effectiveness standards for managerial positions and the periodic convention of these into
measurable time-bound objectives linked vertically and horizontally and with future
planning."
In organizations, effectiveness areas will have to be identified in:
 production,
 Sales,
 Finance,
 Materials and personnel functions
Objectives should be set linking them to the overall organizational objectives, and then
control should be exercised. In materials management, the effectiveness areas may be
identified as follows:
1. Inventory levels
2. Inventory ratio
3. Rejection percentage per supplier/per item
4. Scrap

36
Materials Management (BUMA-312)

5. Unit cost

After identifying the effectiveness areas, the specific output requirements and measurement
criteria will have to be established. They must then be converted to time-bound targets. Thus,
the objectives and policies of materials management are derived from the corporate goals and
policies.
3.4 SCOPE
Policy should be spelled out in the following areas

Organization
Acceptance of integrated materials management itself is a major policy decision. some of the
important areas which come under this category are:
 The internal structure,
 delegation of authority,
 interface relations,
 coordination of the entire materials management function,
 identifying training needs, and developing a policy manual.

Purchasing
Policy must be clearly laid down with regard to source development, quotations, receiving
salesmen, negotiations, price, quality, plant visits, personal buying reciprocity, capital
equipment buying and make or buy decision. These are very important areas where purchase
department must be given exclusive powers. If other departments like production,
maintenance and engineering require some technical details about new materials from the
suppliers, then they must inform the purchase department about correspondences that they
plan to have with suppliers in this regard.

Stores

37
Materials Management (BUMA-312)

Procedures must be established for receipt, inspection, handling, storing, issue stoke
verification, surplus and obsolete material disposal so that the inventory control levels are
keep at a desired level. This will also ensure proper accounting, safety, minimum lead time,
and eliminate pilferage.

3.5 POLICY MANUAL

The policy manual is generally prepared with a note from the Chairman of the company
emphasizing its importance. Such a policy manual will be circulated to all divisions up to the
middle management level so as to make certain that policies and procedures are consistently
followed leading to the achievement of the corporate objectives. The policy manual
familiarize the materials management department with the procedures and guidelines to be
observed. Periodical revision of the manual needs to be undertaken to keep it realistic and
responsive. Typically, the manual will have the scope which we earlier discussed, and will
also stipulate many procedural guidelines.

Contents of the Policy Manual

Policy manual (material management)
The policies and procedures laid down this manual are very essential in achieving the
objectives of a company. This manual will help you in clearly understanding the objectives,
policies and responsibilities of the materials management department.
Content
(The points outlined here are only illustrative and not exhaustive).
1. Materials management is the only department which will serve as the point of contact
between suppliers and the company
2. Any department which may wish to contact a supplier directly must do so after clearance
from materials management and must keep it informed of all transactions.
3. Source development is the exclusive responsibility of materials management department.
4. Other company's salesmen can be received only the materials management department.
Other departments may receive them after clearance from materials management.

38
Materials Management (BUMA-312)

5. Materials management can question the quality, quantity and price of the materials
asked for the user department, in the best interests of the company.
6. The practices of reciprocity, personnel buying, etc, will be done by materials
management under top management decisions. (it may be sometimes explicitly stated).
7. Materials management shall keep the concerned departments informed of the delivery
schedules, accounts payable, receipts, etc., so as to ensure smooth operations.
8. Market price levels, new product developments, etc., will be communicated to the
concerned departments by the finance department in prompt clearance of supplier bills
and in insuring the stock-in-transit and stores.
9. In order to effectively perform its function, materials management department will be
assisted by the finance department in prompt Clarence of supplier bills and in insuring the
stock-in-transit and stores.
10. Marketing and production departments shall keep the materials management department
informed of future plans so that expeditious action can be taken in controlling inventory
levels.
11. The materials management department will assist top management in capital equipment
buying through locating sources and analyzing the merits of various alternatives.

The policy aspects management department will assist top management in capital operating
personnel are clear about their responsibilities and the procedures they have to follow so that
the overall organizational goals are easily achieved.

The role of materials management here depends upon the position of the head of the
materials management division in the organization. If he is a member of the top management
team, then a key role is played by him as he is best equipped to deal with the problem.
Otherwise he has to play a supporting role by providing relevant data so that the top
management can take a scientific decision. A great deal of coordination is required between
materials management and production departments in collection, collation and analysis of
data, such as quality equipments, quantity equipments, existing production departments,

39
Materials Management (BUMA-312)

quantity requirements, existing production facilities, balance equipment requirements and so

on. Few organizations have formed committees to analyze and recommend proposals.
Make or buy decisions arise due to a variety of reasons. Mostly such situations arise due to
consistent failures on the part of suppliers in the supply of items. The management then
decides to make the item. Sometimes availability of items from outside suppliers may not be
adequate owing to stiff competition from many end-users. This also may lead to making the
item in ones' own plant.

Factors that are to be carefully analyzed in arriving at make or buy decision include the
following:
1. Quality requirements
2. Quality requirements
3. Cost aspects

All the above factors have to be considered in depth before a decision taken
Quality requirements
If the suppliers consistently fail to meet the quality requirements, then the firm may decide to
make the item. Firstly, it is essential to find out whether such exacting quality requirements
are necessary at all. It may mean specialized procedures, tooling, skilled labor and rigid
inspection standards. Another important aspect is whether the buyer will be able to make the
item to such quality standards when established vendors are unable to do so. A vendor enjoys
the benefit of speciation and probably the item in question is his main product line. Buyers
also have the option of changing the supplier and hence there is a lot of flexibility.

Quantity requirements
When the quantum is small such as specialized jigs and fixtures, it may be worthwhile to
make them especially if the existing facilitates and the little amount of sub-contracting is
adequate for such manufactures. It is not a paying proposition for the supplier to accept such
small jobs. Sometimes demand for items may not be certain and it may be advantageous to

40
Materials Management (BUMA-312)

make it using a flexible production schedule. When the requirements are very large,
generally buying would be desirable.

Cost aspects
Advantages and disadvantages will have to be qualified and cost analysis has to be done. If
existing capacity can be used then fixed costs do not normally enter the analysis. However,
when fresh capacity is to be added, additional fixed costs will have to be incurred and have to
be taken into account. In utilizing the existing capacity for making an item, care should
betaken to see that the projected sales requirements of the finished products are not affected
for want of capacity.

Factors such as the cost of transportation of a raw materials vis-a-vis finished item,
economies of scales and the cost of capital must be given a through analysis in arriving at a
make or buy decision. A detailed note or marginal costing is given in Exhibit 2.3.

3.6 MARGINAL COSTING

Marginal costing is very useful with regard to decisions involving make/buy. This technique
particularly avoids the difficulties experienced in allocating fixed costs in the conventional
manner to a number of processes or products. The conventional method of allocating fixed
costs amongst different products does not delineate the contribution made by the individual
products to the profit. Let us examine this by means of the example
Table 3. 1 Conventional analysis
Rs Rs
Sales revenue - 4,000
Variable expense
Material costs 1,300
Wages and Expense 1,240
Fixed expenses 1,400 3,940
Profit 60

41
Materials Management (BUMA-312)

Table 3. 2Marginal analysis

Rs Rs
Sales revenue - 4,000
Variable expenses
Material costs 1,300
Wages and expenses 1,240
2,540
Recovered fixed costs Costs 1,460

By selling this particular article, the company has recovered Rs 1,460 as a contribution to
total fixed costs. Each such article would then contribute to the recovery of the total fixed
costs, and when the entire fixed costs are recovered, each additional article would produce a
profit of Rs 1,460. If more than one product is involved, then the contributory margin can be
worked out for each product and the difference between the price and the variable cost.
Hence, each product would make a contribution to the recovery of fixed costs, which are
regarded as a whole with no attempt to allocate them. The products with the largest
contribution margin are preferred for 'making' in the organization.

Other than the three factors discussed above, factors such as flexibility, technical know-how,
labour content, usage level, etc. also influence the top management's policy in make or buy
decisions.

3.7 CHECKING YOUR PROGRESS

1. explain the concept of MBO
2. What are the factors that are to be carefully analyzed in arriving at make or buy
decision?
3. discuss the meaning and scope of marginal costing
3.8 SUMMARY

42
Materials Management (BUMA-312)

 A clearly defined materials management policy enables the spelling out of authority
and responsibility. It also helps to identify the prerogatives of the materials
management to avoid confusion that may arise in inter-departmental activities.
 Within the materials management area, it facilitates uniform and consistent action in
various activities. Procedures and systems get standardized, leading to greater overall
efficiency.
 Based on the corporate goals, broad policies are laid down in order to attain them
within a define time span. The top management therefore expects that each
department must work towards the organizational objectives.
 Management by objectives (MBO) is a tool which is increasingly used by many
organizations. It can be defined as "the establishment of effectiveness areas and
effectiveness standards for managerial positions and the periodic convention of these
into measurable time-bound objectives linked vertically and horizontally and with
future planning."
 Acceptance of integrated materials management itself is a major policy decision.
some of the important areas which come under this category are:
 The internal structure,
 delegation of authority,
 interface relations,
 coordination of the entire materials management function,
 identifying training needs, and developing a policy manual
 Marginal costing is very useful with regard to decisions involving make/buy. This
technique particularly avoids the difficulties experienced in allocating fixed costs in
the conventional manner to a number of processes or products.

43
Materials Management (BUMA-312)

CHAPTER FOUR
INVENTORY CLASSIFICATION AND MANAGEMENT
Contents
4.0 Objectives
4.1 Introduction
4.2 Codification and Standardization
4.2.1 Concept and Nature of Codification
4.2.2 Advantages of Codification
4.2.3 Process of Codification
4.3 Cost Reduction by Codification
44
Materials Management (BUMA-312)

4.3.1 Evaluation Codes

4.3.2 Methodology of Codification
4.3.3 Part Number and Codes
4.3.4 Requirement for Codes
4.3.5 International Codification
4.4 Standardization
4.5 Material Handling and Maintenance
4.5.1 Definition of Material Handling
4.5.2 Right Method of Materials Handling
4.5.3 Ergonomics
4.6 Maintenance Management
4.7 Review Question
4.8 Summary
4.0 OBJECTIVES
This unit enables students:
 To understand the meaning, conceptual frame work and methodologies of
codification and standardization
 To recognize the importance of codification and standardization in material
management
 To learn the concept, scope and significance of material handling and maintenance
management

4.1 INTRODUCTION
To maximize the aforesaid advantages, it is necessary to develop the codes with all
concerned, namely personnel from design, production, engineering, inspection, maintenance
and materials. Handling the material duly increases the cost and not the value of the items.
The working methods are improved by ergonomics and the defects in manual handling are
identified. The choice of equipments, the process of codification, standardization, the
determining factors including packaging and bulk material handling will be discussed, with a
view to reduce material handling cost.

45
Materials Management (BUMA-312)

4.2 CODIFICATION AND STANDARDIZATION

4.2.1 Concept and Nature of Codification
Any organization stores a large number of items, there should, therefore, be some means of
identifying them. A common practice is to describe them by individual names. Since several
departments use the same item, they call the same item by different names and stores them in
different places. One store-keeper might classify an item as Sal Ammonic, whereas a
research chemist might identify it under the name of Ammonium Chloride, only to be told
that it is not available. A classic example comes from the U.K.: An electrical firm found that
a simple item of a screw with a width of 3/8" and length of 6" has as many as 118 names
depending on the type of usage and the department using the screw. A few names were
plunger, dowel pin, roller, locating peg, drive pin, pinion spindle, pin mould holding, motor
drive spindle, trip arm pin, armature stud, etc. (See Exhibit 4.1) A proper codification
removed the 117stocking points and with it the associated inventories, entries, obsolete item,
etc.

Table 4.1
Names describing plan single diameter pins
Pin Carrier link pin
Pin hinge Standing value
Peg Valve cotter pin
Locating peg Clutch toggle pin
Dawel Swing bolt pin
Valve cotter Pin-towing eye
Canopy rod Wheel stud dowl
Roller shaft Inlet rocker bracket

46
Materials Management (BUMA-312)

Pivot Oilway plug

Brush Armature cradle bearing rod
Plug Connector moving oscillator coil
Spindle Main spindle location
Stop Latch
Roller Button
Plunger Stud

4.2.2 Advantages of Codification

As a result of rationalized codification, many firms have reduced the number of items. It
enables systematic grouping of similar items and avoids confusion causes by long description
of the items. Since standardization of names is achieved through codification, it serves as the
starting point of simplification and standardization. It helps in avoiding duplication of items
and results in the minimization of the number of items, leading to accurate records.

Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to
the minimum. If items are coded according to the sources, it is possible to bulk the items
while ordering..

4.2.3 Process of Codification

Codification is a process of representing each item by a number, the digits of which indicate
the group, the sub group, the type and the dimension of the item. Many organizations in the
public and private sectors have their own system of codification, varying from eight to
thirteen digits. The first two digits normally represent the major groups, such as raw
materials, spare parts, sub-contracted items, hardware items, packing material, tools oil,
stationary, etc. The next two digits indicate the sub-groups, such as ferrous, non-ferrous, etc.
Dimensional characteristics of length, width, head diameter usually constitute the further
three digits and the last digit is reserved for minor variations.

47
Materials Management (BUMA-312)

The codification process could be obtained by the nature of items in grouping all items of the
same metal content, say ferrous, non-ferrous, etc. The system of codification could be built
by the end use of items, that is, items grouped according to maintenance, spinning, weaving,
packing, foundry, machine shop, etc. The codification could be thought of on the basis of
source of purchasing where items obtained from on source of purchasing are grouped
together and given codes. The codification could also built on the basis pf alphabetical
listing.

It can also be done numerical digits or by a combination of English letters and numerical.
The universal decimal classification of codification, which is used in libraries, introduces
decimals for identifying items.

Whatever may be the basis, each code should uniquely represent one item. It should be
simple and capable of being understood by all. Codification should compact, concise,
consistent and flexible enough to accommodate new items. As far as possible uniform
dimensions, say the metric system, should be adopted. It should be meaningful and oriented
towards the needs of an individual organization. The groupings should be logical, holding
similar parts near to one another. Each digit must be significant enough to represent some
characteristics or aspect of the item. Two fundamental systems are described in detail in the
following paragraphs.

Kodak system
The Kodak system has been developed by Eastman Kodak Company of New York which
consists of 10 digits of numerical code. The logic of major grouping based on sources of
supply. All materials are divided into 100 basic classifications, contributed only by
procurement considerations. For instance, a bolt is listed as hardware item if this is listed in
hardware catalogues and available with hardware suppliers. If this bolt, however, is available
only as part of the machine, it will be available under maintenance. Each class is divided into
10 sub-classes. For example, if class 20 represents cutting tools then 200 represents drills,
reamers, counter bars etc.

48
Materials Management (BUMA-312)

Brisch system
The Brisch system named after a prominent consulting engineer in the UK consists of seven
digits is applied in three phases. The items are grouped into suitable preliminary categories,
such as assemblies, sub-assemblies components, off the shelf items. After these preliminary
categories, items, are grounded within the respective clans in order to bring similar items
together. The Brisch system, though it consist only of seven digits, is quite comprehensive as
the basis is on logical major groupings.

4.3 COST REDUCTION BY CODIFICATION

In order to contribute effectively to the profit center concept, the materials executive is
constantly on the look out for cost reduction techniques as he is the largest spender of the
resources. He should appreciate the fact that costs do not occur but are incurred and this is
the philosophy behind all cost reduction programs. While plenty of techniques on cost
reduction are available for the purchases executive and discussed in the book, the starting
point for any cost reduction program is to identify the individual, material or problem
uniquely. The periodic table of elements with the proper identification of the elements in an
ordered systematic representation- bear ample testimony as to how this is done. To facilitate
need identification, a unique nomenclature of the material is essential. Each item should have
a single name and each name should correspond to a single item.

4.3.1 Evaluation Codes

Confusion in locating the materials lying in store leads to avoidable delays, reducing the very
concept of a storing system to a farce. The usual process of identification is through the
names of individuals. Identifying individuals by their names may not always be successful.
The income-tax department identifies the tax payers by means of the permanent account
number, consisting of numeral and alphabets. This process of identifying human beings and
materials through numbers and alphabets is called codification. Pin codes, telephones, bank
accounts, prisoner numbers, LIC policy number, code of ethics and secret messages are

49
Materials Management (BUMA-312)

common examples of codes that we see in a day- to- day life. Sometimes color codes, as in
traffic signal, are also used.

The universal decimal classification, used in the libraries, is also a typical example. While
dealing with the materials, a common practice is to describe them by individual names. One
store keeper might classify an item as sale ammonic, whereas a research chemist might of the
numerous items purchased in an organization, classification enables like items to be grouped
together as a part of process to eliminate duplication.
Coding is the procedure for allocating symbolic identification marks to different items to
simplify and facilitate their identifications and retrieval.

Cataloguing is the process of recording in the form of comprehensive vocabulary; inform on

all classified and coded items, it serves as a ready reference and operating guide to both user
departments, supply agencies and other agencies. For effective classification it is necessary to
have a unique uniform name or descriptive phase and a unique stock code number, where
two or more items happen to fall within the same name category, differentiation is achieved
by a fine definition to conclude color, dimension and shape. The code is a shortened form for
identifying an item and provides the channel through which inform on stock items can be
conveniently and quickly stored, processed and retrieved. Coding is a complex and
cumbersome process. Hence it is advisable that skilled people and consultants should
develop the codes.

4.3.2 Methodology of Codification

Codification is the process of representing each item by a number or alphabet, the digits of
which indicate the group, the sub-group, the type and the dimension of the item. Sometimes
the bin location and the suppliers' name are also included in the codification process. Many
organizations in the government, public and private sectors, have developed their own system
of codification. The numbers of digits vary from seven to thirteen depending upon the

50
Materials Management (BUMA-312)

number of items, use of check digit, number of manufacturing sister organizations, inclusion
of vendor, etc.

As the number of digits increase, the amount of information that can be built into the code
also increases, but correspondingly the chances of committing an error while recalling a code
also increase and the cost of computer space also goes up.

4.3.3 Part Number and Codes

There should be a logical basis classification into each group. Each code should represent
one item and each item by a single code. In should be simple and understood by all. It should
be compact, concise and consistent. While building a code, care should be taken to provide
flexibility, so that future additions and expansion can be accommodated in the code. For
instance BHEL had only 8 digit codes when it started, but later on when inter-plant common
codes were thought of, it had to re-do the coding and presently a 12 digits common code has
been developed. As far as possible uniform dimensions, say metric system, should be
adopted. There should be no redundant digit and each digit must represent some significant
characteristic. In a numerical code, there can be ten-zero to nine-different groups in each
place, whereas in an alphabetical system, each place can represent 26-A to Z - items. Hence
it should be meaningful and oriented towards the needs of an organization. The codification
process should extend to spare parts as well. Unfortunately, the suppliers' part numbers are
still used by most of the organizations.

Rationalized codification is essential in the case of spares for easy identification, because the
range and number of spares is very large. Many expensive spares, such as bearings
manufactured by different suppliers, has considerable interchangeability. Hence a common
code should serve the purpose from a functional point of instead of using the part numbers
given by the suppliers. Wherever necessary, the vendor's name could be included in the code
structure and the part number given by supplier must be avoided. Short-cut methods like
adopting temporary codes have landed many organizations to great difficulties of duplicating
the same time, flabby inventories and increased obsolescence.

51
Materials Management (BUMA-312)

4.3.4 Requirement for codes

The following requirement should be kept in view while deciding the coding structure, in any
organization interested in cost reduction:
(a) Allocation of material codes should be governed by logical, simple and easy rules;
(b) the material code assigned to an item must be unique, with no likelihood of its being
duplicated for another item;
(c) Similar items should be grouped together and it should be possible to retrieve a good of
items as a whole;
(d) The material code should facilitate identification of inventory group, i.e. raw materials,
packing materials, laboratory chemicals, engineering spares, etc.
(e) If necessary, the code should also identify equipments(machineries and their related
spares;
(f) The retrieval of the code for an item should be simple and straightforward;
(g) The code should be flexible enough to accommodate new items introduced, following
expansion and diversifications.

To maximize the aforesaid advantages, it is necessary to develop the codes with all
concerned, namely, personnel from design, production, engineering, inspection, maintenance
and materials.
Thus codification enables:
(a) Easy recognition of items,
(b) Avoiding long cumbersome names,
(c) Systematic logical grouping of similar items,
(d) Elimination of duplicate items,
(e) Reduction in number of items,
(f) Facilitate bulk ordering on a staggered delivery basis,
(g) Cutting down the lead time,
(h) Minimizing the working capital locked up,
(i) Help in simplification and standardization,

52
Materials Management (BUMA-312)

(j) Facilitate computerization,

(k) Facilitate transfer among sister organizations.

4.3.5 International Codification

In the case of multi-plant organization, it would be advantageous to have the same code in all
the units for facilitating inter-plant transfers. This may be extended to different organizations
belonging to the same industry groups. In this context, it is necessary that industry
associations should start developing common codes. This concept of codification at the
industry level should be extended to the national levels, where all the industries using the
same materials will identify each item by a common code.
A lead in developing the national codification can be given by national associations, like
industry associations, manufacturing associations, small industries associations, professional
associations, Indian standards institutions, customs, excise, directorate general of technical
development, chief controller of imports, etc. Admittedly this process will take a long time,
but the efforts are worth the result and pave the way for international codification, which will
pave the way for a smooth, meaningful and rewarding work environment.

4.4 STANDARDIZATION
Definition and Scope
A standard is defined as a model or general agreement of a rule established by authority,
consensus, or custom, created and used by various levels of interest. For instance, an
individual may be the starting point of using the standard and then his department will use
the same standard to suit its needs. The firm may similarly prepare, by consulting different
departments, a standard for guiding the activities. Related industries in the industry group
may also prepare industrial standards. At the national level, by consulting manufactures,
scientists, users and government departments, national standards are evolved. Such national
standards are presented and discussed to form international standards. The standards could
cover a variety of industries, such as engineering, textile, chemical, pharmaceutical,
agricultural and also education. The topics covered under standards can include purchase

53
Materials Management (BUMA-312)

contracts, form, sampling, testing, safety measures, etc. Thus, standardization can be
conceived on a three- dimensional plane of levels, industries and topics.

Conceptual Framework of Standard and Standardization

According to the international standards organization located in Geneva, standardization is
defined as the process of formulating and applying rules for an orderly approach to a specific
activity, for the benefit and with the cooperation of all concerned and in particular for the
promotion of the overall economy, taking due account of functional performance conditions
and safety requirements.

The word standard is multi-values, as it may mean a physical standard, a technical document,
test method, code of rules, or rule of law of government. Standardization is the process of
formulating and applying rules for an orderly approach to a specific activity, for the benefit
and with the cooperation of all concerned, after meeting the function and safety
requirements. It is based on the consolidated results of science, technology, research and
development. Standards are sets of developments formulated to secure savings in money,
manpower and time. Standardization is an indispensable element in all functional areas, such
as a design development, materials management, production, quality control, maintenance,
marketing, personnel and finance.

In practical terms, a standard means a written document agreed upon by all parties - that is,
by people representing buyers, sellers, manufactures consumers and also many types of
authority and technical professions. It determines not only the basis for the present, but also
for the future development and it should keep pace with the progress.
In industry, the term standardization denotes a size, a set manufacturing process, a definite
weight, a particular dimension, use of a specified component in the process and above all a
given satisfaction to the consumer.

Need for Standardization

54
Materials Management (BUMA-312)

Standardization is required not only ensuring procurement of the right quality of incoming
material, but also for cost reduction.

Importance of Standardization
Standardization enables the materials manager to achieve overall economy and ensure inter-
changeability of parts. Since more than one manufacturer can supply standard items, it will
imply better availability, better delivery. Standardization also implies reutilizing purchase
efforts, less stock and hence less obsolete items. It also means less inspection efforts; as a
matter of fact, many.

Simplification
The process of standardization logically leads to simplification or variety reduction. This
implies reducing unnecessary varieties and standardizing to the most economical sizes grades
shapes, colors, types of parts and so on. In large organizations handling 50,000 items, there
are several items under stock having very little variation in quality, dimension or functional
effectiveness. Nevertheless these continue to be in stock for historical reasons. Practical
experience indicates that often this plethora of variety is not even perceptible

These items can be analyzed by their frequency of usage or movement analysis over the last
few years. Frequency or movement analysis would bring out items which are seldom used or
not at all. On the basis of this analysis a company could set standards to replace these items.
The setting to of a standard depends on the effect the dimension variation has on the
performance of the product.

Preferred numbers
We are all aware that bulbs of 15, 25, 40, 100 and 150 watts are available. It is interesting to
note that these numbers have been worked out on the basis of what is known as an R 5 series.
They are known as "Preferred number". This series is a geometric progression with its
starting number as 510 = 15 and its fifth number 150 is 10 times the first number which is
15. Similarly, one could have 1 R10 . . . R80 series. These are series which increase 10, 20 ...,80

55
Materials Management (BUMA-312)

times in the 10th, 20th... 80 steps, respectively, the increments being based organizations do
not check routine items bearing the ISI mark in a detailed manner and resort to inspection of
only a small fraction of items. It is also possible to enter into rate/ running contract lot sizes
is not problem for standard items.

"In yet another undertaking, namely, Fertilizers and Chemicals Travancore Ltd, there were
nearly 100 varieties of electric motors. There were too many varieties of tools, oils, paints,
enameled copper-wire electrodes, heat exchangers, pumps oil seals, values ball-bearings,
various hardware items, printing and stationary items and so on. The committee therefore
desires that the matter should be pursued vigorously by public sector undertakings in
coordination with Indian agencies."

Benefits of Standardization
The important benefits of standardization are as follows:
1. Standardization helps reduce inventory items
2. It helps in evolving better means of communication about an item in the company
3. It forms a base for further inventory analysis
4. The specification of items can be more clearly spelled out, making quality control firm
5. Ina developing economy like ours, where the need is to promote exports, insistence on
standards helps in creating confidence in the international market.
By using national standards, it is easier to locate sources of supplies and in the case of
machinery parts, the replacement of parts can be had directly from the source rather than
reverting to the machine. It could also be used as a basis for publicity and selling for end-
products, and if made from standard parts will be readily available in the market.

Specification
While standardization is the process, the standard is the result of a particular standardization
effort approved by a recognized authority. Standards are classified in a variety of ways like
technical standards, managerial standards, etc. Technical standards apply to the productive
phase of business, such as the materials, suppliers, purchasing procedures, manufacturing

56
Materials Management (BUMA-312)

practices, etc. While managerial standards refer to the administrative phase of the business,
such as corporate policy, accounting systems and performance evaluation. The process of
standardization logically leads to simplification variety reduction. One of the forms a
standard takes is the specification.
A specification is a concise statement of a set of requirements to be satisfied by a product, a
material, a process it may be determined whether the requirements given are satisfied.

4.5 MATERIAL HANDLING AND MAINTENANCE

4.5.1 Definition of Material Handling
A poor materials handling system always results in accumulation of work in process and
lower motivation. Scientific materials handling is concerned with moving the right quantity
of materials at the right time, in a given space from the consumer. It deals with the science
involving movement, packing and sorting of materials manually or mechanically. The
movement of materials can be vertical, horizontal, in batches, in one piece or unit load, with
or without the aid of gravity. This function includes every consideration of the product,
except the actual processing operation. The handling is usually included in an integral part of
the transportation and production process.

4.5.2 Right Method of Materials Handling

The pace of implementing projects and carrying out purchases activities is influenced
considerably by the flow of needed materials and equipments. The flow channels are the
materials handling and distributing processes, both of which increase the cost of operations.
Therefore, efforts should be made to achieve the optimum movement of equipments and
materials with minimum delay at the lowest cost. In this context, it is well known that the
movement of materials is a wasteful, expensive and avoidable activity.

4.5.3 Ergonomics
Ergonomics in this context is the technique concerned with increasing productivity by
harmonizing the design of working tools and methods for operating the handling equipments,
with the skill and capacity of those using the tools. It is also concerned, with relating the size
57
Materials Management (BUMA-312)

of tools, handling equipments and facilitates to the average size of operating staff. It is also
necessary to reduce or avoid fatigue in handling material. The major objective of
ergonomics is to prevent both the waste of investment and the loss of productivity, that arise
from acquiring equipments, which are to be used them effectively . For this purpose, both
the purchase managers and the users should study the physical characteristics well, as the
skills of the material handling staff to advise on the proper choice of equipments.

Research studies have indicated that 50 percent of production cycle time in some industries is
spent on materials handling, and the cost, particularly in heavy engineering, mining and
process industries in the country. The buyer is always in search of methods to reduce the
value of the product is not increased, but only the cost due to the handling is increased.
Hence the buyer is concerned with handling, as it offers effective cost reduction steps.

The buying process in any industry can also be though of as a series of steps in handling, as
follows
 packaging done at supplier's end,
 loading and transportation by vendors,
 unloading at users end,
 receiving,
 inspection of incoming material,
 warehousing and binning,
 issues to shop floor,
 in-process handling at several production stages,
 handling at various stages of inspection,
 packing, finished goods warehousing and loading,
 shipping and transportation to customer's premises.
Thus, any industrial activity can be constructed as an integrated material handling activity
and accounts for about 50 percent of production cycle time.

58
Materials Management (BUMA-312)

Manual handling
The stress of manual handling by manual labor in the construction industry is easily seen.
The maximum permissible load is only about 30 kilos per man and 20 kilos per woman.
Extensive medical research has shown that the average man should not be subjected to a
spinal disc stress of more than 30 kg. The common usage working habits in manual handling
are:
 lifting improperly,
 carrying too heavy a load,
 unsafe gripping, and
 failure to wear personal protective equipment, which result in sometimes fatal
accidents.
Periodical medical fitness and training can reduce the incidence of hazards. The foot should
be placed close to the load and probably spaced for body balance. Manual handling demands
that the back should be straight, as nearly vertical as possible with elbows being straight. The
knees should be bent only for grasping the load or putting down the load.

It is preferable to work in teams for the jobs of lifting, carrying, putting down, etc. The
accessories used for manual handling include hooks, crowbar, rollers bars, etc. Needless to
emphasize, the manual handling is costlier compared to mechanical handling and could be
restricted only for short distances.
Thus manual handling should be minimized from all considerations and mechanical handling
should be introduced, if material is to be handled at all. Large types of equipment like hand
operated equipment, power driven equipment, electromagnetic equipment are available and
the choice depends on cost of handling the materials, magnitude of labor saving. Effect of
operational cost, space required, cost, space required, cost of equipments, etc.

Choice of equipments: A to Z Factors

A large number of materials handling equipments are manufactured in the country, but the
choice of equipments rests on a large number of parameters. These parameters include: (a)

59
Materials Management (BUMA-312)

plant/stores location, (b) plant/stores layout, (c) product layout, (d) process layout, (e) unit
load, (f) types of material and its abrasively, (g) obsolesces, (h) production process, (i) spare
parts availability, (j) safety, (k) standardization, (l) capital cost, maintenance cost and labor
cost, (m) benefits to be accrued, (n) moisture, viscosity, angle of repose and temperature, (o)
after-sales service, (p) maneuverability noise and life, (q) countibility with existing
equipments, (r) anticipated service hours per year, (s) speed, (t) plan of movement, (u)
flexibility for expansion, (v) fixed-path equipments, as conveyors, (w) variable- path
equipments as forklifts, (x) adaptability for computerized/ robot control, (y) adaptability for
polarization, (z) purpose of moving and distance moved.

Mass production would be impossible without handling and the commonly used material
handling equipments include: conveyors monorail devices, hosts, lifts, chutes, pulley drive
equipments, over head travailing cranes, trucks, fork-lift, movable ramps, mobile cranes,
dumpers, shovels, excavators, and motorized, scrapers, industrial tractors, wagon tippers,
wheel barrows, hand trucks, power trucks, rollers, pipelines, jib cranes, lifting trackless,
wire ropes, etc.
A detailed cost-benefit analysis has to be done before deciding the equipment. For instance,
Orissa cement found that elephants are best for handling materials.

Packaging
Good packaging is essential, for the protection of items against physical damage,
deterioration and pilferage. The basic requirements include that each receptacle should (a)
contain,
(b) preserve,
(c) protect
(d) present,
(e) be sturdy and
(f) of a balanced construction.

60
Materials Management (BUMA-312)

Bundling is often applied in the case of sawn timber, metal rods, and other losses and bulky
commodities. Paper boards, corrugated sheets, plastics, pvc, glass bottles, laminated sheets,
sacks are used where the risk of damage or loss through exposure is great.
Tensional stampings made of wire, steel, or synthetic fibers are also used to bind the
containers for extra length and stability.
Internal padding in the form of rubber, foam rubber, wood shavings, sawdust and other
forms of cushioning is also applied to provide anti-shock protection for delicate and high
value materials. Packaging prevents breakage or crushing often encountered in handling,
storage and transportation activities. Proper packaging provides security against pilferage in
transport. The weight of each package must be suited to the capacity of the available
equipment. Bulky packages must be avoided, as the risk of dropping and damaging the
content is very high. Lighter packages involves more movement and loading.

Making packages for easy identification is an important packaging equipment. Marketing is

done by branding, embossing, etching, painting, printing, stenciling in a clear manner. The
data on marking should include
 name and address of the consignee,
 name and address of the issuing stores,
 description of contents,
 code numbers to avoid pilferage,
 package number,
 date of dispatch,
 shelf-life,
 method of lifting,
 number of packets in each,
 special clauses such as inflammable, radio active, profile, explosive, poisonous, etc.

Insufficient or improper labeling of packages has been major cause in transit losses.
Packaging cost sometimes goes up to 25 percent of the product. In case of tooth paste tube, it
is well known that cost of the container is more than the contents, and value engineering

61
Materials Management (BUMA-312)

techniques may be applied to identify the optimum packing cost, which should be shared
between the buyer and seller.

Bulk material handling

In this context, it may be mentioned that the consumption of essential raw materials such as a
coal, ore, bauxite, etc, has more than tripped during the last decade. With an increase in the
total production of utility material in the energy sector from two billion tones in 1984 to six
billion by the turn of the century, the amount of over burden to be reclaimed will increase
from 12 billion tones to 45 billion tones. The choice of suitable conveying, storage and
homogenization systems for bulk materials does not only depend on the materials
characteristics, such as grain size and quality, grain distribution, theological properties,
abrasively, and moisture content, but also on such factors as output, conveying method,,
stockyard requirements, degree of homogenization, environmental influences, staff
requirements, operating costs and the increased demand for expansion and automation in
order to rationalize.

In addition, the trend towards energy conserving processing of coal and ore, brings about a
change in the technology of transport handling and storage system, towards a higher degree
of homogenization. New blending processes are applied in storage and simultaneous,
homogenization of bulk material, which have to be blended as evenly as possible, even when
several components of varying qualities are to be mixed. Further space saving stock piles at
higher flow rates and integrated milling process require new equipment components. All
these factors and progressing automation will force the trend towards continuously operating
bulk handling plants.
In an automated process, stacking, blending and reclaiming will be separate units, which
have to be integrated into a single chain corresponding to the flow of materials. The tendency
towards full automation and automatic control of bulk material handling, conveying, storage
and process creates new interface problems, resulting in the development of modern
equipment and plant systems.

62
Materials Management (BUMA-312)

Evaluation of material handling

The effectiveness of material handling systems can be measured in the ratio of time spent in
handling to the total tie spent in production. The cost effectiveness an be measured by the
expenses incurred per unit weight handled. However, it can safely be said that very few
organizations try to collate the expenses and time in this manner, so as to objectively review
the performance for taking remedial measures. Equipment utilization ratio is an important
indictor for judging the efficient of material handling system. This ratio can be computed and
compared with similar firms, or in the same firm over a period of time. The personnel
assigned to material labor cost. The ratio of materials handling time lost by direct labor to
total direct labor time, will give the effectiveness of material system's deliveries.

The efficiency of material handling system depends upon: (a) efficiency of handling methods
employed for a unit weight through a unit distance, (b) efficiency of the layout, which
determines the distance through which the materials have to be handled, (c) utilization of the
handling facilities and (d) the efficiency of the speed of handling. When a large volume has
to be molded from a limited number of sources to a limited destination, then fixed path
equipments like conveyors are preferred. For increased flexibility, varied path equipments
are chosen. In this context, the role of the buyer is limited in assisting the purchase of
equipment, and in coordinating movement of in-process and finished goods. In this process,
the buyer can help to generate ideas towards cost reduction, in collaboration with industrial
engineering and production departments. Arrangements must be made with the suppliers, to
deliver in suitable containers, so that handling at all stages becomes easy.

A to Z handling cost reduction

A large number of methods have been practiced to reduce the materials handling cost in
Indian organizations, and these are mentioned below:
a. As materials handling adds no value but only increases the cost and production cycle
time, eliminate handling wherever possible.
b. Sequence the operations in a logical manner, so that handling is unidirectional and
smooth

63
Materials Management (BUMA-312)

c. Use gravity wherever possible, as it results in conservation of power and fuel

d. Standardize the handling equipments to the extent possible, as it means interchangeable,
better utilization of handling equipments and less spares inventory
e. Install a regular preventive maintenance program for material handling equipments, sot
that down-time is minimum
f. In the choice of handling equipments, criteria of versatility and adaptability must be the
governing factor
g. The handling equipments used in raw material, stores, in-process workshops, finished
goods warehouses, and scrap-yards must be coordinated for overall effectiveness and
training of people concerned.
h. Weight of unit head must be maximum, so that each handling trip is productive
i. Work study and method study aspects- such as elimination of unnecessary movements
and combinations of processes - should be considered, while installing a material
handling system
j. Non-productive operations in handling such as slinging, loading should be kept at a
minimum, through appropriate design of handling equipment.
k. Location of stores should be as close as possible, to the shop floor using the material.
l. Application of operations research technique, such as queuing can be effective in optimal
utilization of material handling system
m. The material handling system should be simple and safe to operate with
n. Keep proper maintenance and avoid overloading
o. Items like castings on arrival can be kept on standard skids or pallet loads.
p. Operate at specified speeds, and provide adequate reserved space for movement
q. Arrange with suppliers to deliver in standard size/packs or containers suitable for
unloading, storing and issuing
r. Operate with skilled workmen with adequate supervision.
s. Canopy guards should be provided, if there is a danger of falling objects
t. Avoid jerking when tilting a load, especially when the load is at a height
u. Conveyors should avoid hazardous points or crossing points of workers
v. when multiple conveyors are used, no conveyor can feed on to a stopped conveyor

64
Materials Management (BUMA-312)

w. While handling dangerous substances, adequate precautions including provisions for fire
fighting appliances must be taken
x. When corrosive material is handled, appropriate measures should be taken to prevent
damage to the containers or spillage on ground.
y. Before handling, the usual questions like what, where, why, when, how, from which
place, which material, to which destination etc, should be asked to reduce, if not
eliminate, the material handling process
z. The condition of the floor such as slipperiness, abbsorbtive quantities, color and static
disseminating properties will affect material handling operations. Periodical review of
the layout, lighting working conditions, packaging, safety, accidents, costs, benefit, etc,
should be carried out by the material handling team.

4.6 MAINTENANCE MANAGEMENT

It is exaggeration to say that maintenance management has been one of the most neglected
aspects of management. In most industries, whether they are they public sector or private
sector, little attention is paid
 to the proper stocking of spare parts,
 to maintaining proper policies and procedures,
 to acquisition and development of required quantity of technicians and junior and
senior managers who may have appropriate skills to operate and maintain the modern
equipment properly,
 to the application of the principles of work study, incentives and performance
evaluation to the extent possible.

The reasons given by many for the lack of management in maintenance are:
1. Machine failures occur at random (and are therefore, unpredictable)
2. One maintenance job is not like another maintenance job so as put it in a standard
category equipment: this makes it difficult to provide proper skilled manpower and
facilities for maintenance and repair

65
Materials Management (BUMA-312)

3. Different types of equipment are imported at different times, resulting in a heterogeneous

stock of equipments; this makes it difficult to provide proper skilled manpower and
facilities for maintenance and repair
4. Obtaining spare parts from foreign countries is difficult; making them within the country
is economical since the quantity of each item is small. It is difficult to apply management
principles and generate economies in such circumstances

True, the above given explanations are some of the real problems in applying management
principles/ techniques to maintenance; the last two reasons, (iii) and (iv), are particularly true
for developing countries. Therefore, the need for proper management of maintenance is vital
as also the need to make the best use of whatever management concepts are available, even if
the circumstances do not permit their application. It must be appreciated that good
maintenance management is an important input for achieving the desired quality of the
products and services. In the following paragraphs we will discusses the concepts, principles
and techniques of management useful in maintenance.

Primary objective of maintenance management availability of the operations system

The objective of maintenance is to facilitate the optimal use of capital equipment through
actions such as replacement, repair, service modification of the components or machinery so
that these will continue to operate at a specified availability for as long as it is beneficial to
do so. Maintenance encompasses keeping the ‘availability’ of the entire, productive/
operations system of the organization. One of the basic definitions of ‘availability’ is as
follows:

Availability = t running______
(Over a specified time) t running + t down

Where, t running = total time of operating in the normal operating state

And t down= total time for which the plant (or equipment) is out of
the operation either because it is being given maintenance service or waiting
for it
66
Materials Management (BUMA-312)

The availability of a plant can be improved by various means, such as

1. Diagnosing the faults or failures as early as possible and taking quick decisions regarding
the same
2. Reducing major break-downs or crisis situations with the help of appropriately organized
preventive maintenance programs
3. Designing and installing the equipment in such a way that the failures of the equipment
will be low over its lifetime or in other words, increasing what is known as the
‘reliability’ of the plant, machinery and equipment in the design stages itself. Also he
equipment could be so designed that the times for maintenance action are small i.e. the
‘maintainability’ should be high
4. Having proper replacement policies of equipment and their component parts in such a
way that the total reliability and availability of the system is enhanced at optimal costs.
5. Having standard times and standard procedures in maintenance as much as possible, so as
to grain good control over maintenance operations and also to provide adequate
incentives and motivation for maintenance personnel.

Importance of statistics of failure

Most situations in the area of maintenance involve probabilities. An understanding of the
statistics of failures may provide useful information for making maintenance decisions on or
prior to the failure of equipment and for planning general organization-wide maintenance
policies. Generally, the following statistics of failure are collected.
a. How long was the machine component working before it failed? This is the time-to-
failure
b. What percentage of instances did it fail at time t. This is the relative frequency if failure
corresponding to time t.
Obviously, one cannot collect a continuum of such data, but only in range
4.7 REVIEW QUESTIONS
1. summarize the major activities during the process of codification
2. how do you explain the difference between coding and cataloguing
3. explain the significance of rationalized codification

67
Materials Management (BUMA-312)

4. discuss the importance of standardization

5. mention the draw backs manual handling
6. how can one evaluate the effectiveness of material handling systems?
7. define the following terms
a. specification
b. ergonomics
c. tensional stampings

4.8 SUMMARY
Codification enables easy recognition of an item in stores, thereby reducing clerical efforts to
the minimum. Codification is a process of representing each item by a number, the digits of
which indicate the group, the sub group, the type and the dimension of the item. Coding is
the procedure for allocating symbolic identification marks to different items to simplify and
facilitate their identifications and retrieval.

Cataloguing is the process of recording in the form of comprehensive vocabulary, inform on

all classified and coded items, it serves as a ready reference and operating guide to both user
departments, supply agencies and other agencies.

standardization is defined as the process of formulating and applying rules for an orderly
approach to a specific activity, for the benefit and with the cooperation of all concerned and
in particular for the promotion of the overall economy, taking due account of functional
performance conditions and safety requirements.

Standardization enables the materials manager to achieve overall economy and ensure inter-
changeability of parts. Scientific materials handling is concerned with moving the right
quantity of materials at the right time, in a given space from the consumer. It deals with the
science involving movement, packing and sorting of materials manually or mechanically.

68
Materials Management (BUMA-312)

CHAPTER FIVE
INVENTORY ACCOUNTING
Contents
5.0 Objectives
5.1 Introduction
5.2 ABC Analysis
5.3 Advantages, Principles and Objectives of ABC Analysis
5.4 Limitations of ABC Analysis
5.5 Checking Your Progress
5.6 Summary
5.0. OBJECTIVES
By the end of this unit students are expected to:
 Understand the concept and scope of ABC analysis for inventory control
 Recognize the Advantages, Principles and Objectives of ABC Analysis
5.1. INTRODUCTION
In materials management, various analysis techniques have been applied in areas needing
selective control, such as inventory, criticality of items, obsolete stocks, purchasing orders,
receipt of materials, inspection, store-keeping and verification of bills. Many organizations
have claimed that ABC analysis has helped in reducing the clerical costs and resulted in
better planning and improved inventory turnover. ABC analysis has to be restored because

69
Materials Management (BUMA-312)

equal attention to ‘A’, ‘B’ and ‘C’ items will not be worthwhile and would be very
expensive. Concentrating on all items is likely to have a diffused effect on all the items,
irrespective the priorities.

5.2. ABC ANALYSIS

ABC analysis is a basic analytical management tool which enables top management to place
effort where the results will be greatest. This technique popularly knows as always better
control or the alphabetical approach, has universal applications in any areas of human
Endeavour. The technique tries to analyze the distribution of any characteristic by money
value of importance in order to determine its priority.
The annual consumption analysis of any organization would indicate that a handful of top
high value-items- less than 10 percent of the total consumption value, and these few vital
items are called ‘A’ items which need careful attention of the materials manager. Similarly, a
large number of ‘bottom’ items- over 70 percent of the total number called the trivial many-
account only for about 10 percent of the consumption value, and are known as the ‘C’ class.
The items that lie between the top and bottom are called the ‘B’ category items.

5.3. ADVANTAGES, PRINCIPLES AND OBJECTIVES OF ABC ANALYSIS

Advantages of ABC analysis
 This approach helps the materials manager to exercise selective control and focus his
attention only on a few items when he is confronted with lakh of stores items.
 By concentrating on ‘A’ class items, the materials manager is able to control
inventories and show ‘visible’ results in a short span of time.
 By controlling the ‘A’ item, and doing a proper inventory analysis obsolete stocks are
automatically pinpointed.
Mechanics of ABC Analysis
The mechanics if classifying the items into ‘A’, ‘B’ and ‘C’ Categories is described in he
following steps:

70
Materials Management (BUMA-312)

1. Calculate the money as annual issues for each item in inventory by multiplying the
unit cost by the number of units issued in a year. It is assumed that the issues and
consumption are the same.
2. Sort all items by money of annual issues in descending sequence
3. Prepare a list from these ranked items showing item no, unit cost, annual units issued
and annual rupee value of units issued.
4. Starting at the top of the list, compute a running total, item-by-item issue value and
the cash consumption value
5. Compute and print of each items the cumulative percentages for the item count and
cumulative annual issue value
The normal items in most organizations show the following pattern
1. 5 percent to 10 percent of the top number of items account for about 70 percent of the
total consumption value. These items are called ‘A’ items
2. 15 percent to 20 percent of the number of items account for 20 percent of the total
consumption value. These items are called ‘B’ items
3. The remaining number of items account for the balance 15 percent of the total issue
value. These items are called ‘C’ items

Principle of ABC Analysis

The basic principles in ABC analysis are:
i. the analysis does not depend upon the unit cost of the items but only on is
annual consumption value
ii. The limits for ABC categorization are not uniform but will depend upon
the size of undertaking, its inventory as well as the number of items
controlled.
Purpose of ABC Analysis
The objectives of carrying out ABC analysis is to develop policy guidelines for selective
control
Normally, once ABC analysis has been done, the following broad policy guidelines can be
established in respect of each category.

71
Materials Management (BUMA-312)

Table 5.1 ABC analysis

A-items B-items C-items
High consumption value Moderate value Low consumption value
1. very strict control Moderate control Loose control
2. No safety stocks (or very Low safety stocks High safety stocks
low)
3. Frequent ordering or weekly Once in three months Bulk ordering once in 6 months
deliveries
4. Weekly control statements Monthly control reports Quarterly control reports
5. maximum follow-up and Periodic follow-up Follow-up and expediting in
expediting exceptional cases
6. Rigorous value analysis Moderate value analysis Minimum value analysis
7. As many source as possible Tow or more reliable source Two reliable sources for each item
for each item
8. Accurate forecasts in Estimates based on past data on Rough estimates for planning
materials planning present plans
9. Minimization of waste Quarterly control over surplus Annual review over surplus and
obsolete and surplus (review and obsolete items obsolete materials
every 15 days)

72
Materials Management (BUMA-312)

10. Individual posting Small group posting s Group postings

11. Central purchasing and Combination purchasing Decentralized purchasing
storage
12. Maximum efforts to reduce Moderate Minimum clerical efforts
lead time
13. Must be handled by senior Can be handled by middle Can be fully delegated
officers management

Color coding can be used to identifying A, B and C categories in stores. Usually red is used
for ‘A’ items, pink for ‘B’ items and blue for ‘C’ items.

‘A’ items merit a tightly controlled inventory system with constant attention by the purchase
and stores management. A large effort per item on only a few items can cost only
moderately, but the effort can result in large savings. ‘B’ items merit a formalized inventory
system with periodic attention by the purchase and stores management. ‘C’ items use a
simpler system designed to cause the cost of the least trouble for the purchase and stores
department, perhaps even at the cost of a little extra inventory cost. It is also common to
further subdivide ‘A’ items as A 1 and A2 or A+ and A- and similarly categories for ‘B’ and
‘C’ items exist for exercising finer control.

Objective of ABC analysis

As discussed earlier, the ABC analysis enables the materials manager to exercise selective
control when he is confronted with a large number of items. Tighter and accurate procedures
are essential for ‘A’ value items relating to materials planning forecast, ordering, review,
records, posting, revisions, lead time analysis, safety stock, materials consumption control,
purchase budget, delivery schedule, value analysis follow-up clerical efforts, physical stock
verification, receipts issues, stores accounting and inspection. The degree of control should
be rigorous for ‘A’ items and should be minimum for ‘C’ items.

ABC analysis is also helpful to rationalize the number of orders and reduce the overall
inventory. For instance, let us consider three items accounting for a consumption of Rs

73
Materials Management (BUMA-312)

60,000, Rs, 4,000 and Rs, 1,000 respectively, each being ordered four times a year. The
following pattern would then emerge.

Table 5. 2 example of items ordered four times a year

Item No Annual Number of Value per Average inventory
consumption value orders order
(Rs)
1 60,000 4 15,000 7.500
2 4,000 4 1,000 500
3 1,000 4 250 125

If A, B C analysis has been done, then I implies that ‘A’ item should be ordered more, say
eight orders, three for ‘B’ and one for ‘C’ item. Then the pattern given in table 6.2 emerges.

Table 5. 3 examples of items ordered eight, three and one times

Item No Annual consumption Number of Value per Average
value (Rs) orders order inventory
1 60,000 8 7.500 3.750
2 4,000 3 1,333 667
3 1,000 1 1,000 500

It is thus noted that even though the total number of orders is the same, the average inventory
has been reduced significantly by recognizing that ‘A’ items should be ordered more
frequently. (The optimum number if orders can be arrived at by formulate discussed under
inventory systems.

5.4 LIMITATIONS OF ABC ANALYSIS

74
Materials Management (BUMA-312)

ABC analysis, in order to be fully effective, should be carried out with standardization and
codification. ABC analysis is based on grading the items according to the importance of
performance of an item that is by V.E.D –vital essential and desirable- analysis discussed
later. Some items, though negligible in monetary value, may be vital for running the plant,
and constant attention is needed. If the inventory position is analyzed according to the value,
commonly known as XYZ analysis, then results of ABC and XZ analysis will be different,
depending upon the nature of obsolete items. The results of ABC analysis have to be
reviewed periodically and updated. It is a common experience that a ‘C’ item, like diesel oil
in a firm, will become the most high value item during power crisis. However, ABC analysis
is a powerful approach in the direction of cost reduction as it helps to control items with a
selective approach.

5.5 CHECHING YOUR PROGRESS

1. Discuss the objectives and advantages of ABC analysis
2. Write the principles of ABC Analysis
3. explain the draw back/limitations of ABC analysis

5.6 SUMMARY
ABC analysis is a basic analytical management tool which enables top management to place
effort where the results will be greatest. ABC analysis enables the materials manager to
exercise selective control when he is confronted with a large number of items. ABC analysis
is also helpful to rationalize the number of orders and reduce the overall inventory.

75
Materials Management (BUMA-312)

CHAPTER SIX
MATERIAL REQUIREMENT PLANNING
Contents
6.0 Objectives
6.1 Introduction
6.2 Definition and Scope
6.2.1 Material Requirement Planning
6.2.2 Elements of Material Requirement Planning
6.2.3 Drawbacks of Service Levels and Safety Stock Computations
6.2.4 Handling Uncertainties
6.2.5 Combining Good Points of EOQ with MRP
76
Materials Management (BUMA-312)

6.2.6 Forecasting and Planning the Demand of Material

6.3 Ordering Systems
6.4 Right Mode of Transport
6.5 Checking Your Progress
6.6 Summary
6.0 OBJECTIVES
This unit will enable students to:
 Understand the meaning, concept, and scope of materials requirement planning.
 learn the various material ordering systems and purchasing policy
 identify the right approach and choice of method of transport

6.1 INTRODUCTION
Materials requirement planning is a special technique to plan the requirements of materials
for production. How it is different from techniques such as economic order quantities and
safety stock computation? In order to understand the differences we need to take another look
at safety stock computational and other methods.

6.2 DEFINITION AND SCOPE

A material planning is the scientific way of determining the requirements of raw materials,
components, spares and other items that go into meeting the production needs within
economic investment policies. As the definition needs planning within economic investment,
we need a system which evolves methodology to plan the purchase requirements in a
scientific fashion. It is related to the user department activities and hence to the investment
policy of the individual organization.

6.2.1 Material Requirement Planning

When we are formulating chemical or pharmaceutical products, or when we are making
assemblies out of the various components (manufactured or bought-out) we are dealing with

77
Materials Management (BUMA-312)

bunched requirement of materials. The requirement of raw materials then depend upon the
requirement of production of the finished product (assembly, or a shampoo, or a medial
formulation). It seems, it would be better if we know the production plan/ schedule for the
assembly of the finished product and accordingly arrange for all the raw materials that go in
to the finished products, rather than depending upon statistics and probabilities. This is
precisely what MRP attempts to do. It is a simple system of calculating (arithmetically) the
requirement of the input materials at different points of time based on the plan schedule for
production of the finished good.

There are no probabilities involved anywhere, only the derivation of the requirements of
input materials based on the requirement or plan for production of the final products. Such a
system will work well for materials that have no direct demand of their own, but have only a
derived demand. These materials can be called dependent demand of their own, but have
only a derived demand item. The finished assembly has a direct demand of its own and
therefore it is an independent demand item.

Let us also review the EOQ model/s. All of them assume a uniform (or a more or less
uniform) pattern of consumption of material. Based on averaged consumption, the EOQ
model answers the ‘how much’ and ‘when’ questions for optimum cost considerations.
Optimal cost or otherwise, the basic difficulty in some peculiar production situations arises
because of the averaging of consumption of materials.

When we are dealing with five different varieties of shampoos, five varieties of soaps,
another give of cleaning powders of solutions, the requirement for raw materials over time
for these formulations does not fall in the smooth average consumption pattern.
6.2.2 Elements of Material Requirement Planning
Material requirement planning consists of:
 a set of logically related procedures, decision rules and records discovered to translate
a mater production schedule into time-phased net requirement and the planned

78
Materials Management (BUMA-312)

coverage of such requirements for each component inventory item needed to

implement the schedule.
 both an inventory control and scheduling technique.
 It consists of a series of steps which start by determining what finished products are
needed to meet the demand by time periods, and are completed with a schedule of the
finished product components needed at each assembly level of each product. Specific
plans through a computer can be use as in MRP, the demand is known for all practical
purposes.

It is particularly useful
 when the final product is complex and made up of several levels of assemblies,
 the finished product is expensive
 the production cycle time is long,
 the consolidation of requirement for several product is desirable so that economic
lot size are applicable, and
 the existence of a bill of materials listing the identification of the numbers through
the code numbers.

6.2.3 Drawbacks of Service Levels and Safety Stock Computations

Let us say 10 different chemicals are needed to make a particular brand of shampoo. A
cautious manager fixes 95% survive level for the stock of raw materials and, therefore,
expects a stock-out to occur only 5% of the time. He is confident 95% of the time about the
availability of the materials. Inspite of such precaution, he observes that production
stoppages due to the lack of raw materials are much more than 5% of the time. Where has he
gone wrong?

Let us examine the basics of this computation. He needs 10 materials at a time. Each
materials are stored with 95% service level. The probability that each material is separately
available over a long length of time is 0.95. But, the probability that all the ten materials are
available simultaneously is:

79
 Materials Management (BUMA-312)

0.95 x 0.95 x 0.95 x 0.95 x 0.95

x 0.95 x 0.95 x 0.95 x 0.95 x 0.95
= 0.5987 = 0.60

The result is that the actual availability is only 60% of the time. Four out of ten times he
should expect inability to run the particular shampoo line. This is how limited statistical
methods of computation are.

Production and Operations Management

Mot interpreted and understood properly. Safely stock calculations were made for individual
item requirements and never for bunched requirements of materials. In many production
situations the latter is the case. Probably, in such cases we need not adopt statistical safety
calculations in the first place.

MRP Calculation- An Illustration

It seems, therefore, that for assembling (or similar) situations it is better on our part to
calculate the requirement of materials from the production schedule/plan the final goods. Let
us illustrate how we may do these calculations.

Master schedule, Table 7. 1 (desks)

Week No
1 2 3 4 5 6 7 8
50 0 30 20 0 0 70 70

Lead time = 3; order quantity = 100

Requirements 50 0 30 20 0 0 70 20
Scheduled receipts 100
MRP-
Desk 80
tops
 Materials Management (BUMA-312)

On hand 60 10 110 80 60 60 60 -10 -30

Planned order release 100

Lead time- 5; order quantity = 250

MRP- Requirements 40 90*
plywood Scheduled receipts
sheets
for desk On hand 160 160 120 120 20 20 20 -70 -20
top Planned order release 250

 Requirements from other variety of furniture

In fig 7.1 note the requirements of desks generates requirements of lower level components
such as desk-tops and plywood sheets. Note how the on-hand balances, the scheduled
receipts of materials have been taken into account. The scheduled receipt is due to some plan
(MRP) generated earlier. This materials is already on order and is scheduled to arrive. The
desk-tops calculation gives us a negative figure in the 7 th week. Therefore, 3 weeks prior to it
(lead time is 3 weeks), i.e. in the 4 th week, we must order for desk tops. Although the
requirement is only 10 units, we order for 100 units, because that is the economic lot size.
We have combined the benefits of EOQ and MRP in this illustration. MRP is for generating
correct calculated requirements for lower category materials at appropriate times as per the
need of master schedule. EOQ concept is also utilized for generating additional cost
economies of larger lot sizes.

Genesis
People have been calculating requirements of materials prior to the statistics. As industry
became more complex, models such as EOQ and the science of statistics became available
and offered relief from cumbersome and detailed calculations for planning. The trouble was
that even those situations where arithmetical computations would have done a better job,
people used statistical and averaging methods.

81
Materials Management (BUMA-312)

But, with the advent and proliferation of computers things changed. The cumbersome
arithmetical computations could not done in on time at all, since the last decade, the MRP
system is being once again, seriously considered. Decades ago this was the only planning
system available and had no special named to it. Today it has come to be known as MRP.

With the modern-day works using thousands of different materials, and manufacturing a
variety of products, a computerized system of MRP becomes essential. In the Western
countries and also in India many organizations have installed an MRP system.

How successful has the experiment of installing the MRP system, particularly in Indian
been? The degree of success of any system depends upon the proper consideration of the pre-
requisites of the system. This is true with MRP system as well.

Prerequisites
We may mention the pre-requisites or premises on which the MRP system built
a. This system in its pure form, is suitable for ‘dependent demand’ situations – as we
saw earlier
b. The demand for the dependent items is derived from (i) the master- schedule for the
finished goods, and (ii) the various manufacturing or procurement lead-times for
these components of the final finished goods.
c. And, a firm schedule for delivery or assembly of the finished goods should be
available. Firms schedules can be had if the customers commit orders with enough
time to cover the various lead-times from the raw materials stage to the finished-
good stage of the product. The firmer the schedule for finished goods, the more valid
will be the MRP system to derive requirements of materials at different time.
MRP is not and should not be a rigid system; it takes into account variations in the
materials inventory position and the committed final goods orders at various points of
time as the production process continuous
d. Therefore, MRP should have an immediately correcting mechanisms for the above
mentioned deviations. A quick efficient information feedback system is an essential

82
Materials Management (BUMA-312)

pre-requisite of an MRP system. Without this, the inventory status figures will be
incorrect, the bill of materials will be incorrect (if some design changes take place),
the lead- time will be incorrect and, thus the whole detailed calculations which are
supposed to indicate correct quantities of inventory (how much?) for correct points of
time (when?) will turn out to a futile effort. A good management information system
and MRP go hand-in-hand.

6.2.4 Handling Uncertainties

Although firm data is desirable, it may not always be possible to have customer- orders
committed quite ahead of time. Part of the orders may be so, but not all.

A certain amount of forecasting is inevitable in such cases. The forecasts, being forecasts,
will go wrong to some extent and corrections become necessary for the MRP process.
Constant (i.e. frequent periodic) updating is essential for the success of the MRP system. It
means, a certain amount of uncertainties can be handled by revised planning carried out
frequently. Of course, as the uncertainty component increases more and more, the safety
stock and EOQ concepts become more and more relevant. When everything is planned by
means of uncertain forecasts it is wise to take calculated risk maintain calculated buffer
stocks and conduct calculated size of production runs.
The more the component of uncertainty, the more one needs to plan based on safety stock
and other concepts.
One cannot do away with the safety stock (or the related safety time) concept. It must be used
along with the MRP to the required degree at requisite places. Bu, the more than there is the
component of safety stocks or safety times, the less is the validity of the MRP system. In
short, a judicious combination of MRP concept and the statistical/ probabilistic concepts
have to be used for a good materials and production plan.

6.2.5 Combining Good Points of EOQ with MRP

Similarly, one can also use the EOQ concept advantageously along with the MRP system.
The EOQ model may rest on certain assumptions of the linearity if consumption, but the

83
Materials Management (BUMA-312)

basic concept- of balancing the order/ set-up costs with the carrying costs of inventory- is
pretty good. This concept can be utilized in deriving a batch- size for a product in an MRP
(fig 7.2)

Amount Cumulative Cumulative carrying cost Order cost (mentioned

Week required batch sizes corresponding to the here for comparison
batch sizes
1 1000 1000 0 500
2 0
3 2500 3500 300 500
4 0
5 0
6 500 4000 450 500
7 1000 5000 810 500
8 0
9 0
10 2000 7000 1890 500

Order cost= Rs 500 per order or set-up

Inventory carrying cost: Rs 0.006 per week
Cost per unit: Rs 10
It is beneficial to make material available only when required (MRP concept) but it may
be additionally beneficial if this material is also procured/ produced in batches ahead of
time so that carrying costs are offset by the reduction in cost due to economies of scale.

What we saw in the earlier examples is called ‘part-period balancing’. There are many other
economic lot sizing devices such as the ‘period of quantity’- the order quantity is not a
quantity or numbers, but is in terms of the numbers of periods of supply. One must
remember though, that the lot sizes deal with ‘how much?’ Which is a question which comes
after ‘when?’. Unless the ‘when?’ is solved first, there is little benefits to gained by
answering ‘how much?’

84
Materials Management (BUMA-312)

To summarize, MRP is an old system, revisited once again and found to have immense
benefits for planning materials whose requirements are generated by higher-level materials in
which the former are incorporated. With computations being done on a computer the MRP
system is dynamic, i.e. it can respond speedily to the changing situation such as customer
demand changes, order priority changes, and even design changes. The same old system is
made much more dynamic, and retains whatever is good in the EOQ, Safety stock and
similar techniques, MRP provides important and calculated information for materials and
production planner.

Materials planning -Over-ordering and under-ordering

Planning is the most neglected area in the purchasing activity. A major weakness in the
materials management system of developing countries is the lack of proper materials
planning and coordination. The lack of coordination has led to fragmentation, which in some
cases had prevented the development and maintenance of uniform standards.

Over-ordering and under-ordering materials are consequences of lack of planning in supply

management and are commonly visible in many organizations.
Over-ordering is marked by over-investment and unproductive use of costly working
capital. It creates the need for extra storage facilities to hold unnecessary surplus stocks and
additional facilities for the presentation, maintenance and security of surplus inventories.
Some surplus stocks lose value or perish through deterioration and obsolescence. Sometimes
inadequate storage facilities have been provided and as a result, large quantities of valuable
equipment are stored in open stockyards with consequent damage and deterioration

Under-ordering is characterized by equipment and material shortages that cause

unnecessary delays and costly interruptions in executing the commitments. In many cases,
poor planning has led unwarranted emergency orders, usually processed by air at high cost.
Ill-planned purchasing at micro-and macro-levels have a powerful inflationary potential.
Thus, materials planning are the most important function that distinguishes the buyer as a

85
Materials Management (BUMA-312)

manger and segregates him from other categories of staff. To spend the money is easy, but
planning enables the buyer to spend the money better in an optimum manner.
We will now discuss some of the well known techniques of materials planning that can be
used in the industry. Needless to emphasize, the materials, particularly for those items where
the demand exceeds supply thereby resulting in a shortage of availability. Purchase planning,
if properly carried out, will make the buyer to know not only the price but the cost of the
item.

A to Z influence factors
Materials planning process will be influenced by a large number of factor, such as (a) state of
health of national economy, (b) price trends and validity, (c) credit policies, (d) direct and
indirect taxes, (e) foreign exchange regulations, (f) import policy, (g) international market
conditions, (h) business cycles, (i) corporate objectives, (j) technology availability, (k)
demand for the item, (l) supply of the item, (m) transportation losses, (n) total lead-time, (o)
rejection rate, (p) working capital (q) storage capacity, (o) plant utilization , (s) seasonal
factors, (t) communication system, (u) delegation of power, (v) information available, (w)
location of plant, and location of suppliers, (x) cost criticality reliability and availability of
items, (y) information on substitute products, and (z) techniques used to determine forecasts.

In may be noticed that the above factors could be classified as:

 controllable,
 uncontrollable,
 external,
 internal,
 quantifiable,
 intangible, etc.

Sometimes the government regulations affect the planning process like the government
stipulating urea should be packed 100 percent in jute bags and not polythene bags. This
becomes uncontrollable and representations by the industry is needed. But, since the whole

86
Materials Management (BUMA-312)

organization moves on purchase planning, it is desirable to consider the above factors while
formulating plans. Macro-factors such as revenue budgetary deficits about Rs 10.000 crores
adversely affect the price. In this context, control which is always associated with planning as
an essential aspect of management arises from the inherent imperfection of things and
people, both within a particular plant and outside, in the form of suppliers and purchase
executives. Usually people and ten percent of the current consumption and treat it as the next
years planned estimates, but let us discuss some more method.

Bill of Materials
Bill of materials (BOM) is the document generated at the design stage, which details the
structure of the product.
 It provides details such as the item stock number, description, types, quantity required
materials and the type of relationship between the group of components.
 BOM is the basic document used by all departments to accomplish their activities
involved to finish the product. Material requirement planning (MRP) procurement
action for bought-out components, releases of orders for manufacturing items, pricing
a product detailed break-up of the cost, are based on bill of materials. For example if
a chair is assembled, the bill of material will be four legs, two arms, back rest, glue
and a box of nails. By multiplying the quantities given above for the required chairs,
we get BOM.
 The BOM must not only list all components of a given product, but must be so
structured as to reflect the way the product is actually made in steps, from raw
material to component, part subassembly and then to assembly and finished items.
 Explosion of BOM refers to the splitting of the requirements for the product to be
manufactured into its basic component.

Sometimes, this is also known as parts schedule in some engineering organization. Instead of
maintaining the bill of material for individual end-products under the MRP approach, the bill
of material is restated in terms of the building blocks or modules, from which the final
product is put together. In MRP as the components are planned based on production schedule

87
Materials Management (BUMA-312)

of products and their bill of materials the items are better matched. Specific demands for
these items have been calculated rather than forecast in the MRP and the existing surplus is
taken to find the net demand.
The inputs for the computer are the product master schedule, orders from external sources,
forecasts of items subject to independent demand, product structure file and the inventory
file. The outputs from the computer are
(a) order release notice,
(b) rescheduling notice,
(c) cancellations of orders,
(d) item status analysis, back-up data and
(e) planned order schedules for future.

Use of standard deviation

Statistical distributions such as normal distribution help in purchase planning, if past data on
consumption are available. Let us consider weekly consumption of a particular fast moving
item for a 24 week period. The consumption in kg under stable process conditions for the
period are 25, 26, 27, 28, 29, 30 ,31, 32, 33, 34, 35, 36, 37, 38. The range of fluctuation is
identified as maximum of 39 kg minus lowest of 23 kg, which gives 16 kg, with an average
of 30 kg.

The most useful graph is obtained by plotting the values on the horizontal axis against the
frequency of occurrence in the vertical axis. If a large number of observations of
consumptions are available then we get a bell-shaped pattern known as normal curve, which
is uniquely determined by the average and standard deviation refer to any book on statistics
for details. The mean is obtained as total divided by the number of observations as 30 kg.
Now get the difference of individual observations from the average as -4, -4, -5, -5, -5, -2, -
2, 2, 3, -4, 5, 0, -3, 6, -7, 1, 6, -3, 1, 1, 9, 2, -5, 8 these differences and add, which gives us
476. The standard deviation is defined as 476/23 or 4.6

88
Materials Management (BUMA-312)

The standard deviation measures the fluctuation on deviations and is useful for determining
the (a) safety stock, (b) inventory control, (c) consumption norms, (d) forecasting and (e)
decision making purposes. For the purpose of materials planning, we take three standard
deviations on either side of the mean or 13.8 from the mean of the interval, indicating 26.2 to
43.8 will be relevant. In this case a buyer may feel that the interval indicating fluctuation is
too much and he has to reduce the fluctuation by identifying the causes for the very low and
high values. If there are sufficient reasons for the extreme values, he can omit these extremes
and recalculate the interval to determine the purchase quantity.
Exponential smoothing
Instead of taking the simple average, in order to get the forecast often buyers resort to three-
monthly or four- monthly moving averages to smoothen the recent observations and forecast
the average as the (n + 1)th period. Let us take last four weeks consumption from the
previous example as 39, 32, 25, 38. The total is 134. The average 33.5 is the expected
quantity for the next month and so on. In this method, we have given equal weightage for all
the previous figures in arriving at the new forecast. In exponential smoothing method, we
give more wightage for the latest figure and it is also possible to consider the long-term
trend, seasonal and cyclical effects in arriving at the forecast. Refer to any book on statistics
for details. It is necessary to use a computer for this and the formula is expressed as follows.

New forecast = Old forecast + d {current demand – Old forecast} = (1 – d) old forecast + d
current demand
Here d is the smoothing constant varying between zero and one smoothing, the old forecast
is100, current demand is 120 and the smoothing constant d is 0.2 then new forecast = (1 –
0.2) 100 + 0.2 (120) = 80 + 20 = 104.

Thus all we need to prepare a new forecast is the old forecast current demand and select a
value of smoothing constant. We select do in a weighted average. It can be noted that as the
data gets older, it is progressively discounted in value. Supposed d = 0.5, then we get the new
forecast as (1-0.5) 100 + 0.5 (120) = 50 +60 = 110. In this way, the historical data are
automatically discounted in value to get the forecast.

89
Materials Management (BUMA-312)

Other sophisticated operations research techniques used in the context of purchases planning
include regression analysis correlation method, decision theory simulation techniques, liner
programming time series analysis Delphi concept, probability theory, decision tree dynamic
programming and the reader is requested to refer to any standard text book on operations
research for details.

6.2.6 Forecasting and Planning The Demand Of Material

Materials planning activity raises the level of the buyer from an order placer to a purchase
manger. Efficiency cannot be visualized without sensible or effective planning. Purchase
planning aims at motivating people and serves as an effective control.

The cyclical swings of well serves as an effective control with the resultant escalating costs,
make the purchase planning job a difficult but an important one in the organization. In this
context, the readers are familiar with the great depression of 1930s and the stock market
crash of October 1987 and these are the classic examples of business cycles.

In industries that have established production lines, volume and value of sales forecast
converted to production planning, from the basis of materials planning and purchase budget.
The duration of long term planning may coincide with the country’s five year plans and
perspective planning approach.
The short term forecast usually for one year, broken into quarterly or monthly figures- are
derived from the long term forecasts. These sales forecasts are converted into production
plans by the production planner and the purchase plans are developed from the detailed
manufacturing plans. These plans should also include contingencies like shutting down a
production line to authorize vendor’s overtime. In engineering or jobbing industries where
items are custom built to suit the market demands materials requirements will have to be
worked out from he market demands. Past consumption data are very on the basis of past
consumption pattern, as history is the wisest counselor of all, according to a proverb and
planning is based on this principle. Safety stocks are to be provided for fluctuation in

90
Materials Management (BUMA-312)

consumption and lead-time abnormalities. Materials planning should help to reduce, if not
class-wise, the frequency of rush order, postponements and cancellations.

Materials planning- both quantity and value in terms of money crisis management of sitting
on the neck and get the things done by better forecasting methods, rather than reacting to the
situations.

Qualitative and Quantitative Forecasting

Forecasting technique can be:
 Qualitative
 Quantitative

Qualitative technique
Qualitative technique of forecasting consists mainly of subjective inputs, which often
disregard precise numerical description. It permits inclusion of soft information (human
factors, personal opinions, etc) in the forecasting process. Those factors are often omitted or
downplayed when quantitative techniques are used because they are difficult or impossible to
quantify.

Qualitative techniques include:

Jury of executive opinions
It helps to bring together the considerable knowledge and talents of top management people,
simple, inexpensive.

Sales for composite

The sales staff is often a good source of information because of its direct contact with
customers and experience.
Delphi method - used to develop consumers of expert opinion
Customer analysis /Evaluation/
Quantitative technique

91
Materials Management (BUMA-312)

Involves either the extension/projection of historical data or the development of associative

models that attempt to utilize causal (explanatory) variables to make a forecast. They include:
6.3 ORDERING SYSTEMS
Purchase policy
There are several systems of purchasing available to the buyer. Admittedly the system to be
adopted depends on factors like:
 demand,
 supply prices urgency of requirement,
 vendor, types of material,
 organization culture,
 powers of delegation,
 procedures,
 past indigenous discussion making value level in the hierarchy imports,
 indigenous capital consumables spares seasonal commodities etc.

We are familiar with the well known system of “bartering”, which is practiced even today in
some parts of the world. The simplest purchasing system is buying off the counter, on a
cash transaction. At the other extreme is the constitution of a high power steering committee
that buys on the basis of global tenders. Each system has its own advantages and
disadvantages and organizations will have to choose a system suited to meet their
requirements. It is noted that the objective of the purchase policy is to buy he required
material in the right quantity from the right source the right time and price to obtain the
maximum value for each rupee of expenditure.

Large organizations usually have a written purchase policy to be adhered to by all. The
purchasing activities are always subject to audit and hence the systems should be so designed
that they do not give rise to any structures. The purchase executive has to dispose of excess
materials, scrap, etc, in addition to his buying activities. The amount involved in these items
will be rather high, if these are metallic in nature which requires the disposal system to be
properly designed. Therefore, if the purchase executive has to effectively use the resources at

92
Materials Management (BUMA-312)

this disposal, this system should be well established and flexible enough to cope with the
ever changing environment.

Cash Purchase
In contrast to credit purchases, some items are brought off the shelf from the bazaar, under
cash purchase system payments, for these are made across the counter. A major reason for
such purchases is that, these items are required urgently and are of such values that would not
cause any harm to the organization, even if the prices paid are

Materials Objective
The successful operation of any business depends, to large extent on the availability of goods
and services of the right quality in the right quantity at the right time, from the right source,
at the right price. These form the classical ‘five rights’ objective of the materials department
that broadly generalize and sum up the fundamental elements of the function. These basic
requirements will be suitably amplified and modified by the needs and objectives of the
individual organization.

To achieve these objectives, purchasing can be considered as a profit center. These objectives
can be translated in practical terms of maintaining an uninterrupted flow of materials. Any
stock out and the resulting loss of production can be debited as a loss. The ‘value added’ by
the purchase function in maintaining the suppliers can be credited as a profit. Objectives can
be set in terms of price, quality delivery and service.

Any reduction in price can be credited as a ‘profit’. The function’s contribution towards cost
reduction and product improvement can also be measured against the objectives. Similarly,
the purchases division can contribute to the avoidance of wastage and obsolesce. Because of
the very nature of is work, the purchasing section will have interactions with the best of
internal and external groups. This necessitates improvement in interpersonal relations, which
is one of the important means of achieving the objectives.

93
Materials Management (BUMA-312)

The above discussion of the environment at once indicates to us that materials management is
not a routine function that can be entrusted to anybody. Scientific purchasing has to maintain
an uninterrupted flow of materials and at the same time reduce inventories obsolescence and
varieties, without a reduction without a reduction in consumer satisfaction. It must have an
accurate specification of the materials required and a clear understanding of their costs. As
the volume of transactions grows, the department will have to use computers. These activities
necessitate a premium on the analytical and decision making abilities of the materials
executive.

Policy Manual: A to Z Items

The conditions necessary for the success of materials function from the profit center point of
views must be incorporated in the form of a manual. This may be part of the total corporate
manual. Some of the points which may be included in the manual are given below. The
policy manual familiarizes the procedures and guidelines to be observed. Obviously the
following list is only indicative and not exhaustive.

a. Corporate policy including guidance on purchasing goals strategies, plans, and

programs
b. Action plans for planning processes in purchasing function after recognizing all
influencing factors
c. Organizational aspects such as interrelations with finance, user

Program and constraints

In developing countries, evolving standards through consensus process has to face several
limitations. The effectiveness of the committee procedure, which is essential for
standardization, depends on the knowledge and competence of the experts to strike a balance
between conflicting interests from sound technological considerations. Coordination must not
be dictated by individuals’ vested interests. The availability of experts in developing
countries is comparatively limited and those who are academically knowledgeable are

94
Materials Management (BUMA-312)

handicapped for lack of technical data is due to the fact that few industries have effective
quality control systems in operation. To the extent, that quality can be measured by a definite
number of desired right quality, in respect of each parameter that is acceptable for every
conceivable condition of use and of consumer circumstances.

Manufacturers cannot economically produce such a wide range of models, as to meet every
combination of desired and possible levels of price and performance. There may be some
products in the market of lower quality at cheaper price. But there will also be other products
of better quality at a higher price. The standard quality if established at all, certainty
represents a compromise, bargaining point around which lesser or better performance is
traded off against the price. For meaningful standards predominant among human elements
of inputs are the voluntary contributions of the experts and interested parities comprising he
committee. Both justification for and the success of voluntary consensus standard process
hinge essentially on cooperative inputs from a variety of sources such as buyers sellers,
consumers, government, industries etc. In particular, the quality of the standard produced is
very much a function of the extent, to which all members are prepared to put their cards on
the table and to participate in free and open discussion directed towards development of a
standard that represents the best current solution to the problem.

Consumers and purchase executives can play a significant role by organizing movements
wherein non-standard products are boycotted and rejected. Public awareness of consumer
rights is achieved by exposing malpractices and educating the average buyer. Wherever
consumer movements have started working as in Gujarat, the manufacturers and traders have
an automatic check, and goods and commodities of acceptable standards are sold in the
normal course.

Admittedly in tailor- made industries or job shop the scope of standardization is limited or
even negligible compared to mass production and repetitive types of jobs. Further,
developing economics depend upon industrially advanced nations for procuring high-tech
precision equipments. Standardization and interchanges of spare parts or assemblies between

95
Materials Management (BUMA-312)

industries, in this context, obviously starts with the standardization of the mother equipments
produced by the developed countries, who may not always adopt international standards.

In spite of the above difficulties standardization results in simple operations, less paperwork,
improved inter-departmental coordination conducive to computerized application,
pinpointing areas involving in efficiency. In short standardization is a means to faster and
better understood communication with fewer mistake and hence a smoother life for the
materials executive.

6.4. RIGHT MODE OF TRANSPORT

Transport Cost
Transport is the very life and blood of business management and commerce. The purchase
man's job is not complete until unless he ensures that the material is shipped from the
vendor's premises located in different areas to his organization. Buying the transportation is a
key element in his job description particularly because the transportation cost accounts for
nearly 15-20 percent of the cost of materials purchased. In fact this will be higher if suppliers
are located in remote areas and the mineral, etc., the freight costs will be more than the cost
of the item itself.

As the organizations grow in size, transportation becomes very crucial and effectiveness
depends upon the knowledge of alternatives, their rates, schedules, merits and demerits for all
types of materials coming from diverse sources, such as local, regional, national or
international. It is also noted that developing countries like India increase the freight rate and
diesel rate almost every year by about 10 percent and even to maintain transportation costs at
the existing level, the buyers should think of reducing the transportation costs. He has to
coordinate sometimes the movement of goods within the factory premises, as well as
dispatching finished goods to the customers. In such complete cases, a separate department
may be formed to coordinate the movement of all materials- inside an outside the factory to
ensure safe, rapid and economic transportation.

96
Materials Management (BUMA-312)

The buyer should seek constant improvements in transportation with a view to cutting down
transportation costs, achieving greater speed and better quality of service in the light of the
technological advances in transportation, handling purchasing and logistics management. A
knowledgeable buyer can achieve greater reduction in cost through effective use of lowest
cost transportation, commensurate with the most satisfactory service. It is possible to reduce
the transportation cost by appropriate choice of mode of transport, route selection rate
verification, auditing, management of claims, and application of linear programming
techniques for optimum transportation costs.

Choice of Method of Transport

The choice of the mode of transport is indeed complex and depends upon the types of
materials, rate charges, distance to be covered volume, safety, handling charges, time
available loading charges, unloading charges, taxes, etc. The usual modes of transport are
railways, lorries, air cargo, inland waterways, international shipping parcel post and courier
services. Value of commodity is the first factor which largely influences the cost of
transportation. Costly items require careful handling and carry greater liability on the part of
transport agency and this is based on the principle of compensation to transport agency for
care and handling, and air traffic is preferable in such cases.

Weight, volume and size of the shipment are another factor determining the transportation
cost which increased, at decreasing rate per unit with increases in volume. Freight rates for
fuller capacity are lower are lower than those for small load. Transport agencies enter into
long-term contract moving larger volumes of goods over a specific period of time.

However, railways are the preferred mode of transport, when dealing with goods of large
volume, with the increase in distance, the unit transport cost increases. The railways offer the
same fright charges for certain block of distance, and increases are related to the block of
distance. Similarly international goods are usually transported by international shipping.
Thus, there is a direct relation between speed transport cost and flexibility with the choice of
transport. The cost decreases as we go from air, to road transport, to rail transport to inland
waterways, but the time element is just the opposite.
97
Materials Management (BUMA-312)

Railways
The Indian railways is the chief transportation agency in our country, carrying the bulk of
goods and packages. The Multigauge network spread over 61,000 route kilometers is the
Asia's biggest and has 7,100 goods sheds, and 100 break of gauges, and carries a freight of
about 250 million tones year. At any given time, it has about 10 million tones in all places
and carries annually goods worth Rs, 25 thousand corores. The railways charge about half of
the rates of the road transport and the gross revenue is about Rs. 50 million daily.

An examination of salient features reveal that railways are ideally suited for long distances
over 500 km. with the country. Movement of heavy unit such as coal, steel, raw material,
ores etc, are more economically handled, by the railways. Railways being a national
organization, political and social considerations influence the freight rates and choice of
routes. Food grain, coal, fertilizers and oil are moved at rates below the cost, in order to
reduce the freight charges, and ensure accident-free transport. The railways are ideally suited
for long distance bauling of heavy unit loads. In order to cater the traffic coming from a
multitude of destinations, heavy marshalling is resorted to, causing delays. However, the
introduction of scheme such as freight forward scheme, quick transport service, parcel
express, and customer service try to reduce the delays.

Quick transport service was introduced to overcome the consumer's fear about delays and
includes a surcharge, which is returnable, if the consignment does not reach the destination
within the target time. To complete with the door-to-door service of road transport
particularly for smaller and high rated commodities, the railways has capacity. The freight
forward scheme involves a collection agency, which ensures that a single wagon is loaded
with small consignments of different consumers for a single destination. Increased number of
pracel express for quick transportation of perishables have also been introduced. The
railways also settle about Rs. 25 crores of claims due to transit losses. The Indian railways
escape the liability of settlement of claims, if the loss is due to: (a) act of god, (b) act of war,
(c) act of public damages, (d) arrest or seizure under legal process, (e) orders on restrictions

98
Materials Management (BUMA-312)

imposed by any government, (f) act of omission of consumer or consignee, (g) natural
deterioration of waste, (h) latent defects, (i) fire explosion, (j) goods fasely declared.

Road Transport
These are a large number of factors hindering the smooth flow of traffic through the road.
One of the major implements is the innumerable number of control check posts resulting in
considerable delays and uneconomical operation. The condition of state highways and other
loads leaves much to be desired, particularly after the monsoon. It is starting to note that only
one out of nine kilometers of the roads can be operated under all weather conditions. Most of
the roads are single lane with narrow, weak and old culverts, resulting in fatal accidents.
Many of the lorry owners are unorganized and posses less that can ply throughout the
country with national permits is also limited. The institutes of road research in the country
should find out ways and means of reducing the maintenance cost of roads and at the same
time improve the efficiency of road traffic.

Water Transport
Transportation by shipping is generally resorted to, in case of imports and usually the
cheaper mode of transport moving material from one part of the country to another through
inland water ways. Rivers also is considered under shipping. Obviously, this is the cheapest,
but takes a longer time.

Air Transport
The air transportation is the costliest of all modes of transport, but it is the fastest. The
consignment needs, in times when the buyer needs it most, the handled by air transport. Food
items in flood affected areas, medical items, highly corrosive parts and critical items not
readily available in stores, are the classic examples where air transport has to be used. In case
of non-availability of critical items in the factory, the buyer must analyze whether it is
worthwhile to go in for a faster mode of transport for an urgent order. This decision is

Basically a time/cost trade off. Obviously, he has to pay more transportation charges, if he
operates under any of these two conditions avoid stock outs. But so long as the increase in
99
Materials Management (BUMA-312)

cost due to this operation- measured by the marginal cost is less than the loss of revenue due
to non-availability of material, it will be worthwhile to undertake such a mode of transport.
However, It should be noted that such cases should not become routine. On the other hand,
an increase in the number of rush orders resulting in air lifting reflects poorly on the follow-
up purchasing departments.

Containerization
The container concept was first introduced in the USA. When the first sea land service was
opened in 1963 between two ports. Since then, this inter-modal transport has moved forward
rapidly and today it is the most economical means of transport. This service is essentially
depot-to-depot, door-to-door and available for general and refrigerated cargo. This process
eliminates, multiple handling during loading and unloading and utilize cargo pace
effectively. The container is a framed meal box with strong door and is usually a size 6 m by
3 m. The process of containerization of materials came in to practice in India in 1970.

The advantages to the importer are as follows: (a) reduced rate as compared to regular
airline rates by 40 percent, (b) consequently CIF rates will be proportionally less and
customs duty will also be less, (c) better cargo with less handling, (d) follow-up orders
which is an indirect benefit to the importer, (e) reshipment telex advice with source of
supply, (f) packing charges are reduced in lieu of cases/cartons/ creates and corrugated
boxes will be used, (g) efficient handling of cargo, both at the point of origin and destination,
by the consolidation, (h) confirmed space allocation in advance by airlines and speedy
shipment, (i) faster clearance at airports, (j) pilferage and theft reduced to nil, with lower
insurance premium, (k) inland container deports have been organized in important cities of
the country and hence is rendered simple, (m) special facilities to transfer horizontally for
loading/ unloading are needed and this reduces accidents.

6.5 CHECKING YOUR PROGRESS

100
Materials Management (BUMA-312)

1. Explain the Elements of Material Requirement Planning

2. How can one perform MRP Calculation
3. Describe the reasons for Over-ordering and under-ordering
4. Discuss the Concept and importance of Bill of materials (BOM)
5. Write the Uses of standard deviation

6.6 SUMMARY
The definition of materials planning, the need and benefits of materials planning, and the
factors influencing the process of materials planning are discussed in this chapter. The
process of materials planning in the form of bill of materials, materials requirement planning,
and standard deviation approach of past data are discussed at length in this chapter.

A material planning is the scientific way of determining the requirements of raw materials,
components, spares and other items that go into meeting the production needs within
economic investment policies. The successful operation of any business depends, to large
extent on the availability of goods and services of the right quality in the right quantity at the
right time, from the right source, at the right price. The choice of the mode of transport is
indeed complex and depends upon the types of materials, rate charges, distance to be covered
volume, safety, handling charges, time available loading charges, unloading charges, taxes,
etc.

101
Materials Management (BUMA-312)

CHAPTER SEVEN
WASTAGE MANAGEMENT
Contents
7.0 Objectives
7.1 Introduction
7.2 Disposal of Obsolete and Scrap Items
7.3 Reasons for Obsolescence
7.4 Control of Obsolescence
7.5 Disposal Methods
7.6 Checking Your Progress
7.7 Summary

7.0 OBJECTIVES
The objectives of this unit are:
 To understand the concept and importance of wastage management
 To recognize the meaning of obsolete and scrap items
 To learn the techniques for surplus obsolete and scrap item management

102
Materials Management (BUMA-312)

7.1 INTRODUCTION

7.2 DISPOSAL OF OBSOLETE AND SCRAP ITEMS

Obsolete stocks are those equipments and materials which are not damaged and which have
economic worth, but which are no longer useful for the specific company’s operations.
Management of SOS
Recently SOS surplus obsolete and scrap-items management has assumed tremendous
importance in materials activities, in view of the financial stringencies. The problem of
identification and disposal of obsolete surplus goods is acute in many developing economies,
because of the fear that the same item may not be available, if needed again in the same
organization. Holding obsolete and surplus stocks is costly. These costs include-
 inventory carrying charges which is currently estimated at about 30 percent cost of
periodic stock taking cost of maintaining the records,
 cost of security,
 cost of preservation,
 loss of use of capital tried up in inventories,
 cost of additional staff for stores work,
 cost of storage space,
 cost of lower morale due to seeing the same non-moving item everyday, etc.
In view of the cost impact of the redundant and obsolete stocks, special effort must be made
to avoid keeping them.

Categorization of Obsolete/Surplus
Obsolete stocks include items like:
 spare parts of machines which have been phases out,
 assemblies related to modified equipments for which there is no future need by the
user,
 items like food and drugs, whose effectiveness have lapsed with the passage of time.

103
Materials Management (BUMA-312)

Obsolete items are non-moving in nature, but every non-moving item may not be obsolete as
it may include insurance items.

Surplus items are those materials which have no immediate use but have accumulated due to
faulty planning, forecasting and purchasing surplus stocks at a specific time include
numbers of items which are in excess of requirements. It may be noticed that surplus stocks
result from over-ordering and significantly contribute to the quality of obsolescent and
dormant stock, if stock is likely to last longer than a reasonable period, or when it is no
longer required for the job for which it was purchased, but the material is in good condition.
It may be noticed that surplus materials are those which are required at all due to changes in
design, manufacturing process, etc.

Dormant or slow moving stocks are those categories of items whose usage is infrequent. The
items usually become dormant when large quantities of spares are held as safety stock, which
breakdown less frequently than has been anticipated. Salvageable materials are those, which
cannot be used for the original purpose, but out of which certain parts can be removed and
used probably after rework. For this purpose, a reclamation cell should be set out wherever
justified, to each part will be salvaged and to keep track of the performance of reclaimed
material.

7.3 REASONS FOR OBSOLESCENCE

The reasons for the occurrence of obsolete items are:
 Changes in product design,
 technological innovation, rationalization, cannibalization,
 in accurate forecasts,
 faulty purchases practices,
 improper store keeping and wrong codification,
 poor maintenance and mistakes in several departments like planning, purchasing,
transportation, design, stores handling, etc.,.

104
Materials Management (BUMA-312)

In order to minimize obsolescence, let us now analyze the reasons for obsolescence usually
encountered in many organizations.
 One of the most common reasons for obsolescence in many organizations is the
sudden development of high tech/new technology/ automation/ rationalization/ design
change/ product change/ diversification.
 Adoption of standardization and elimination of non-standard verities has led to
obsolescence in a few cases.
 Changes in the product design invariably leads to some items getting invalid and the
entire previous stock becomes obsolete.
 When a machine breakdown occurs, some times it is rectified using parts or
assemblies of an identical machine and this process is known as cannibalization. The
processes if continued unchecked, results in obsolete/scrap items. Faculty forecasts
and planning by the marketing department leads to accumulation of obsolete items.
 Incorrect purchasing practices, buying in bulk, faulty store keeping methods,
inadequate stores preservation, inefficient material handling poor manufacturing
method.
 The problem of obsolescence is more acute in spares intensive industries, like power
generation process industries, mining and transport sector. Strategies for
identification, minimization and disposal of obsolete items need a good computerized
information system for generating periodic reports for action.

7.4 CONTROL OF OBSOLESCENCE

The process of combing the stock records periodically through a computer and analyzing the
movement of items has been found to be very effective in many undertakings. For this
purpose, the stores issues must be combed and items must be classified as FSN or fast
moving, slow moving and non-moving.
Items issued from the stores at least once during the last five years may be classified as slow
moving.
The remaining items have not been issued even once during the preceding years and may be
categorized as non-moving. In this case, care should be taken avoid the ‘really insurance’

105
Materials Management (BUMA-312)

items- as certified by maintenance department. The year limitation and the time period can be
varied according to the requirements of individual organizations.

XYZ Analysis
The FSN analysis should be combined with another analysis known as XYZ analysis, based
on annual inventory valuation of materials. Generally it is noticed that about 10 percent stock
items account for about 70 percent of inventory value is accounted by 20 percent of items
and only 10 percent of the inventory value is accounted by the remaining 70 percent of the
items. This is conventionally called XYZ analysis, based on inventory value as against the
usual ABC analysis which is based on annual consumption value. While further control is
needed for Y and Z categories, immediate action, by the purchase manage should cancel all
pending orders for the above categories.
The purchase manager should cancel all pending orders for the above categories. Obviously
in this process, items may classified as ‘real insurance spares’ should be sorted out, that too
by restricting only one set per machine. The non-moving X category items may be disposed
off after approval from user department. The organizations should introduce ‘buy back
clause’ in the purchase contract to prevent the recurrence of the supplier dumping unwanted
spares; circulation to sister units, transfer to other companies at mutually agreed prices,
selling back to the original suppliers, are sometimes resorted to in a few cases.

Control of Scrap
Scrap is another classification which is usually tagged onto obsolete and surplus materials.
Scrap can be defined as a residue from manufacturing process, which cannot economically
used within the organization. The amount of scrap as a percent of the total production is
certainly a measure of the working efficiency of the personnel connected with the production.
Scrap also arises due to a number of reasons like breakage, distortion, in the form of
condemnation of the machinery, turning, borings, flashes, spoilages, empties broken tools
etc. Waste steel, irreparable materials are usually categorized as scrap. Thus scrap refers to
unusable material, whose value is only in terms of its materials content. Only 80 percent of

106
Materials Management (BUMA-312)

metal that gets into the plant will come out as finished product and the remaining 20 percent
is normally converted into process scrap.

Scrap is usually collected, properly segregated, and categorized into:

(a) ferrous scrap,
(b) metal scrap and
(c) Waste.
There are various grades of ferrous scrap, like basic open hearth and blast furnace grades,
electric furnace and foundry grades, cast iron grades, etc., and are suitable for remelting to
produce iron and steel or its alloy. Metal scrap consists of non-ferrous scrap including
copper, brass, tin, lead, zinc, aluminum, nickel, etc, and command a better price.
Waste comprise all non-metallic scrap like paper, containers, oils, bags, plastic, rubber,
wood, etc Organizations try to minimize the scrap by controlling at the manufacturing
process by fixing tolerance limits for each category. Non-returnable containers, packing
cases, pallets, gas cylinders, drums, tins containers also are treated as scraps for the purpose
of disposal.

Periodically analysis of waste and scrap, with the reasons therefore, help to reduce the
incidence of waste. Some organizations have reduced obsolescence by introducing formal
documentation, known as ‘effective point advice’ while incorporating technical/design
changes. In this system the proposed changes, details of new materials, approximate date of
introduction for profitable introduction of changes with minimum side effects. Some
organizations have constituted cost reduction committees, with a view to identify how an
item becomes obsolete/ scrap and how to prevent the same in future. Sometimes, the art of
salvaging or recovering useful parts from the condemned machinery and reclamation or
bringing back to the original serviceable form like retreated tyre, is resorted to, whenever,
economical.

Responsibility for Disposal

107
Materials Management (BUMA-312)

In most companies, the disposal action is normally handled by the purchase department. This
particular duty has been assigned to the purchase department because that appears to be the
most convenient department for it. The purchase officer’s knowledge on the price trends is
supposed to be more intimate and accurate than that of any other sections in the company.
Since he has purchased the item, he should know the material cost/price of the item, he
should know the material cost/price of the item. His contact with the salesmen of other
companies is one of his sources of information as o possible uses of the material.

7.5 DISPOSAL METHODS

Obsolete and surplus goods should be disposed off as soon as practicable, provided adequate
steps are taken to ensure that such an action will not result in unethical premature disposals.
It will be appreciated that delays in disposing off redundant stocks not only increases the
inventory carrying cost, but creates the risk of deterioration and loss of sale value of the
stocks. It is well known that in advanced countries organizations pay money to remove the
junk items. It sounds, ironical that due to faulty planning an items which is bought for usage
in the organization becomes non-moving and unserviceable and has to be disposed off. The
disposal is effected by
 Inviting offers from time to time from possible scrap dealers,
 Annual contract and
 Public auction.

Before disposal action is initiated,

 it is necessary to ensure that the item is not needed in any department of the company.
 It is also essential to see that the highest value possible is realized from disposable
obsolete stocks. For this purpose, the minimum valuation of the item should be done
in terms of the depreciated use, or its scrap value.
 The advantages in transferring the item to other departments or similar organization
should be thoroughly examined.

108
Materials Management (BUMA-312)

 Hazardous items and dangerous chemical must be dumped at sea or buried in the
ground, so that it is not sold back to the same organization with original packing,
must be examined.

Before, disposal action it is essential that the scrap is segregated according to metal, shape,
size etc. When the scrap is mixed the return is even lower than the lowest element in the
mixture. When costly scrap such as copper, aluminum tungsten are involved, it is imperative
that they segregated as returns are hung and price levels are different. In practice it has been
found that it is profitable to dispose the scrap directly to the end users, rather than to
middlemen who normally form a cartel of their own. Parties are required to inspect the scrap
in the scrap yard and deposit the earnest money. Very often the company insists on the basic
price, calculated in close coordination with the finance department. In the disposal action, the
purchase manager has to deal with a set of hard bargainers, who gang themselves into cartels
and at the same time be able to answer audit queries on realization values of the scrap.

Other than the direct deal with a scrap merchant, the normal procedure adopted are either
through open auctions or through the commonly used tender systems, even though many
companies precautions as it involves less work and can be carried out expeditiously. Since
the scrap market is erratic, even if earnest money deposit is collected the vendor find it
desirable to forego the deposits. It may be worthwhile to have well formulated rules
regarding the disposal. After satisfactory completion of the auction the agents are paid the
agreed commissions. Usually large organizations set-up committees consisting of
representatives of purchases, finance, stores maintenance and production, in order to decide
on the disposal action. Discussions on disposal must be taken, so as to make the best
benefits of a fluctuating market. Disposal action may also be affected by entering into annual
contract with intending purchasers, or by periodically inviting offers from intending
purchases, or by public auction.

A large number of organizations find it advantageous to make the buyer collect the scrap
straight from the shop floor, as the scrap accumulates. A contract can be entered into with

109
Materials Management (BUMA-312)

the buyer and everyday his men should pick up the scrap as it collects. The best approach to
scrap reduction is to buy the material to the nearest in shape/size form to the specific product.
Scrap dealers also give good tips to reduce the scrap generation and to get maximum
advantages for the company. Various techniques of waste reduction like recycling salvaging,
value engineering standardization industry engineering, work study, methods study, a
consciousness amongst all persons to effective waste control Program.
7.6 CHECKING YOUR PROGRESS
1. What are the final outputs after a Scrap is collected, properly segregated, and
categorized?
2. Write down the reasons for the occurrence of obsolete items.
3. List down the different forms of obsolete stocks.
4. Explain the technical difference between XYZ Analysis and FSN analysis in
wastage management

7.7 SUMMARY
 Management of SOS items is becoming increasingly important in view of
technological changes. The reasons of SOS are discussed for effecting control on the
same. The procedures for disposal are discussed at great length, to get the maximum
recovery of SOS items.
 The problem of identification and disposal of obsolete surplus goods is acute in many
developing economies, because of the fear that the same item may not be available, if
needed again in the same organization.

110
Materials Management (BUMA-312)

 Surplus items are those materials which have no immediate use but have accumulated
due to faulty planning, forecasting and purchasing surplus stocks at a specific time
include numbers of items which are in excess of requirements.
 Scrap can be defined as a residue from manufacturing process, which cannot
economically used within the organization

111