MODULE -2

DEFINITIONS OF QUALITY

The concept of quality concerns how well and for how long a product meets the requirements of
the customer.

Philip [Link] defined quality as “Conformance to requirement”

William Edwards Deming defined quality as “Continuous improvement”, which he means that
everything constantly changes and therefore one must develop processes that lead him to improve
everything.

Joseph Juran defined quality as “fitness for use”. A component is said to be good quality if it works
well in the equipment which it is meant.

Ishikawa defined quality as “most economical, most useful and always satisfactory to the customer”

ISO 9000 defined quality as “the totality of features and characteristics of a product or service, that
bear on its ability to satisfy implied needs”

In general, quality is defined as ”Product property decided by the customer needs, conforming to
specifications, assured performance and safety, proper packaging and timely delivery, efficient
technical service and incorporating customer feedback”

DIMENSIONS OF QUALITY

i. Performance
ii. Features
iii. Reliability
iv. Conformance
v. Service ability
vi. Durability
vii. Aesthetics
viii. Perceived quality

QUALITY PLANNING

It is the process of establishing quality objectives and developing the plans for achieving those
objectives. Quality planning is the activity of developing the products and processes required to
meet customers’ needs.

OBJECTIVES OF QUALITY PLANNING

1. To produce quality products which meet customers’ needs

2. To define quality standards and to prepare product specifications
3. To prepare guidelines on various elements effecting quality.
4. To establish quality objectives and developing plans for achieving these objectives
5. To have quality assurance system in every functional group of the organization
6. To evaluate product designs with a view to improve quality and reduce the quality costs.
7. To develop quality control techniques.
8. To identify opportunities for excellence.
9. To identify opportunities for excellence.
10. To create an excellent operating culture in the organization.
PROCESS OF QUALITY PLANNING

Identification of customers

Discovering customer needs

Translate customers’ needs in to suppliers’ language

Develop the product that meets the customer’s needs

Optimize product design

Develop the process

Transfer to operations

THREE PRONG APPROACH TO QUALITY PLANNING

Quality planning can be achieved by the three prong approach. According to three prong
approach, identification and preparation of quality planning is done by,

1. Product planning

2. Managerial and operational planning

3. Documentation

1. Product planning
Product planning may be defined as –Evaluation of the range ,mix, specification and
pricing of existing and new products in relation to present and future market requirements
and competition
2. Managerial and operational planning
I. Preparing organizational structure: involves responsibilities, authorities and
relationship arranged in a pattern, through which the organization performs its
functions
II. Preparing organizational procedure: involves written documentation of purpose
and scope of each and every activity i.e., what shall be done and by whom, when,
where and how it shall be done, what material, equipment shall be used and how
it will be controlled and recorded.
III. Preparing process: involves resources and activities which transform input into
output in the most effective and quality effective manner. Resources include man,
materials, machines, money
 IV. Preparation of resources needed to implement quality management: includes
the resources needed for all activities of the overall management function that
determine the quality policy, objectives and prepare for implementation such as
quality control, quality improvement.
3. Documentation

All the elements, requirements and policies adopted by company for its quality
management should be documented in a systematic and orderly manner in the form of written
policies and procedures.

The following are examples of the types of quality documents

a. Drawing
b. Specifications
c. Blue prints
d. Test procedures
e. Product process
f. Inspection procedures
g. Work instructions
h. Operation sheet
i. Quality manual
j. Operational procedures
k. Quality control and quality assurance procedures

QUALITY MANAGEMENT SYSTEM

Systems are a set of interrelated elements. System must clarify to the organization-what to do,
who will do it, how the work will be done, when to do it.

Management System is defined as “A system to establish policy and objectives and to achieve
those objectives

Quality management system is defined as “A management system to direct and control an

organization with regard to quality. Quality management system can assist organizations in
enhancing customer satisfaction. It encourages organizations to analyse customer requirements,
define the processes that contribute to the achievement of a product which is acceptable to the
customer and to keep these processes under control.

CONCEPT AND ROLE OF ISO 9000

ISO is the International Standards Organisation is founded in 1946, with the objective of
promotion and development of international standards for facilitating international exchange of
goods and [Link] 9000 is a family of standards for quality management [Link] 9000 has
been applied to sectors like engineering (BHEL, Crompton Greaves, L&T etc.), Process sectors
(Hindalco, SAIL, TISCO, Ranbaxy, etc.), education sectors(NIIT, Aptech) , automotive sector(TELCO,
Mariti, Eicher), software sectors(ICS, NUT)

What is ISO 9000?

The ISO 9000 series of standards promotes the adoption of process approach when developing,
implementing and improving the effectiveness of a quality management system to enhance
customer satisfaction by meeting customer requirements.
Whom does ISO 9000 help?

1. Organisations, whom want to promote their products in international markets.

2. Organisations in creating confidence to the customers regarding the product quality
3. Organisations in withstanding the competition
4. Customers in getting good quality products.
5. Organisations in expanding their business throughout the world wide.

ISO 9000 SERIES:

1. ISO 9000: This standards describes the fundamentals of quality management systems such
as what is quality, quality policy, quality control
2. ISO 9001: This standard ensures quality through the whole cycle of production ie, from
design and development, production, installation and servicing.
3. ISO 9002: This standard focuses on detecting nonconformity during production and
implementation of the means to prevent the reoccurrence of non conformity.
4. ISO 9003: quality assurance in final inspection and test.
5. ISO 9004:This standard provides guidelines as the technical, administrative and human
factors affecting the quality of products

ELEMENTS OF ISO 9000:

1. Management Responsibility: The management shall define and document its quality policy
and identify organizational structure and resources required to the implementation of
quality policy.
2. Quality systems: Establish and maintain a documented quality system to ensure that the
product conforms to specified requirements.
3. Design control: Establish and maintain procedures to control and verify the design of the
product in order to ensure that the design output meets the design input requirements.
4. Document control
5. Purchasing: It shall identify the essential features of a purchase order from the point of
view of quality assurance.
6. Purchaser-supplied product: Establish and maintain procedures for storage and
maintenance of purchaser-supplied product
7. Product identification and Traceability: Procedures for identifying the product from
drawings.
8. Process control: Identify and plan the production and processes which directly affect
quality and outline the controls that are required to be exercised over these processes to
meet the requirements of the standards.
9. Inspection and testing: Ensure the inspection and testing at each of the three principle
stages, that is receiving, in process and final, since the records of these inspections and
tests will be then objective evidence of product quality.
10. Control of non-conformity product: Non-conformity of product be prevented from
inadvertent use.
11. Corrective action: Non-conformity be investigated and corrective action taken to prevent
recurrence.
12. Handling, storage, packing and delivery
13. Quality records
14. Internal quality audits: To verify whether the quality activities comply with planned
arrangements
15. Training
 16. Servicing

STEPS FOR INSTALLATION OF ISO 9000:

Quite essential for a company to have a structure and well defined quality system that identifies,
documents, coordinates and maintains the necessary quality to meet the customer requirements.

1. Preparatory step

I. Quality awareness training is conducted to the workforce at different levels, to make

sure that the desired skill is available within the organization to meet International
Standards

II. Task force should be established at three levels to prepare necessary quality documents
1. Top management group- Quality policy
2. Departmental heads-Quality procedures
3. Junior level executives-work instructions
III. Analyse the existing practices and procedures and the corrective actions to be
implemented
IV. Develop standard procedures for manufacturing
V. Quality policy, quality records, work instructions, specifications etc should be
documented in a systematic and orderly manner.
2. Implementation step
a) Implementing the documented quality system into practice in the organization
b) Quality system should be evaluated on a regular basis, to determine whether these are
effective in achieving stated quality objectives.
c) A third party audit is carried out by an independent body to establish the extent to which
an organization meets the requirements of an applicable standard.
d) Conduct pre registration
3. Registration and Certification step
a) Apply for the registration
b) Certification body will conduct an adequancy audit and compliance audit
c) The certification body will issue a certificate.

QUALITY AUDIT:

Quality audit is defined as “A systematic and independent examination, to determine whether

quality objectives are as per the plans, and whether these plans are implemented effectively in
achieving quality objectives, with the maintenance of quality standards”.

Objectives of quality Audit:

1. To study the quality of the existing systems and find out the non conformity with the quality
system.
2. To suggest the corrections to be done in different areas and operations.
3. To propose and implement methods as per ISO standards.
4. To evaluate a supplier before entering a contract with him.
5. To suggest best procedures and practices.
6. To reduce the loss of money due to duplication of activities, high repairs, etc.

CONCEPT OF TOTAL QUALITY MANAGEMENT:

Total quality management (TQM) means quality in every aspect of company’s operation.
TQM involves effective decision making, problem solving, quality planning, quality implementation
and quality improvement strategies of all departments of an organization. In a total quality
management concept, the word quality has a wider meaning, it means quality of output of every
department and every employee, cleanliness, orderliness, punctuality, customer service,
standardization of works and continuous efforts for their improvement.

Effective TQM results in greater customer satisfaction, fewer defects, less waste, reduced costs,
improved profitability and increased productivity.

Definition:-

1) TQM is a management approach of an organization centered on quality, based on the

participation of all its members and aiming at long term success through customer satisfaction and
benefits to all members of an organization and to society.

2) TQM is a cost effective system for integrating continuous quality improvement efforts of
people at all levels in an organization, to deliver products and services which ensure customer
satisfaction.

TQM involves due consideration of the following

i. An internal environment conductive to quality improvement at all levels.

ii. The commitment of management on optimizing systems/ methods and training of workers.
iii. Competent consultancy guidance.
iv. Availability of facilities for continuing education of the staff

TEN MANTHRAS OF TQM

1. Quality is never an accident, it is always the result of untiring and intelligent effort. There
has to be the will to produce a quality product
2. Quality is like a prayer to God, which never comes out without hard work and devotion.
3. Quality is everybody’s work
4. Take care of quality, quality will take care of everything.
5. Document is dependable, but, not the memory.
6. Quality begins with the cleanliness of the workplace.
7. Quality is achieved through team work
8. Quality begins and ends with education.
9. Quality is the attribute that a customer uses to evaluate products and services.
10. Make it right for first time and all times.

LINK BETWEEN ISO 9000 AND TQM.

TQM is a mechanism to change the culture of the company to achieve its goals, ISO
certification standards facilitates this change. Thus ISO may be called as the subset of TQM. But,
TQM is much more comprehensive. It looks quality in four dimensions- requirements of customer,
management commitment, countrywide participation and analysis of quality problems. Thus ISO is
just beginning of TQM process.

ISO 9000 is a quality management system. Organizations have to prepare quality manual.
Organization that have received ISO 9000 certificate will not necessarily to produce quality products
and services.
Approach of ISO 9000:

Management Commitment

ISO 9000

Teamwork SPC/SQC, other tools and

techniques. {SPC:- Statistical Process

Control

SQC:- Statistical Quality

Control}

LINK BETWEEN ISO 9000 AND TQM:

ISO 9000
Quality
improvement
tools and
Techniques
TQM Change management

Business process Re- Information Technology

Engineering

MISSION STATEMENT:

The mission statement is a declaration of what an organization should like in future. The vision of
the future must to find expression in the strategic quality plan and must clearly address the
following questions:

(a) Where are we going?

(b) How are we to get there?

Mission is to design, manufacture and supply high quality and reliable products.

Mission statement should be easy to understand, describe the functions of the organization,
purposes for employees, customers, supplier.
Eg: Tata

Vision:
To be the most admired and responsible Integrated Power Company with international
footprint, delivering sustainable value to all stakeholders.

Mission:

 To earn affection of customers by delivering superior experience and value, thereby

making them our ambassadors
 Driving competitiveness by operating our businesses at benchmark levels
 Chapter 5

Materials and sales management

PURCHASE DEPARTMENT

In any industry before starting the process of production, the prime requirement is to procure raw
materials, machinery and tools that go into the production and other materials required for the
maintenance work.

In small industries the function of purchase is performed by the works superintendant, but in case of
large industries, a separate department, known as purchase department is provided for the
purchasing of material.

Objectives of purchasing department:

1. To maintain regular flow of materials.

2. To purchase at a competitive price the right quality, in right quantity and at a right time from
a right source.
3. To ensure higher productivity.
4. To ensure the production of a better quality production at a competitive cost.
5. To ensure a better margin of profit.
6. To act for standardization, variety reduction and value analysis.

Functions of purchasing department:

1. Maintain records of available and reliable suppliers, and prices of materials.

2. To prepare and update list of materials required by different departments of the
organization within a specified span of time.
3. Place and follow-up purchase orders.
4. Maintain records of all purchases.
5. To prepare purchasing budget.
6. To check if the material has been purchased at right time and at economical rate.
7. To make sure through inspection that right kind of material has been purchased (quantity,
quality e.t.c.,

Methods of purchasing (or) buying techniques:

(a) Purchasing by requirement

(b) Purchasing for a specific future period.
(c) Market purchasing
(d) Speculative purchasing
(e) Contract purchasing
(f) Central purchase organization
(g) Through Directorate general of supplies and Disposal.

(a) Purchasing by Requirements:

In this method, the required quantity of materials for any particular job are purchased, when
the job is in hand. This method is suitable for the industries, having less working capital.
 Advantages:
(i) The market fluctuations will not affect as costing is based on the market rates.
(ii) Small storage space will be required.
(iii) Less inventory carrying cost.

Disadvantages:

(i) The selling price will be higher.

(ii) Profits are limited since the orders are for small quantities.
(iii) Sudden demands cannot be met.
(iv) Bargaining cannot be had due to the small amount involved.
(b) Purchasing for a specific future period:
Under this method, the materials are purchased in bulk for specific future period to maintain
the flow of production. The standard items which are in regular use are purchased by this
method.
Advantages:
(i) As the order is received, production can at once be started.
(ii) The market fluctuations will not affect to a small size.
(iii) The involved working capital working capital will be less.
(iv) Less storage space is needed.
(v) Cost analysis is easier.

Disadvantages:

This cannot adopted for large scale industries.

(c) Market purchasing:

This type of purchasing is generally made to take advantage of price fluctuations. Raw
materials are generally purchased on the basis. When the raw materials are available at low
price, they are procured in bulk quantities, to get greater margin of profit in finished goods.
This is suitable in cse of goods involving major fluctuations.
Advantages:
(i) As purchasing is done in lot, distribution cost is less.
(ii) Production will be continuous.
(iii) Bargaining power will be more due to bulk purchases.

Disadvantages:

(i) Large space is required.

(ii) If the market is down, there is big loss.
(iii) Capital requirement is more.
(d) Speculative purchasing:
In this method, the purchases are made not according to requirement, but they are made
with a view that there will be a greater demand for the product in future.
Advantages:
(i) Profits will be more if the demand increases.
(ii) Production will be continuous.

Disadvantages:

(i) More capital is required.

(ii) More storage space is required.
(iii) If speculation goes wrong, then the profit on the finished is reduced.
 (e) Contract purchasing:
Contracts are given to suppliers for large amounts of future requirements, for a certain
period, subject to review and cancellation with an appropriate period of notice. While calling
quotations, the appropriate quantity and time etc. are specified.
Advantages:
(i) It avoids necessity for keeping stocks.
(ii) The purchase is not affected by market fluctuations and the supply ensured.
(iii) The purchase department is relieved from the routine work.

Disadvantages:

The supply may not be regular, as it is out of control of production department.

(f) Central purchase organization:

Large industries or certain big government industries may have section-wise stores at
different places and each section may have a separate store. In such case there arises a
problem as to whether purchases should made its own purchases or whether purchases
should be made by the central stores that would go on supplying material to section-wise
stores.
Advantages:
(i) A strict control and check is possible. Therefore, there will be a little chance of
malpractice.
(ii) It can have direct dealings with the manufacturer and can get things as per
specifications.
(iii) When the central stores makes a purchase, it is on a large scale, naturally,it can
obtain a good bargain and things will be cheaper.

Disadvantages:

There may be delay in getting materials from the central store to the sectional stores.

(g) Through directorate general of suppliers and disposal:

The directorate general of supplies and disposal provides supply of different products at
relatively cheaper rates for different government organizations. This department enters into
contract with various organizations for supply of certain materials to various government
organizations during the year at agreed rates.
These suppliers have to certify that they shall not supply to other purchases same material
at lesser rate during the contract year.

Purchase procedure:

The main objective of purchase department is to purchase the materials of specified quality and
quantity at lowest price. The purchase procedure consists of following seven stages:

(1) Receipt and analysis of requirements and processing of requisitions.

The various departments of the organization communicate their requirements for various
items to purchase department through requisition form. A purchase requisition form
prepares the basis for making the purchase and contains the following data.
I. What is the material required with quality and other necessary specifications.
II. Quantity required.
III. Date by which the materials are needed.
IV. Place of delivery.
V. Name of the suggested supplier.
 PURCHASE REQUISITION

Requisition no: ------------------ Date: ---------------

Shop: ---------------------

Required for

1. (a) work order no: ----------------

(b) Department use: -----------------
(c) To Stock: ----------------

s. no description Specification of quantity approximate Remarks

material cost

Delivery required upto: ---------------- signature: ---------------------

Address of probable suppliers ( indentor)

1. -------------------------
2. -------------------------

2 Report of store keeper ---------------------------------

-------------------------------------------------------------------

Signature : ---------------------(store keeper)

3. (for the use of purchase section)

Supplier ---------------------

Purchase order no. ----------------

Date of delivery promised ---------------- signature : ---------------- (purchase officer)

(2) Choice and location of potential suppliers:

This process consists of selecting a fair number of vendors (suppliers) through Authorised
Representatives, Catalogues, Advertisements, Trade journals, trade fairs, etc.

The criterion for ultimate choice of a vendor is also based on the following factors:

I. Reliability of supply-based on past performance of supplier.

II. Assurance of timely delivery of goods.
III. Other considerations like after sales service, attitude towards goods rejected by purchaser,
technical assistance in and after installation, etc.

While considerations, the following factors are also considered:

I. If the purchase is to be made from local market or any other place.

II. If all the purchase is to be made from a single vendor or from several vendors.
III. Whether to buy directly from manufacturers.
 (3) Request, receipt and analysis of quotations:
Quotation or tender is an enquiry to know whether the suppliers can supply the desired
material by the specified date under specified conditions and if yes then at what rate.

QUOTATION FORM

From:

Section head,

------------------

------------------

To :

M/s: -------------------------

------------------------- Dated: --------------------

----

No. ---------------------------

Dear Sir,

Quotations are invited for the purchase of material as shown below and should reach this office at the
latest on (date) at(time). The quotations should be sent with full details and supported by details literature or
pamphlets, etc.

(i) Please mention on the top of the envelope.

Enquiry no. ------------- Date on which due. -------------------
(ii) The quotations should be submitted in duplicate.
(iii) The quotations should be given in same order as are in enquiry letter.
(iv) The quotations should be valid for atleast one month from the date of opening.
(v) The quotations should be sent in sealed covers.
(vi) The rates quoted should be upto destination of purchaser and include all taxes.
(vii) The right is reserved to accept or reject any quotation wholly or partly without assigning any reason.
(viii) The vendor representative may be present at the time of opening of quotations.

s. no Description Quantity Unit cost Total price Discount Total net

Of material required price

Yours faithfully,
 Based on the urgency of quotations (or) tender, they may be

Single tender: a reliable firm will be asked to supply, with whom they are already in business
contract and rates are fixed by mutual acceptance. It is called as single tender.

Close tender: when material is required, firms which are registered will be invited to tender their
rates in most economic rates. The tenders are invited only from limited firms, hence also called as
“Limited Tender System”

Open tender: it is also called “unlimited tender system”. A tender notice in newspapers is published,
so that wide publicity can be given.

Earnest money deposit (EMD): It is demanded from supplier who quotes tender

After receiving quotations from the suppliers, these are studied for comparison of rates, other terms
and conditions mentioned in the request for quotations. A comparative statement is prepared for
analysis.

COMPARATIVE STATEMENT

Date of issue of tender: --------------------------- Date of receipt of tenders: ------------------------

S. No. Item code description Qty. Previous Quoted price

required price(rs.) Firm one(rs.) Firm 2(rs.) Firm 3(Rs.)

Terms & conditions:

1. 1. 1.
2. 2. 2.
3. 3. 3.

(4) Placing of orders:

After selecting the right vendor, a purchase order is sent to him. The purchase order constitutes a
legal document and it serves as the supplier authority for the delivery of material according to the
terms and conditions of purchase order.
 PURCHASE ORDER

Purchase order No. :------------------

Date : -----------------------

To from

M/s. ------------------- M/s. -----------------

---------------- ------------------

Reference: your tender/quotation No.----------------- Date :-----------------------------

Please supply the following materials in accordance with the terms and conditions mentioned as under:

[Link] Description of Quantity Price/Unit Amount Delivery Date

material Promised

Terms & conditions:

------------------------

------------------------ signature(purchase officer)

Atleast six copies of purchase order are prepared by the purchase section and each copy is
separately signed by the purchase officer. Out of these copies, one copy each is sent to store keeper,
supplier, accounts section, inspection department and to the department placing the requisition and
one copy is retained by the purchase department for record.

(5) Follow up and expediting the purchase order:

Placing the purchase order does not guarantee the supply of materials. So the purchase
section maintains contact with supplier in order to:
a) Get information about progress of order.
b) Supplier to be reminded before the expiry of the delivery period as it is the essence
of the purchase contract.
c) Take corrective actions, so that material may be received in time as earlier planned.
(6) Verification of suppliers invoices for payment after processing discrepencies and
rejections:
Reports about the material whatever has been received are compared with the purchase
order to find out quality variations. The quality variations if found regarding quality should
be immediately brought to the notice of vendors. The rejected material may be returned to
supplier for replacement.
Invoices are checked to ensure that the material has been received as per purchase order
specifications and agreed price. After confirming these things payment is made to the
vendor for the material received.
 (7) Closing completed orders and maintenance of records:
After comparing the purchase order with the receiving reports and vendor’s invoice, the
orders are treated as completed orders and closed. The last step of the purchase procedure
is filing the records of these transactions i.e., maintenance of records.

INVENTORY:

It is a detailed list of movable goods, such as raw materials, materials in process, finished products,
general supplies and equipments, which are necessary to manufacture a product and to maintain
the equipment and machinery in good working order.

Technique of maintaining inventories at appropriate level is known as inventory control.

Inventory control: Inventory control is defined as “the scientific method of finding out how much
stock should be maintained in order to meet the production demands and be able to provide right
type of material at right quantities and at competitive prices”.

In simple words inventory control can be defined as “Not too much, not too little and at lower cost
for higher profit”.

The need of inventory control: The necessary of inventory control is to maintain a reserve (store) of
goods that ensure manufacturing according to the production plan based on sales requirements and
at the lowest possible ultimate cost. If it is excess than the actual requirements, it results loss due to
be kept idle for some time for want of materials, then the factory will be under loss. So it needs
inventory control.

Inventory control Technology:

There are three important techniques available for inventory control. They are:

1. ABC analysis or selective control analysis.

2. System of Re-ordering.
3. Economic Order Quantity (EOQ) model.

Classification of inventory:

Inventories can be classified in different ways depending on their function or convention.

I. Classification according to function or material flow:

Production inventory- Items going into final product such as raw materials, finished parts or
subassemblies procured from market or outside source.
Work in process inventory- Items in semifinished stage or products required at different
stages of the product.
Finished goods inventory- are finished goods or final products ready for dispatch to users or
to distributors.
Operating and maintenance inventory-items which do not form the part of the final product
but are either consumables used during the manufacturing process or required for repair
and maintenance functions.
Miscellaneous inventory – other than those mentioned above such as obsolete and
unsaleable products or scrap arising from the production process.
 II. Conventional classification:
Direct inventories- include materials in any form which becomes an integral part of the final
product to be dispatched.
Indirect inventories- include materials which are not processed and do not become an
integral part of the final product but, without which the completion of the final product is
not possible. These may be cutting fluids, lubricants, etc.
Finished products inventories- products ready for dispatch to the market i.e., final products.
Purchase parts inventories- are semifinished, finished parts purchased from the market for
utilization at the time of assembly of the final product.

INVENTORY MODELS:

1) EOQ (Economic Order Quantity):

While placing orders in an economic way, fundamentally it is to be decided as how much

minimum quantity can be ordered at a time and when to place such orders without causing any
interruption to the production.

The level of material, at which new order s placed for want of material is called Re-order level.

The time taken by the material to reach the shop after placing orders before the material is
exhausted, is called lead-time.

Max. stock
Usage(or)
consumption
Inventory Level (Q)

Re-order level

Min. stock

Buffer Stock (or) Safety Stock

Lead Time Time

1. Maximum stock: It is the maximum quantity of material that is allowed to be kept in stores
at any time.
2. Minimum stock: It is the lowest quantity of stores below which the stock is not allowed to
fall in normal circumstance.
3. Standard order: It is the difference between maximum and minimum quantity and this is
known as economic purchase inventory size(or) economic order quantity.
4. Reorder point: the level of material, at which a new order for the requirement of EOQ is
placed.
5. Lead or procurement time: It is the time taken by the material after placing the order and
receiving the materials.
Re-order level=Lead time × consumption
6. Buffer or safety stock: It is the stock which is not usually consumed in normal circumstances.
This stock is utilized to keep the production continuous if lead time increases under
unavoidable circumstances.
7. Cycle time: It is the time between two successive orders.
The question “How much to buy?” leads to the determination of economic order quantity. It is the
quantity of inventory which can reasonably be ordered economically at a time. Thus, EOQ represents
the quantity of quantity of material to be ordered and purchased at a time.

The evaluation of the most economic ordering quantity to be purchased involves calculation of the
following two costs:

(a) Procurement cost or ordering cost or buying cost.

(b) Inventory carrying cost.

A. Procurement cost or Buying cost:

The cost includes the expenditure made on:

i. Calling quotations
ii. Processing quotations
iii. Placing purchase orders
iv. Receiving and inspecting
v. Verifying and paying of bills
vi. Other incidental charges, etc
B. Inventory carrying cost:
i. Insurance
ii. Storage and handling
iii. Deterioration
iv. Taxes
v. Interest, etc
Relationship between cost and quantity

Total Cost

Inventory
carrying cost
A
Cost

Procurement
cost

AI

EOQ Order Quantity

The economic order quantity is obtained by quantity whose procurement cost is equal to inventory
carrying cost. Total cost is calculated by adding procurement cost and carrying cost.

As EOQ, is the quantity to be ordered, at a time, by reducing the total cost. Thus in the figure total
cost is minimum at the point A and AI represents the economic order quantity EOQ. And at
procurement cost is equal to inventory carrying cost.
From the figure we can say that procurement cost decreases as the order quantity increases and
inventory carrying cost increases as the order quantity increases.

EOQ is mathematically calculated, as given below:

Let Q is the economic lot size or EOQ.

P is the procurement cost per order.
C is the inventory carrying cost per unit.
A is the total items consumed per year.
And C0 is the cost of each item.
Then, total procurement = No. of orders placed in a year × procurement cost per order.
= ×P

Inventory carrying cost per year =Average Inventory × annual inventory carrying cost per unit

= ×C

Total Cost = Procurement cost × Inventory carrying cost

Total Cost = ×P + ×C ----( 1)

This total cost is minimum when, Procurement Cost = Inventory carrying cost

= ×C

Or Q2 =

Economic Order Quantity, Q = -----(2)

Substituting the value of Q, in equation (i), we get

Total Cost = + ×

√ √ √
= + = =√2𝐴𝑃𝐶
√ √ √

Total inventory cost = √2𝐴𝑃𝐶 -----(3)

And Total annual cost = AC0 + √2𝐴𝑃𝐶 -----(4)

2. ABC analysis:

As the size of industry increases, the number of items to be purchased and then to be taken care of
also increases. It becomes difficult and costly to give equal attention to all the items of the industry.
ABC analysis, popularly known as ‘Always Better Control’, helps relative inventory control.

According to ABC analysis method of inventory control, all the items of the industry are divided into
three groups, based on the percent of items and percent of value of items. They are,
 1. A-Class Items: these are high valued but are limited or few in number. They constitute 10%
of items but account for 70% of total inventory cost. They need careful and close inventory
control, proper handling and storage facilities. Such items being costly are purchased in
small quantities oftenly and just before their use.
2. B-Class Items: These are medium valued and number lies in between A and C- items. They
constitute 20% of total inventory cost and about 20% of the total items, they need moderate
control. They are more important than C-items. They are purchased on the basis of past
requirements. These items being comparatively less costly, a safety stock of upto 3 months
may be kept. These items need every care but not so intensive as is required for A-items
3. C-Class Items: Are low valued, but maximum numbered items. They constitute 10% of the
total inventory cost and 70% of the total items. These are the least important items like
clips, all pins,washers,rubber bands, etc. They are generally procured just before they finish
and a safety stock of 3 months or even more can be purchased at an instant.

100

90

70

B
% of Inventory Cost

10 30 percent of items 100

Advantages of ABC-Analysis:

1. It becomes possible to concentrate all efforts in area which need genuine efforts.
2. It is most effective and economical method as it is based on selective approach.
3. It helps in placing the orders, deciding the quantity of purchase, safety stock, etc. thus saving
unnecessary stockouts or surpluses.
Stores and stores management:

Generally unworked material is known as stores and the place where it is housed is called “store
Room”.

Holding all kinds of stores, materials, semi and fully processed goods in custody is known as
“storage” and the aspect of material control concerned with physical storage of goods is known as
store keeping.

The responsibility of stores management is “to receive materials, to protect them in storage from
damage or theft, to issue the materials in the right quantities at the right time and to the right place
and provide the services promptly and at least cost”.

Objectives of stores management:

1. To receive, handle and issue goods economically and efficiently.

2. To see that the stock should not fall below the minimum and goes above the maximum.
3. To arrange for systematic and efficient storage of materials.
4. To maintain records of movement of stock.
5. To ensure right time delivery to customers.
6. To level out irregularities in purchasing.
7. To have uninterrupted flow of materials.
8. To prevent any theft, wastage, deterioration of stock.
9. To utilize available space and labour effectively.

Function of stores department and the duties of store keeper:

1. To identify all the items of stock and plan the store for optimum utilization of the cubic
space(i.e., length, breadth and height).
2. To receive all types of materials, goods and equipment including manufactured products in
the factory and record them with their cost.
3. Correct positioning of all materials and supplies in the stores.
4. To maintain stocks safely and good condition by taking all precautions to ensure that they do
not suffer from damage, theft and deterioration.
5. To issue items to the users only on the receipt of authorized stores requisitions.
6. To record and updates and issues of materials.
7. To make sure that stores are kept clean and in good order.
8. To prevent unauthorized persons from entering the stores.

Stores location:

While locating the stores the size of the industry to which it is attached is taken into account, and
the other factors considered are the bulk of material that arrives to the stores and the amount of
material to be handled during issues to the various shops and the amount of material to be handled
during issues to the various shops daily.

Stores may be located as

1. Centralised stores and

2. Decentralised stores.
 Centralized stores:
In small factories, it is desirable to centralize the materials so that these may be brought
under the control of one store keeper and the store-room should be near to the place,
 where material is to be used. If there are several manufacturing departments, the store-
room will be most conveniently situated, where it is near to all the departments. This will
reduce handling and a lot of manual work is eliminated. This type is called centralized stores.

Moulding & smithy or forging Heat Treatment Machine Shop

casting

Foundry Stores Packing and

Pattern making storing

office

Fitting shop

 Decentralized stores:
In large factories, where there are several departments, each using a different type of
materials, it becomes beneficial to separate the stores. This type is known as decentralized
stores.

Moulding & casting stores Smithy or Forging Stores

Stores Machine Shop

Pattern Making Stores

Office

Stores Stores
Cycle Stand
Fitting Shop Packing & Storing

Stores Layout

After deciding the degree of centralization of storage areas, blocking out sub-groupings of materials,
and carefully determining the relative locations of each area, there remains the detailed layout of
store room space. The internal arrangement of a stores department is known as a layout.

A good layout aims at the following:

a. Maximum utilization of the available space.

b. Greater efficiency of the stores department.
c. Easier accessibility to all the materials.
d. Maximum security of all the materials carried and records maintained.
e. Greater economy and use of lesser time in receipt, movement, placement and issue of
materials.
f. Minimization of spoilage, damage and other kinds of losses.

Stores records
In order to maintain an efficient record of stores, the following books and records will be required,

i. Inward and outward registers:- Movements of material from and to the store room
ii. Stock register:-
a. Dead stock or non consumable register: entries of non consumable articles such as all
machinery, equipment, furniture, etc. are made
b. Consumable register: Consumable stores received such as coke, diesel, oil, kerosene,
petrol, paints etc,
iii. Daily receipt register: Any material comes in the store, it is entered datewise in the daily
receipt register.
iv. Issue register: all stores issued are entered datewise in it by store keeper.
v. Store ledger: it is the detailed record of the receipt and issue of materials with respect of
quality, quantity and value of all the items kept in store.
vi. Surplus stock register: materials that do not be used for long time.

INDENT FORMS

BIN CARD

This is a card which is attached to each bin, rack, shelf or other container for stores. A record of all
materials entering or leaving the bin and balance of material in hand is kept in this card.

Bin Card
Bin No: …………………. Maximum quantity: ………………………….
Article: …………………. Ordering quantity: …………………………...
Code No: ……………… Minimum quantity: …………………………..
Stores ledger folio

Date Quantity Received Quantity Issued Balance Remarks

Checked By Date:
…………………… Signature:

STORE LEDGER

It is the detailed record of the receipt and issue of materials with respect of quality, quantity and
value of all the items kept in store. A separate sheet or card is maintained for each article. It contains
the name, description, bin number etc.
 Store ledger
Name of article: Bin No:
quantity Physical verification Remarks
Source of receipt

each transaction

unserviceable
Specifications

Balance after

Sign of Store
with bill no.

surplus and
transaction

Indicating
obsolete/
Received

verifying
Amount
Date of

Keeper

Sign of

officer
Issued

Result
Rate
rate

Importance of sales department:

The sales management can be defined as the planning, directing, and control of the personal, selling
activities of business unit, including recruiting, supervising, paying and motivating the sales
personnel or salesmen.

Selling activities can be performed to distributers to wholesaler, whole-saler to retailer, retailer to

consumer or sometimes producer can directly sell to the consumers.

Sales management is the term applied to the process of distributing goods from the producer to the
ultimate user. It consists of advertising, selling, transporting, handling and financing or risk-taking.

The sales manager must see that the product reaches to the final buyer. In this process, the sales
manager will have his organization with sales asst. manager, sales supervisor, salesmen, etc. who
pursue the wholesale and retail dealers in keeping their brand of product.

Functions of sales department:

1. Studying consumer’s psychology and demand.

2. Studying the conditions existing in competitive firms.
3. Studying the market fluctuations.
4. Assisting in the preparation of marketing plan.
 5. Preparing sales budgets from the marketing plan.
6. Ensuring suitable packing of the products.
7. Creating communications network for the department.
8. Providing technical advisory and other services to the customers.
9. Determining sales staff requirements and handling the recruitment, training and
compensation of sales staff.
10. To explore newer markets for selling the company products.

Sales forecasting:

Importance of sales forecasting:

1. It helps to determine production volumes considering availability of facilities, like

equipment, capital, manpower, space, etc.
2. It forms a basis of sales budget, production budget, etc.
3. It helps in taking decision about the plant expansion and changes in production mix.
4. It helps in deciding policies.
5. It facilitates in deciding the extent of advertising.
6. The sales forecast helps in preparing production and purchasing schedules.

Types of forecasting:

1. Short-term forecasting: it covers a period of 3 months, 6 months or one year.

2. Long-term forecasting: it covers a period of 5,10 and even 20 years.