A STUDY ON SELECTIVE INVENTORY

MANAGEMENT AND VENDOR MANAGEMENT

OF MANUFACTURING COMPANIES
An
Dissertation report

BHAVAN SIET Institute of Management

Bangalore

In partial fulfillment of the requirement for the award of the degree

of
Post graduate program in management

By

R.RAJESH KIRAN (07BS077)

Internal Guide:
Anil kumar.
Faculty, MBA Programme

BHAVAN SIET Institute of

Management
Bangalore
JAN-2009
1
 ABSTRACT
This dissertation makes an attempt to present the “A study on selective inventory
management and vendor management of manufacturing companies”. The
dissertation was related to effectiveness of inventory control system, purchase
procedure & vendor management of manufacturing companies.
Understanding the inventory control system, purchase procedure & vendor
management of different companies.
This Study involved understanding the effectiveness of inventory control system,
purchase procedure & vendor management of companies, the collecting data from
the companies and making the final conclusion in period of 30 days. .
The methodology used in studying and understanding the perceived views of
companies on inventory control system, purchase procedure & vendor
management.
This study was mainly concentrated on inventory management adopted by the
company the mode of the managing the order & further actions for satisfying the
requirement are analyzed.
The companies purchase procedure & system have considerable amount of
influence upon the level of inventory. So the study of purchase has vital roll to
understand the efficient system of the companies.
The study is also on vendor management analysis, which is adopted by the
companies for selecting the suppliers, which will give a clear picture about the
effectiveness in selection of suppliers.
Suggestion and Recommendation are given on inventory control system, purchase
procedure & vendor management. I hope that the dissertation is successful in its
intended purpose.

2
 ACKNOWLEDGEMENT
Besides Labour, the successful completion of any Research Project
requires proper guidance and help from a member of people. I was fortunate to
have all kinds of support from everyone around me i.e. my professor, family
members, friends as well as the Management of my college.
Where, I undertook the research for this dissertation work. I, therefore take
this opportunity to express my profound sense of gratitude to all those who
extended their whole hearted help and support to me whether directly or even
indirectly in carrying out the dissertation work.

First of all, I express my utmost gratitude to my Project Guide ANIL

KUMAR Faculty, MBA Programme, who has enthusiastically imparted relevant
information, Support in carrying out this report.

I am thankful to our beloved Director of PGPM Programme, Dr.

JAGADEESH RAJASHEKAR who has enthusiastically imparted relevant
information, Support in carrying out this report.

I would like to express my gratitude to all MBA Faculty members, my

Parents and friends for being constant source of support and encouragement.

R.Rajesh Kiran
BHAVAN-SIET Institute of Management

3
 CONTENTS
Chapter Title Page
No No.

I INTRODUCTION 1
II REVIEW OF LITERATURE 4
III METHODOLOGY 12
IV RESULTS AND DISCUSSION 14
V SUGGESTION AND RECOMMENDATION 40
VI SUMMARY AND CONCLUSION 42
VII REFERENCES 43

LIST OF TABLES
Table Title Page No.
No.
4.1 Stock of Inventory in Last 4 Months. 18
4.2 Direct Material Cost. 20
4.3 Average Production Schedule. 21
4.4 Inventory Required for Average Production. 21
4.5 ABC Control Characteristics. 23
4.6 ABC Analysis. 23
4.7 Authority And Responsibility of Purchase 26
Personnel.
4.8 Delivery Rating of Vendors 38
4.9 Rating of Vendors 39
4.10 Documents Maintained in Materials and Purchase 39
Department.

4
 LIST OF FIGURES
Figure Title Page No.
No
4.1 Stock of Inventory in Last 4 Months. 17
4.2 ABC in Quantity. 23
4.3 ABC in Value. 24
4.4 Functional Structure of Purchase Department. 26
4.5 Steps Involved in Purchase Procedure of 30
companies.
4.6 Functional Structure of Stores Department. 30
4.7 Costing Methodology. 32

5
6
 I. INTRODUCTION
The companies are facing competition because of global market situation . To
face the competition it is not only necessary to improve the manufacturing
practice but also to continuously introduce new product. In other words to adopt
constant innovation

Companies maintain agile & flexible manufacturing & distribution system not
only as a strategic management decision but the every existence depends upon
how they responds to the fast changing market needs, customer expectation &
technological advancements in the external environment

1.1 INVENTORY CONTROL SYSTEM

Now a days the competition is more because of that it is necessary to have

a good inventory control system in every company. In most organization the
problem of effective inventory control is now viewed at the most critical problem
with changes in social climate. While these can be great assets to the
organizations, they become problems if the organizations are not able to manage
inventory properly.

7
 The two major aspects of corporate business are liquidity & profitability.
Any business can not function with out them for some time, but with no liquidity
the firm has no existence. That is why management of inventory is an integral part
of corporate planning in business life.

The proper inventory management for control purpose, various methods &
techniques can be adopted like prompt maintenance of registers, proper raw
material arrangement, fixation of various control levels & application of inventory
control techniques & bin card system etc., which are relevant for inventory control
stores department. The author S.L. Goel says, “Take care of the forest, the tree
will take care of it self” should be the motto of an inventory controller.

Inventory management helps an organization on in the integrated function

in dealing with the supply of the material & allied activities in order to achieve the
maximum co-ordination & optimum expenditure on materials. The Company
(Goetze), whose inventory control system chosen for the study is no expectation
in view of growing signification of the effective & efficient control of inventories.

1.2 STATEMENT OF THE PROBLEM

The problem selected for the analysis is “A study on selective inventory

management & vendor management in Goetz India Limited” .

The variation of the prices of raw materials are also analyzing with their
effective upon the over all working of the unit. And also inventory held at various
levels of production and storage of material is costing high to the company.

In Companies the purchase procedure and vendor-rating procedure is very

difficult. The seldom usage of subjective approach for selecting the suppliers,
which also results choose & hindrance to the availability of good quality raw
materials at right time with justifiable price. So the system of purchase and vendor
analysis of the company is also taken into account for the analysis as these two
aspects results to material management.

1.3OBJECTIVE OF THE STUDY

 To understand the inventory control system with respect to centralized &

localized material management activities.

8
  To study the effectiveness of purchase procedure system
 To understand vendor management system.

1.4 SCOPE OF THE STUDY

This study mainly concentrates on inventory management adopted by the

company, the mode of the managing the order & further actions for satisfying the
requirement are analyzed.

The company purchase procedure & system have considerable amount of

influence upon the level of inventory. So the study of purchase has vital role in
understanding the efficient system of material procurement by the company.

The study is also on vendor management analysis, which is adopted by the

company for selecting the suppliers, which will give a clear picture about the
effectiveness in selection of suppliers.

1.5 BENEFITS OF SOLVING PROBLEM

When the above said problems are solved the company will have effective
inventory control system which will reduce the cost of holding inventory.

The company can develop effective purchase procedure mode, which

reduces lead-time & also it can have system of supplier selection to have good
quality of material at reduced cost.

9
 II. REVIEW OF LITERATURE
The following were a few literatures which were reviewed for undertaking the
study.

2.1 UNCERTAINTY SYSTEMS WITH TWO VENDORS

• A simulation model demonstrated that use of two vendors can reduce

inventory investments for a given service level, or that exposure to stock out
risk can be reduced for some given invention investment.
• The extent of their inventory reduction will change according to the lead time
distributions of the supplier selected and the proportion of the order Quantity
assigned to each supplier.
• The concept of order static’s provides a statistical explanation for the benefits
of multiple sourcing.
• Extensive research is needed to develop a comprehensive theory of multiple
sourcing.
Jack C. Hayya
(Source: Production & Inventory Management)

2.2 AN EXAMINATION OF INVENTORY TURN TURNIN THE

FOTUNE 500 INDUSTRIAL COMPANIES

American corps has pursued many paths to reducing costs in recent times.

Inventory levels in large national and multinational corps vary because of

a multitude of organizational, economic and financial factors. Still, any
measurable major change or trend toward increased inventory turn over is
congruent with the well documented efforts of industrial organizations. Such as
JIT, Supply Chain management, learn prods etc to implement operating policies
that reduce inventories.

Roger C. Vergin
(Source: Production & Inventory Management)

10
2.3 THE PRODUCTION AND INVENTORY MANAGEMENT
AND STRATEGY FIELDS – A CASE FOR MORE
DIALOGS

The production and inventory management and strategy fields should be noted
that superior production and Inventory management could be a primary factor in
achieving a low-cost strategy or a primary factor in achieving a low-cost strategy
or differentiation strategy based on superior customer’s service. Industry analysis
& competitive strategy should be inputs into MRP II, but MRP II can be the basis
of the company competitive strategy; the relationship is two way.

Brian Leavy
(Source: www.managementarticles.net)

2.4 INVENTORY PROFILE ANALYSIS: AN AGGREGATION

TECHNIQUE FOR IMPROVING CUSTOMERS SERVICE
WHILE REDUCING INVENTORY

To improve customer service levels, management must focus on the

shortage stockeeping units (SKU,s) & not allow excess in other SKU,s to hide the
problems. Any SKU below target will result in service-level failures, while any
sku above target is excess & does not efficiency contribute to service level
success. Unlike other inventory aggregation techniques. Inventory profile analysis
(IPA) shortage is a better indicator of service level than month on hand (MOH)
analysis & IPA excess will identify inefficient inventory. IPA can be implemented
using common PC spreadsheets & down loads from most inventory management
systems.

IPA has significant benefits compared with the MOH aggregation

technique. It will provide aggregates benefits when replacing cost-based
aggregation techniques such as inventory turnovers. The question of “How much
is need?” becomes “Which inventory ratio should be used?” Inventory profile
analysis is the answer to the second question & it will provide the answer to the
first.

James A. Robison

11
 (Source: Production & Inventory Management)

2.5 THE ANALYTIC HIERARCHY PROCESS AS APPLIED

TO TWO TYPES OF INVENTORY PROBLEMS

There are many benefits of using AHP

1) It formalizes & makes systematic, what is largely a subjective decision making

process & there by facilitates “accurate” judgments.
2) As a by-product of the method, management receives information about the
evaluation criterion implicit weights.
3) The use of computer makes it possible to conduct sensitivity analysis of the
results.
4) It results in better communications, leading to clear understanding &
consensus among the members of decision-making groups.
Fariborz.Y.Pariovi
(Source: www.management atricles.net)

2.6 THE USE OF BUFFER INVENTORY AS AN ASSET-

MANAGEMENT TOOL IN A QUICK-RESPONSE
ENVIRONMENT

The corporation should periodically evaluate its buffer inventory levels.

As demand changes, buffer level should be evaluated & adjusted to accommodate
the increased or decreased requirements. In this way, Inventory carrying cost can
be minimized while preserving customer service levels. When the assembly
department has the parts needed to build the scheduled ranges, the ranges will be
available in finished goods inventory for the customer as they needed.

Corporation should works with its supplies is to help them establish

acceptable quality & delivery performance & to adopt quick response techniques
of their own. On about 5% of its purchased parts. Paper Corporation has found
than it is necessary to maintain buffer inventories of parts with highly fluctuating
demand or quality or delivery problems.

Marilyn M. Helms
(Source: Production & Inventory Management)

12
2.7 VITALIZING A SERVICE PARTS INVENTROY

Customer service is rarely a principal factor for attracting new customers,

but it is frequently a major reason for losing them. Customers do not forget when
a major piece of equipment was idle while it waited for a spare part.

The experience of WHC (Windomoller & Hoelsher machine fabric of

West Phalia, Germany) illustrates how significant improvements in customer’s
service can be realized through better management of existing resources ABC
analysis revealed problems with the existing system of a spreadsheet simulation
model helped pinpoint the factors causing these problems. New polices designed
do control high variability in demand & excessive lead times have minimized the
need for expensive safety stocks 7 have resulted in dramatic improvements is
customer service levels.

J.CHRISIOPHER SANDVIG
JAMES 1. ALLAIRE
(Source: Production & Inventory Management)

2.8 INVENTORY AUDITING: A MANUFACTURING

PERSPECTIVE

Despite the mystery, which usually surrounds the annual audit program, its
plan is early to understand if we learn the basic concerns of the auditor.

In this article, that there are 5 step in inventory audit plan usually consists
of providing that the inventory (I) exits (2) is completely represented, (3) belongs
to the firm, (4) is properly valued & (5) is properly classified. To develop the
inventory audit plan, an auditor must verify the firms system of internal controls
in addition to verifying management’s financial assertions by obtaining evidence
about them. The time, cost & frequency of the inventory audit with even the best
plans may vary because of factors.

Judith A. Swartley
(Source: Production & Inventory Management)

13
2.9 INVENTORY MANAGEMENT IN THE CONSIGNMENT
SYSTEM

The cock system of Philips is a consignment system managed basically by

the supplies. Its initial performance was not satisfactory because of schedule
changes from Philips (ED& also because of lack of a proper inventory method for
the supplies. In this article we have derived a relatively simple decision
procedures for a consignment system for determing delivery period & safety
stocks level. With a time period base. For other application’s we suggest
considering the products life cycle to determine appropriate weights in estimating.

We have resolved the mechanism of the cock system & then derived an
inventory control method system using the fluctuations index we showed that our
model was reasonable & effective for the Philips case even though it still has
stock on hand unlike the ZERO STOCK of JIT.

Actually, our experience shows JIT’s implementation the total inventory

levels the waste of material handling cost in our consignment system, then the
supplies, customer & end uses can all obtain benefits.

Jui-Shing Hung
(Source: Production & Inventory Management)

2.10 UPGRADE YOUR VENDOR COMPLIANCE MANUAL

By creating your standardized electronic Vendor Compliance Manual

using organized individual line items, the task of updating existing items or
adding new items is much easier. The organization of the template prevents
duplicating requirements throughout the document, making it easier for both you
and your vendors to identify and understand each particular requirement. Clear,
standardized verbiage and adjustable “force” of the requirements provide for a
consistent tone throughout the entire document, and provide great flexibility in
communicating your requirements to the vendor.
Jeffrey Englert - Vendance
(Source:www.management articles.net)

14
2.11 VENDOR MANAGED INVENTORY PAST, PRESENT &
FUTURE
So for those of you new to the term Vendor Managed Inventory or its'
acronym VMI, what is this flavor of inventory management, where did it come
from and where is it headed?

Vendor Managed Inventory or VMI is defined as “A means of optimizing

Supply Chain performance in which the manufacturer is responsible for
maintaining the distributors inventory levels. The manufacturer has access to the
distributors inventory data and is responsible for generating purchase orders."
according to vendormanagedinventory.com.

JAMES 1. ALLAIRE
(Source: Production & Inventory Management)

2.12 IMPROVED INVENTORY MANAGEMENT TOPS LIST

OF RFID BENEFITS, POLL FINDS

Expectations are that radio frequency identification (RFID) technology

will deliver its most significant benefit through improved inventory management
in the supply chain, according to results of a new Web poll released today by the
Computing Technology Industry Association.

Better inventory management was cited as the key benefit of RFID by 29.2
percent of the nearly 500 respondents to the poll. Other benefits cited include
reduced product tampering, theft and counterfeiting, as well as improved
collaborative planning with supply chain partners.

RFID is a wireless data collection technology that uses electronic tags for
storing data. Like bar codes, RFID tags are used to identify items.

Jui-Shing Hung
(Source: Production & Inventory Management)

15
2.13 VENDOR MANAGED INVENTORY
In its simplest form, Vendor Managed Inventory is the process where the
vendor assumes the task of generating purchase orders to replenish a customer’s
inventory. VMI is a term that has is used to describe many types of supply chain
initiatives. These different? VMI? Activities can vary substantially in purpose and
application.

In all of its forms VMI should be about improving visibility of demand

and product flow in a supply chain, facilitating a more timely and accurate
replenishment process between a supplier (vendor) and an inventory site
(customer, distributor, distribution center, etc?). The application of VMI can be at
any point within a supply chain:

Fariborz.Y.Pariovi
(Source: www.management atricles.net)

2.14 VENDOR COMPLIANCE IN THE SUPPLY CHAIN

SYSTEM

The State of Compliance

The modern retail supply chain has rapidly advanced to become the most
remarkable and efficient automation system since Henry Ford developed the
assembly line. Global supplier’s oceans away are accepting XML purchase orders
over the Internet in the middle of the night, filling them with perfect precision
using advanced voice picking systems, and arranging fast, efficient transportation
to automated retailer distribution centers, which organize millions of cartons of
merchandise by scanning advanced RFID data at 600 feet per minute. This
immense, efficient system has allowed all parties involved to cut costs, sell
merchandise, analyze results, and ultimately increase profits.
Jeffrey Englert - Vendance
Fariborz.Y.Pariovi
(Source: www.management atricles.net)

16
2.15 IMPLEMENTING EFFECTIVE INVENTORY
MANAGEMENT
• Stock outs and lost sales are common while warehouses are bulging with
inventory
• On-hand and available-for-sale quantities in their computer systems aren’t
accurate
• The return on investment from inventory is not satisfactory
• some cases, the problem lies in the computer software. Some packages
still do not have the necessary capabilities for effective inventory
management. In other situations, a distributor is using a software package
that is too complicated. His buyers do not have the knowledge, time,
and/or skills to take advantage of the system’s capabilities. But the most
common reason distributors do not achieve their inventory management
goals has nothing to do with the computer system they utilize.
Marilyn M. Helms
(Source: www.management atricles.net)
2.16 HOW MANAGEMENT LOOKS AT PURCHASING

17
 Lysons & Farrington

(Purchasing and supply chain mgmt)

18
 III. METHODOLOGY
3.1 TITLE OF THE PROJECT

“To study on A study on selective inventory management & vendor

management” .

3.2 OBJECTIVE OF THE STUDY

 To understand the inventory control system with respect to centralized &
localized material management activities.
 To study the effectiveness of purchase procedure system
 To understand vendor management system.

3.3 SOURCE OF DATA

The Data collected include both

 Primary Data

 Secondary Data.

Primary Data:

The method which was adopted to collect the primary data is “personal
Interview Survey”.

In order to collect the information a direct personal interview & discussion

was made with different person of material department & stores department
simultaneously.

The following gives details of persons and their department who were interviewed

1. Shri. HANUMATHAIAH (Chief of Stores, Goetze (India) Limited)

2. Mr. SHIVA KUMAR, (Sr. Engineer, Goetze (India) Limited)

3. Mr. Om Prakash (Purchase Department, Goetze (India) Limited) .
4. Mr. VISHWANATH M.P

19
Secondary Data:

Secondary data was collected from various sources such as

1. The different accounting records of the company.

2. Annual records of the Company.

3. Discussion with material manager.

4. Magazines & Journals.

5. Textbooks, Internets & others.

3.4 INFORMATION NEEDED TO ACHIEVE THE OBJECTIVE

Different records in purchase department like, the record of stock
maintenance, inventory records, vendor-rating records, sales & purchase records
were obtained and examined to get the required information

Methods adopted for collection Data

a) Questionnaire Survey

b) Interview method

c) Document Survey

Method adopted for analysis of Data

A) Random Sampling

B) Graphical Analysis

C) Logical Deduction based on the Annual Reports and internal documents of the
respective departments

3.5 LIMITATION OF THE STUDY

The study has the following limitation. As this is a study under taken to
full fill the academic requirement it is bound to have certain limitation. The most
prominent among them are:
1. A detailed study could not be carried out because of time limit.

20
2. The data are collected mainly from one unit & the rest of the units are
scattered at different places.
3. It was not possible to make a comparative analysis of competitors due to
inability in getting information & data relating to other companies in piston
manufacturing industry.
4. The results of the study are based on the assumption that all the information
provided by the respondents are correct.

21
 IV. RESULTS AND DISCUSSIONS

In this chapter the whole analysis is undertaken. They are with respect to
Inventory Analysis, Purchase procedure, vendor management analysis

OBJECTIVE 1

4.1 TO UNDERSTAND THE INVENTORY CONTROL

SYSTEM WITH RESPECT TO CENTRALIZED &
LOCALIZED MATERIAL MANAGEMENT ACTIVITIES.

In companies all material management related activities are centralized

and controlled from its head office. The materials manager in factories are
reporting to the project office and are responsible for co-ordination for material
required. Consolidated material requirement for all three factories are planned and
ordered from the project office and distributed to the respective factories.

In order to have control on Investment and get volume discounts from bulk
purchase, centralization is opted for all purchase and materials planning activities.
However, for the exclusive components and small volume items each factory
plants and procures materials of their own.

4.1.1 Categories of Inventory

• Machinery spares
• Raw materials
• Aluminum processed components
• Rubber components
• Hard ware components
• Electrical and Electronic components
• Sub assemblies
• Consumables

A part from components and raw materials sub contracting is one of the
major activities at factories. Sub contracting includes specialized process like
machining, anodizing, injection molding, power coating, screen printing etc.

22
 Because of centralized procurement of components and raw materials, they
are procured by project office and are transported to all the three factories even for
low volume requirement of models in their regions.

Inventory is procured and stored, based on the model wise requirement of

each factory. Job processing of all components are carried out in plant.

A closer look of Inventory holding pattern of companies will reveal that

there is a tendency of holding higher inventories for contracted items to satisfy the
safety stocks required at each level of inventory holding.

4.1.2 Inventory Control System Multi Model, Multi Plant

Manufacturing

Centralization of purchase and vendor development activities is the

essence of inventory control system. All product manufacturing, scheduling and
module distribution among factories is done by corporate materials department.

During the product development stage all the design activities are carried
out in plant and pilot batch production is carried out after receipt of feed backs on
the pilot batch bulk production is taken up.

4.1.3 Localized Material Management:

Localization of procurement activities is one of the effective and popular

methods of materials management and inventory control. Japanese manufacturing
industry has effectively used this method in JIT and Kanban system of material
management. Localization supports the entire model of manufacturing system and
local industrialization cost of carriage inward is reduced which have a direct
impact on the cost of material purchased. Cost of communication is another area
where considerable savings can be obtained.

The trade off between finished product movements to marketing locations

and movements of raw materials and components to manufacturing unit was a
factor to be considered. Management of carriage inward transportation of
components and raw materials is difficult than management of finished goods
transportation.

Even though companies has continuously reduced it’s

manufacturing cost and material cost with the help of value engineering on its
products. It has not taken advantage on competitive atmosphere activities, the

23
vendor management policy of the company for existing supplier and also
reduction of supplies.

4.1.4 Centralized Material Management

Centralization of material planning and purchasing is done basically to

have better control over cost of material purchased and to avail quantity discount
for volumes purchased for all three plants. All major components and raw
material are planned, ordered and co-ordinate centrally. It also provides
guidelines for the functioning of purchase process and makes purchasing policies.

The objectives of centralized purchasing function are:

• To ensure the materials and services are purchased as per specified

requirements.
• To optimize Inventory
• To ensure that materials and services are available on time
• To optimize cost of purchase
• Better management control over material activity

Major advantage of having centralized material management is cost

advantage for bulk purchase quantity discount for purchases for all three plants
will be a cost reducing factor.

4.1.5 Inventory Level with Different Storage Locations

Inventory level refers to level of inventory at different production stages

by stocking low volume items at number of centers, the over all demand for the
products are divided by the number of location. Each of the locations must
maintain safety stock the system of holding inventory will increase with the
number of locations of inventory is held, because the variability in demand has to
be covered at each location.

Different levels in the whole supply chain shown in Fig 4.1. 20% to 30%
buffer is maintained in each of these levels and in turn pushing overall inventory
higher. Reduction of one inventory level in the above example will reduce 10% to
15% of Inventory of that component. It is also easier to manage lesser level of
Inventory. There are also many hidden cost in maintaining different levels of
inventory.

24
 A closer look at the inventory level in companies reveals that there is a
tendency of holding buffer stock in each of this level. This pushes up the over all
Inventory in the system. Most of the elements of Inventory are held in multiple
levels and locations. This contributes to increased inventory holding period, The
objective of keeping the buffer stock is to meet the un expected demand.

4.1.6 Stock of Inventory Levels in Last 4 Months

When we analyze the stock of inventory level in different stages of

company (Goetze) in last 4 moths. This is exhibited in the table 4.1 shows that
there is a greater increase in last month when compared to first month. That it has
increased from 319.34 lakhs to 413.4. This is shown in the fig 4.1

The stock level at different stages reveals that there is increase in stock
level in last month because of centralized material planning. As last month is the
end of the year there is an Increase in stock level, this may help production
process, If there is bulk orders of pistons.

25
 Table 4.1 Stock of Inventory in Last 4 Months

(Rs. In lakhs)

Inventory Inventory Inventory Inventory

Category 1st month 2nd month 3rd month 4th month
1. Raw materials 189.63 193.47 287 276.4
2. Bought out component 24.97 10.46 11.64 11.11
3. Hard ware component .56 .59 .58 .59
4. Electrical and 16.55 15.85 14.74 9.46
Electronic components
and PCB assemblies
5. Sub assemblies (spares 60.83 62.00 73.28 74.79
from machine)
6. Purchasing consumables 1.06 1.91 1.91 3.39
7. Imported material 25.61 23.21 35.74 37.44
(strech Bolt silicom
locating pins)
8. Rubber material and .13 .16 .25 .22
PVC Items
319.34 307.65 425.14 413.4

26
4.1.7 Direct Material Cost

A detailed study of DMC and bill of material of all the models. Reveal the
pattern of procurement lead time categories were broadly divided into four they
are

1. Departed
2. Local purchase
3. Central purchase
4. Out station purchase

Analysis of DMC of each model reveals the contribution of each lead time
category in total DMC. This is shown in Table 4.2

4.1.8 Average Production Schedule

Tentative schedules are given for three months and firm schedule release
before 25th of every month for the corresponding month. The average production
schedule per month is shown in table 4.3.

Procurement and inventory planning is done considering the production

schedule.

Raw Materials and Component Requirement for Average Production

Schedule

The average production schedule has been further splited into components
and material requirement with the help of bill of materials.

Considering 15 days average as for the calculation done is shown in Table

4.4.

27
 Table 4.2 Direct Material Cost for Each Model

SL Model Model Departed Local Central Outstation Total

code No material purchase purchase purchase DMC
No Name
value

1 AL Co 990 16,000 4470 89.56 679.5 21239.06

2 Bajaj 180 200 26.6 0.52 3.94 231.06

3 Mahindra and 547 315 138.63 2.73 20.28 476.64

Mahindra

4 Hero Honda 186 170 19.37 0.38 2.93 192.68

SPL

5 Lancer 330 330 109.36 2.15 16.15 457.66

6 Kubota 193 196 83.94 1.64 12.21 293.79

7 T.V.S 190 66 22.3 0.44 3.29 92.03

8 Tata 044 280 104.9 1.98 20.32 407.2

9 Indica 333 210 71.16 1.35 13.88 296.39

10 Greves 259 158 114.86 2.17 22.24 297.27

28
 Table 4.3 Average Production Schedule for the Month

SL No Model Name Average Monthly production

1 ALCO 398
2 TATA 3765
3 MAHINDRA 14633
4 TVS 3684
5 BAJAJ 2204
6 HERO HONDA SPLENDOR 9228
7 LANCER 31
8 INDICA 27417
9 KUBOTA 9063
10 GREAVES 1407
Table 4.4 shows Inventory Required for Average Production

SL No Model Name Schedule Inventory required

1 ALCO 398 42265730
2 TATA 3765 766554
3 MAHINDRA 14633 3487337
4 T.V.S 3684 169520
5 BAJAJ 2204 254628
6 HERO HONDA 9228 889026
SPLENDER
7 LANCER 31 7094
8 INDICA 27417 4063063
9 KUBOTA 9063 1331309
10 GREAVES 1407 209180

29
4.1.9 Obsolete and Non Moving Stock
In companies all the stocks held are revived once in six month. Obsolete
and non-moving components and raw material are identified and all possible
actions are taken to dispose of the obsolete stock. For management of inventory
this statement is revived separately and its value need not be considered as part of
inventory normal norms.
Accumulation of non-moving stocks will have a negative impact on the
fund flow and working capital utilization of a company. It also effects the
inventory turn over of the company.

4.1.10 ABC Analysis

Companies maintain about 12000 to 13000 items of raw materials initial
planning and subsequent control of such inventory is accomplished by proper
planning control system (PPC).
ABC analysis is one of the tools for inventory control. ABC refers to
always Better control. For making ABC analysis usually companies consider
value & consumption. But in companies along with value & consumption another
two factors are considered they are time & criticality. This is one of the best
evaluations of ABC analysis in which the company was developed.
ABC control characteristics is shown in table 4.5 Annual requirement of
material is Rs 300crores
Number of Items = 13000
Average value = 300 crorer/13000
= 2,30,769
ABC Analysis is done for 50 Items, as it is difficult to for 13000 items.
The calculated figure is shown in table 4.6
ABC in quantity is shown in figure 4.2
ABC in value is shown in figure 4.3
As for as the Inventory control system adopted by the company is
concerned, the system is good but certain significant change has to be made
according to the analysis. The company’s inventory system is capable to avoid
the wastage of resources and unnecessary blockage of capital, but it has to revise
its inventory control system mainly in holding inventories at various levels.

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 Table 4.5 ABC Control Characteristics

A type B type C type

Very strict control Moderate control Moderate control
Very low safety stocks High Safety stock High safety
Frequent Ordering Once in 2/3 months Such ordering
Maximum follow up Periodic follow up Exceptional follow up
Weekly control statement Quality control Quality control
As many source as 2 or more 2 or more
possible
Centralized purchasing Combined Decentralized

Table 4.6 ABC Analysis

Values Number of Item Item % Amount in Rs. Amount in %

A 9 18% 2524191 71.25%
B 11 22% 681509 19.23%
C 30 60% 336848 9.52%
Total 50 100% 3542548 100%

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OBJECTIVE 2
32
4.2 TO STUDY THE EFFECTIVENESS OF PURCHASE
PROCEDURE SYSTEM

The procedure for purchasing department, purchasing of raw materials,

monitoring and inspecting the processing activity and dispatch to manufacturing
unit.

The major objectives of purchase function are:

1. To ensure that the materials and services are available on time
2. To optimize cost of purchase
3. To optimize inventory
4. Vendor managed inventory
5. Vendor based rationalization
6. Vendor training
7. Quality at vendors place

4.2.1 Functional Structure

Companies follows a centralized system of purchasing.

The functional structure, which is shown in the figure 4.4 is headed by

corporate materials and simultaneously by unit head and then followed by section
head at each unit.

4.2.2 Authorities and Responsibilities

Authorities and Responsibilities of the purchase personnel is shown in table

4.7.

The authority and Responsibility of purchase personnel seems to be

redundant in and it may leads to confusion.

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 Table 4.7 Authority and Responsibility of Purchase Personnel

Description Origin/Responsibility Approving Authority

1. Capital sector/project/ DGM Materials/ corporate Executive Director
Budget Approval team finance
2. Purchase order Release Purchase office / in charge CM-P
less than Rs. 1,00,000 Chief manager-purchase plant Head
greater than Rs 1,00,000 (CM-P)
3. Price Increase Purchase committee (CM-P, Plant head
DGM, CM-F)
4. Release of schedule Purchase Officer CM-P
5. Distribution of required Purchase Officer CM-P
to the suppliers
6. Dispatch material to Section head/team
factory
7. Inventory Profit center head/stores Plant head
8. Releasing of drawing Purchase Officer CM-P
and specification to
supplier
9. Amendment of purchase Purchase Officer CM-P
order/delivery schedule
10. Design change note to Purchase Officer CM-P
suppliers

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4.2.3 Purchase Procedure

There are various steps involved in purchase process. Among them major
8 steps has been identified, they are shown in figure 4.5.

1. Recognition Definition and Transmission for Needs

The production department will plan for the annual production according
to the demand and then it will plan for the materials, which are required for annual
production. Then the production department prepares the purchase requisition
then it will be sent to the materials department. By evaluating the existing
inventory position, materials manages at the factory prepares purchase order, by
discussing with concerned engineers and it will send that purchase order to Head
Office based on requirement of raw materials for the production.

Materials department prepares four copies of purchase order, they are:

1. One is sent to Head Office

2. One is with the purchase department
3. One is send to finance department
4. One copy is kept with the material department

Steps involved in purchase procedure

2. Selection of Supplies

After the receipt of purchase order at Head Office, the next step is supplier
selection, suppliers are selected from the approved under list. Selection of
supplier can consistently meet the requirements of the organization.

The factors which has to be considered for selection of suppliers, they are:-

• Process capacity to meet the quality requirements

• Process control
• Skills of operating personal
• Commitment for delivery as per requirements

35
• Price credit period, functional capability
• Accessibility etc.

3. Purchase and Issue of Purchase Order

Purchase orders are issue from the corporate Office as per material
requirement planning of the plant. Orders are issue to approve venders on
quarterly basis. Development manager and Head corporate materials approve all
the prices. The quality ordered is determined from the production schedule for the
quarter and as per bill of material. Technical specification drawings and
inspection procedure are given to suppliers along with the purchase order.

Monthly schedules for supply of materials are given to all supplies based
on the quantity order. Full Quantity ordered has to be supplied with in the Quarter
and carrying forward is not accepted.

Purchase order includes the follows

• Vendor codes, name and address

• Previous order references or Quote references
• Delivery Instructions
• Terms of payment
• Details of item to be supplied
• Price
• Quantity
• Taxes and duties etc.

4. Receiving and Inspecting the Materials

The next step in purchasing cycle is the receipt and inspections of

materials. Whenever the material reaches the gate, the security makes the entry of
the components and allots a unique number to the consignment and sends the
document to the material receiving supervisor after duly endorsing.

36
 The supervisor checks on the system whether a purchase order has been
issued for the materials received and inward the goods after thoroughly checking
the following:

a) Invoice
b) Delivery challan
c) Way bill
d) Analysis report etc.

The stores supervisor prepares a goods receipts note in five copies. After
the inward entry the material will be afforded for quality checking inspection
along with the documents. QC department will inspect the materials and an entry
will be made in respective GRNs and the QC department will take print out of the
GRN and will be signed by respective department and duly approved by the
authority. Than the materials, be taken into store.

In case of material rejected/rework by QC the same will be returned back

to supplier by stores along with the necessary documents and informed to
corporate materials to initiate further course of action. The functional structure of
the stores department is shown in Fig. 4.6

5. The Invoice Order and Completion of the Order

A copy of the GRN with all the details of material quantity received,
Quantity accepted, Quantity rejected, accepted under concession/deviation date of
receipt etc. Along with the invoice, delivery challan and other documents is
forward by the store in charge to the accounts department.

Using the financial information system the accounts in charge checks the
purchase order copy for the material received and verifies the price. The GRN
date issued and a payment voucher is prepared by deducting the proportionate
amount for packaging, transportation etc for rejected materials. Based on GRN a
debt vouchers is made in case of rejection, debt details shall be informed to the
supplier. On approval of the payment voucher, a cheque is prepared on due date
and issued to supplier.

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 Requirement Recognition

Source List

Vendor Selection

Purchase Order Processing

Purchase Order Monitoring

Inventory Management

Invoice Verification

Payment Process

Fig 4.5 Steps Involved in Purchase Procedure of companies

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4.2.5 Evaluation of Purchase System

Even though there is an average co-ordination between departments which

are involved in the purchase activity, the file movements shows very slow, so that
it will cause to increase in the lead-time.

Sometimes a week or more than ten days is required to the conversion of

purchase requisition into purchase order. Preparation and issues of purchase order
are seems very efficient the purchasing department is responsible for terminating
the contract, which does not make satisfactory contract. Purchasing bears full
responsibility for an order until the materials is received and accepted. There is a
good of communication between different departments.

From the study it is found that purchase department performs the

following significant function regarding Inventory control.

1. Costing
2. Price fixing/Margin/over heads
3. Material price review
4. Interplant transfer

1. Costing Methodology

Once after arriving the requirements of components the purchase

department inquires about the raw materials price (Min from two parties)
availability of the raw material, tax structure etc. calculated the raw material cost
per Kg or Numbers.

After arriving the raw materials, cost per components of purchase

department will go through the manufacturing of the component to arrive at
processing cost and wastage allowance etc. Once after freezing the process it
estimates the cost of the same as per the consumed for each operation and
investment involved in doing so.

39
 At last both raw materials cost and processing cost are added up and then
over head and profit margins are added. The Above said procedure is shown in
Fig. 4.7.

Raw Material Cost

Processing Cost

Overheads

Profit Margin

Price Per Unit

Fig 4.7 Costing Methodology

2. Price Fixed/Margin and Over Heads

By understanding the requirement of the components in terms of quality

and quantity, costing sheet is prepared in a scientific manner considering, raw
material cost and process cost.

Based on the rate arrived per raw material and process by scientific costing
method. Overhead and percentage will be divided. As a thumb rule, it can be
“between” 6% to 10%, whenever a high value or lower value components come
into picture a reasonable percentage will be fixed. That will be acceptable for both
the parties.

40
 The analysis of costing methodology and price fixing function of purchase
department reveals that the company has got good system of analyzing the
estimated price of the component supplied by the suppliers, So that the supplier
cannot quote high price.

3. Material Price Review frequency

For any price Review the scientific costing carried out during the initial
development of the component will be taken no account. The price is reviewed
once in a month.

If the raw materials price goes up/down for any basic raw material as a
thumb rule, then the difference of the cost between old and new are considered
and the prices are revised only to that extent. Other heads like the processing
wastage, over heads and profits are not altered or changed.

4. Interplant Transfer

This is one of the important function of the purchase department where

based on the requirement of the function the materials is transferred from one
factory to the other.

On the receiving the indent from the selection head for transfer of
materials and the stores supervisor issue and transfer the material to the respective
location.

41
OBJECTIVE 3

4.3 TO UNDERSTAND VENDOR MANAGEMENT SYSTEM.

Most of the suppliers in the vendor list of companies are having long time
association with the company. They have been supplying the components or raw
material in their category for many years and are well aware of the needs and
standards of companies. Preferences are given to existing suppliers in new
component sourcing and suppliers are strategically termed business partners.

Other than suppliers, but assemblers and job processors are another
category of vendors. Training, Quality standard, work instruction and tooling are
provided for the sub contractors.

4.3.1 Selection of Vendors

Selection of supplier is the process of establishing the supplier can

consistently meet the requirement of the organization.

The factors considered for selection of supplier are

a) Process capability to meet the quality characteristics process control

b) Process controls
c) Skills of the operating performance
d) Commitment to delivery as per the requirement
e) Price
USL − LSL
f) Credit period CP=
UCL − LCL
g) Service
h) Capability in terms of Investment and development
i) Sales tax registration /Bankers over draft limit
j) Capability in terms of self certification

Process capability is calculated by the following formula

(Source: Vendor Records of Companies)

42
 Where, CP is process control, USL and LSL are the Upper and Lower
Limit of the quality characteristics and UCL & LCL are the upper and Lower limit
of the process with in which the output of the process lies.

For the purpose of consistently produce products, as per requirement the

CP should be at least 1.33. The operating personnel shall posses the knowledge of
the process and the skill to control the process.

The supplier should be committed to deliver online. The supplies can

offer a competitive price of the process if the process is properly managed and the
supplier maintains minimum inventory.

Financial capability of supplies can be ascertained based on the following

a) Credit expected by companies

b) WIP required with supplier

c) Bank O/D limit from bankers.

Due to changes in the production schedules owing to the market demand

the supplier is sometimes required to provide material as a short notice. Existing
supplies are selected on the basis of there past performance with respect to quality
price and delivery.

The selection process is made for

• Component suppliers

• Capital item suppliers

• Miscellaneous item suppliers

• And selection of transporters.

4.3.2 Procedure for Vendor Evaluation and Control

Vendor performance is evaluated once in a quarter based on vendor rating

performance is communicated to the supplier and improvement action sought for
poor quality performance of the component supplied.

43
4.3.3 Objectives of Vendor Rating

1. To keep the buyers in future source selection

2. To provide the buyer with information which is helpful in subsequent
negotiation
3. To provide the buyer with competent information which he cannot act upon
for any corrective measures above said

On receiving the consignment the material is tested and the materials is

accepted in stores no check weather the material is as per the specification given
by the company.

The suppliers performance is evaluated on the following parameter and

weighs are assigned.

a) Quality – 50%
b) Delivery (Quantity and time) 40%
c) Price 10%

The store officer records the suppliers performance date such as quantity
received, quantity accepted, date and delivery etc. For each consignment the
Quantity Accepted
QR =
Total Quantity Received
supplier is given a rating for quality, delivery and price.

1. The rating of quality is calculated as per the following formula.

2. The rating for prices is calculated as per the following formula

order price - Lowest quotation price

Pr =1 -
Lowest Quotation Price

3. The delivery rating is given as follows

a) If delivery rating is done +/-2 day’s than the required date, the supplier gets
40% rating
b) +/-4 day’s+/ – 30% rating

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c) +/-6 day’s +/– 10% rating

This is shown in table 4.8.

Overall Rating

Once in a quarter the individual rating for each factor that is quality,
delivery price is calculated.

The over all rating is calculated by formal

Or = 0.5 x Qr. + 0.4 x Dr+ 0.1 x Pr

Where, or = over all rating, QR = Quality rating, Dr= Delivery rating and
Pr = price rating. This is shown in Table 4.9

The supplier who gets a rating of more than 90% remains as an approved
supplier. The supplier who gets a rating “between” 80% to 90% are asked
improve the performance the supplier whose below 80% is given awareness that
he will be removes from the approved supplier list, if his rating in the next quarter
is less than 80%.

In case no improvement is noticed in the next review also the company

shall proceed to drop the vender from the approved vendor list as per the
agreement upon.

4.3.5 Supplier Corrective Action

The purchase function has to follow up with the supplier for corrective
actions on the following issues.

a) Non conforming products

b) Audit non conforming or compliance

Non Conforming Products

1. Incase of non-conforming product or consignment received, it is segregated

and identified appropriately.

45
2. The non – conformity product is accepted under deviation on QC approval and
concretion is taken from the supplier or it is rejected if it cannot be used.
3. The supplier is informing about the rejection that shall be the responsible to
take back the material. The supplier is asked to give the reason for rejection.

Audit

1. The organization also conducts audits regularly at the supplies place. The
deviations observed during the audit are recorded at on conformance and they
are informed to the suppliers for taking corrective action.
2. The supplier has to conduct why? Analysis to identify the Route cause of the
problem.
3. The supplier has to provide an action plan for implementing of the corrective
action proposed. The corrective acting taken will be verified during the audit.
4. A part from the corrective action to be taken for non conformance products
and deviation observed during the audit, the supplies has to continuous initiate
suitable activities to improve quality and reduce price through implementing
process improvement/up gradation.
5. The supplier is asked to prepare action plan
6. The supplier is providing support from the organization such as technical
expertise; training on process approval, process control etc.
7. The activities taken for improvements are verified during the audit and
continuously monitored.

Documents Maintained in Materials and Purchase Department is shown in

table 4.10

Table 4.8 Delivery Rating of Vendors

Day’s in Delivery Rating in %
1. +/- 2 day’s +/-40%
2. +/- 4 day’s +/-30%
3. +/- 6 day’s +/-10%

Table 4.9 Rating of Vendors

Rating Consequence

46
More than 90% Approved supplier
80% to 90% Improve the performance
Below 80% Warning

Table 4.10 Documents Maintained in Materials and Purchase Department

S. No Documents Department
1 Material Purchase Identity Stores
2 Goods receipt note cum inspection note Stores
3 Stores requisition / issue slip Stores
4 Stores rejection notes SRV(Returnable Stores
Voucher)
5 Stores return note Stores
6 Cardex Stores
7 Periodic Verification Stores
8 Vendor registration form Purchase
9 Purchase Order Purchase
10 Amendment form Purchase
11 Delivery Schedule Purchase
12 Approved vendor list Purchase

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 V. SUGGESTION AND RECOMMENDATION

Inventory Control System:

The materials management activities are centralized & controlled form

project office.

1. Companies are holding their inventory indifferent level in the whole supply
chain reduction of inventory holding levels will considerably reduce the over
all inventory requirements of the company. Buffer stocks in each of the
inventory holding points can be eliminated & 20% to 30% buffer level can be
reduced to 10% to 15% which decreases in the inventory holding cost
2. As per the study decentralization of non-critical components & raw materials
will increase the efficiency of the inventory performance & drastically reduce
the carriage inward cost (transportation cost). Considerable selection in
inventory could also be achieved to any 3 days stock of materials need to be
maintained for local purchase.
3. Standardization of non-critical components will result in variety reduction &
in turn positively compliment the inventory optimization efforts.
4. The companies should take into account of the existing stock level when it
changes the design or when it introduce new model. Other wise absolute &
non-moving stock will increase due to frequent design changes.

Purchase producer Analysis:

Purchase producer analysis in manufacturing companies are centralized &

controlled from head office.

1. The procurement system of the company seems to be good which is identified

in & steps but the file movement seems be very slow.
2. The special function of purchasing department which is costing, price fixing/
margins over heads & materials price review is excellent & it is one of the
techniques of estimating the price of the components which is supplied by the
vendors.

48
3. Since these centralized purchasing procedure there is a lack of communication
between departments. So the purchase procedure should be decentralized in
order to avoid bottlenecks in document flow & communication.
4. An analysis of the functional structure of purchase department reveals that the
authority & responsibility seems to be complex & redundant, so there is a need
for simplification of functional structure & responsibility & authority should
be redesigned.
5. Obsolete &non-moving stock should be revived once in two months.

Vendor Management Analysis

1. Educating the vendors about the requirement of the companies.

2. Selecting the good vendor, who is technically strong to give the good quality
product; which is one of good criteria for vendor management.
3. Supplies corrective action seems to be laborious & that should be simplified
other wise there will be loss of time & finance.
4. Vendor evaluation & control is done on a half yearly basis based on the
parameters like quality, delivery & price of the vendors which is a significant
factor of vendor rating.

49
 VI. SUMMARY AND CONCLUSION

SUMMARY

In a manufacturing, companies, “Inventory management plays a significant

role. An effective & efficient inventory management helps the owners but also
customers, suppliers, government & society”.

The present study has been undertaken with specific objective such as
inventory levels, material requirement planning, inventory norms, & material
management non moving stock, supply chain management, ABC analysis,
evaluation of purchase procedure vendor analysis & rating etc,

CONCLUSION

To conclude that in companies’ material department is only concerned

with receiving materials, storing & issuing to the production cell. It is not making
any significant analysis to control inventory-holding cost at different levels of
production, because all the material management activities are centralized

Regarding purchase procedure the company should move for localization,

this should greatly influence on easy procurement of material in time & also
reduces ordering cost for simplified vendor evaluation system. As the number of
vendors are large.

The companies can go for trail & error method in all the areas. So it can
gain from experience & learn from its mistake. So effective implementation of
systematic procedure & polices is required, than only company can active for
reaching results in the future.

50
 VII. REFERENCES

 Alex Miller, “Strategic Management” , 3rd edition, McGraw Hill.

 G.C. Beri, “Marketing Research”, 3rd Edition, Tata McGraw Hill

Publishing Company Limited, New Delhi.

 I.M. Pandey, “Financial Management”, Vikas Publications

 K. Ashwathappa and K. Shreedhar Bhat, “Production and Operation

Management”, First Edition, Himalaya Publication.

 Naresh K Malhotra “Marketing Research” 3rd edition Pearson Education

Asia.

 Philip Kotler “Marketing Management” 11th edition PHI Pvt. Ltd. New
Delhi.

 Production and Inventory Management Journal, (1997)

 Production and Inventory Management Journal, (1999)

 Production and Inventory Management Journal, (2004)

 Production and Inventory Management Journal, (2005)

 Production and inventory management journal (2006)

 S.N.Maheshwari, “Management Accounting”, First Edition, Sulthan

Chand and Sons.

 www. managementarticles.net

 www.google.com

 www.wikipedia.com

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