Purchasing and Materials Management PDF

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PR 2030
PURCHASING AND
MATERIALS MANAGEMENT
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PR 2030 PURCHASING AND MATERIALS MANAGEMENT
THIS NOTES ONLY MEANT FOR REFERENCE PURPOSE
SUBJECT / MATTERS CONTAINED IN THESE MUST BE
EXPLAINED IN DETAILED MANNER FOR EXAMINATIONS
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PR 2030 PURCHASING AND MATERIALS MANAGEMENT LTPC

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UNIT I FUNCTIONS OF MATERIALS MANAGEMENT 6

Introduction to materials management – objectives – Organization – Functions –
Operating Cycle – Value analysis – Make or buy decisions.
UNIT II PURCHASING MANAGEMENT 8

Purchasing policies and procedures – Selection of sources of supply – Vendor
development – Vendor evaluation and rating – Methods of purchasing – Imports – Buyer
– Seller relationship – Negotiations - Insurance and claims managements
UNIT III STORES MANAGEMENT 8

Store function – Location – Layout – Stock taking – Materials handling – codification –
Inventory pricing – MIS for stores management
UNIT IV MATERIALS PLANNING 12

Forecasting - ABC analysis – Materials requirements planning - Inventory systems –
Quantity – periodic – Deterministic models – Aggregate planning – JIT.
UNIT V INVENTORY MANAGEMENT 11

Basic EOQ Model – Discount Model - Finite Production – Lot size under constraints –
Application of O.R. Techniques in Materials Management.
TOTAL: 45 PERIODS
TEXT BOOKS:
1. Lamer Lee and Donald W.Dobler, Purchasing and Material Management, Text and
Cases, Tata McGraw Hill, 1996.
REFERENCES:
1. Gopalakrishnan P.Handbook of Materials Management, Prentice Hall of India, 1996.
2. Guptha P.K. and Manmohan, Problems in Operations Research, Sultan Chand &
Sons, 1994
3. R. Kesavan, C.Elanchezhian and T.Sundar Selwyn, Engineering Management, Eswar
Press 2005
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UNIT I FUNCTIONS OF MATERIALS MANAGEMENT
INTRODUCTION
Materials management is a function, which aims for integrated approach towards the management of
materials in an industrial undertaking. Its main objective is cost reduction and efficient handling of
materials at all stages and in all sections of the undertaking. Its function includes several important
aspects connected with material, such as, purchasing, storage, inventory control, material handling,
standardisation etc.
MATERIALS MANAGEMENT ORGANIZATION
The major resources in any organization to manage are the materials out of seven main resources required
to run any organization. They are management, materials, money, man power, machines, methods and
matrix or facilities which include systems, plants, location and buildings etc. The purpose of materials
management organization in any industry is to plan the materials requirements for the production of
goods and services. The structure of the organization must be such so as to have the efficient management
of materials controlling its flow, conservation and utilization. Its objective is to use judiciously and
economically. The product must be produced from the available materials purchased at the economic
price and bring together under one organizational component sharing responsibilities of all the aspects
affecting flow, conservation, utilization, quality and cost of materials. Materials management include
inventory management, purchase management, value analysis, store keeping, maintenance and upkeep of
the inventories in hand and in process.
Fig 1. STRUCTURE OF MATERIALS MANAGEMENT DEPARTMENT
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Fig 2. ORGANIZATION STRUCTURE WITH FUNCTIONAL ACTIVITIES
Fig 3. MATERIAL MANAGEMENT ACTIVITIES IN AN ORGANISATION
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The organization of materials management must be such as to efficiently integrate the activities
concerned with materials and regulate its use as per requirements in the production so as to have stability.
The structural development and authority within the hierarchy of the system must be harmonious and
integrative for proper decision making and achieving goals of the organization through proper
information supply system.
SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Materials management is defined as ―the function responsible for the coordination of planning,
sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as
to provide a pre-decided service to the customer at a minimum cost‖.
Scope of Material Management
Material Purchasing Stores Management Inventory Other related

Planning Management Functions
and
Control a). Standardisation
b). Simplification
c). Specification
d). Value Analysis
e). Ergonomics
f). Just-In-Time
The functions of materials management can be categorized in the following ways:

 Material Planning and Control
 Purchasing
 Stores Management
 Inventory Control or Management
 Standardisation
 Simplification
 Value Analysis
 Erogonomics
 Just-in-Time (JIT)
1. Materials planning and control:
Based on the sales forecast and production plans, the materials planning and control is done.
This involves estimating the individual requirements of parts, preparing materials budget,
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forecasting the levels of inventories, scheduling the orders and monitoring the performance in
relation to production and sales.
2. Purchasing:
This includes selection of sources of supply finalization in terms of purchase, placement of

purchase orders, follow-up, maintenance of smooth relations with suppliers, approval of
payments to suppliers, evaluating and rating suppliers.
3. Stores management or management:
This involves physical control of materials, preservation of stores, minimization of obsolescence

and damage through timely disposal and efficient handling, maintenance of stores records, proper
location and stocking. A store is also responsible for the physical verification of stocks and
reconciling them with book figures. A store plays a vital role in the operations of a company.
4. Inventory control or management:

Inventory generally refers to the materials in stock. It is also called the idle resource of an
enterprise. Inventories represent those items, which are either stocked for sale or they are in the
process of manufacturing or they are in the form of materials, which are yet to be utilized. The
interval between receiving the purchased parts and transforming them into final products varies
from industries to industries depending upon the cycle time of manufacture. It is, therefore,
necessary to hold inventories of various kinds to act as a buffer between supply and demand
for efficient operation of the system. Thus, an effective control on inventory is a must for
smooth and efficient running of the production cycle with least interruptions.
5. Other related activities

(a) 3S
(i) Standardization: Standardization means producing maximum variety of products from
the minimum variety of materials, parts, tools and processes. It is the process of establishing
standards or units of measure by which extent, quality, quantity, value, performance etc. may be
compared and measured.
ADVANTAGES OF STANDARDIZATION
1. Work study section is benefited with efficient break down of operations and effective work
measurement.
2. Costing can obtain better control by installing standard costing.
3. More time is available to the supervisors to make useful records and preserve statistics.
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4. Reduced reductions and scrap.

5. Helps supervisors to run his department efficiently and effectively.
DISADVANTAGES OF STANDARDIZATION
Following are the disadvantages of standardization:
1. Reduction in choice because of reduced variety and consequently loss of business or customer.
2. Standard once set, resist change and thus standardization may become an obstacle to progress.
3. It tends to favour only large companies.
4. It becomes very difficult to introduce new models because of less flexible production facilities
and due to high cost of specialised production equipment.
(ii) Simplification: The concept of simplification is closely related to standardization.

Simplification is the process of reducing the variety of products manufactured. Simplification is
concerned with the reduction of product range, assemblies, parts, materials and design.
ADVANTAGES OF SIMPLIFICATION
Following are the advantages of simplification:
1. Simplification involves fewer, parts, varieties and changes in products; this reduces
manufacturing operations and risk of obsolescence.
2. Simplification reduces variety, volume of remaining products may be increased.
3. Simplification provides quick delivery and better after-sales services.
4. Simplification reduces inventory and thus results in better inventory control
5. Simplification lowers the production costs.
6. Simplification reduces price of a product.
7. Simplification improves product quality
(iii) Specifications: It refers to a precise statement that formulizes the requirements of the
customer. It may relate to a product, process or a service.
Example: Specifications of an axle block are Inside Dia. = 2 ± 0.1 cm, Outside Dia. = 4
± 0.2 cm and Length = 10 ± 0.5 cm.
(b) Value analysis :
The customer value the product and pay its cost if it justifies its use and functionality. The
Value Engineering or Value Analysis evaluates this value of the product. The analysis is
necessary to find out the value of the product. This analysis which attempts to find out the
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value of the product and reduces the cost is called Value Engineering or Value Analysis.
STEPS IN VALUE ANALYSIS

In order to answer the above questions, three basic steps are necessary:
1.Identifying the function: Any useful product has some primary function which must be
identified a bulb to give light, a refrigerator to preserve food, etc. In addition it may have
secondary functions such as withstanding shock, etc. These two must be identified.
2.Evaluation of the function by comparison: Value being a relative term, the comparisonValue
analysis is concerned with the costs added due to inefficient or unnecessary specifications and
features. It makes its contribution in the last stage of product cycle, namely, the maturity stage. At
this stage research and development no longer make positive contributions in terms of improving
the efficiency of the functions of the product or adding new functions to it. approach must be
used to evaluate functions. The basic question is, ‗Does the function accomplish reliability at the
best cost‘ and can be answered only comparison.
3. Develop alternatives: Realistic situations must be faced, objections should overcome and
effective engineering manufacturing and other alternatives must be developed. In order to
develop effective alternatives and identify unnecessary cost the following thirteen value analysis
principles must be used:
1. Avoid generalities.
2. Get all available costs.
3. Use information only from the best source.
4. Brain-storming sessions.
5. Blast, create and refine: In the blast stage, alternative productive products, materials, processes
or ideas are generated. In the ‗create‘ stage the ideas generated in the blast stage are used to
generate alternatives which accomplish the function almost totally. In the refining stage the
alternatives generated are sifted and refined so as to arrive at the final alternative to be
implemented.
6. Identify and overcome road blocks.
7. Use industry specialists to extend specialised knowledge.
8. Key tolerance not to be too light.
9. Utilise the pay for vendors‘ skills techniques.
10. Utilise vendors‘ available functional products.
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11. Utilise speciality processes.

12. Utilise applicable standards.
13. Use the criterion ‗Would I spend my money this way?‘
(c) Ergonomics (Human Engineering):

The human factors or human engineering is concerned with man-machine system. Ergonomics is
―the design of human tasks, man-machine system, and effective accomplishment of the job,
including displays for presenting information to human sensors, controls for human operations
and complex man-machine systems.‖
Objectives of Human Engineering

Human engineering (ergonomics) has two broader objectives:
1. To enhance the efficiency and effectiveness with which the activities (work) is carriedout so as
to increase the convenience of use, reduced errors and increase in productivity.
2. To enhance certain desirable human values including safety reduced stress and fatigue and
improved quality of life.
Thus, in general the scope and objective of ergonomics is ―designing for human use and
optimising working and living conditions‖. Thus human factors (ergonomics) discover and apply
information about human behaviour. Abilities and limitations and other characteristics to the
design of tools, machines, systems, tasks, jobs and environment for productive, safe, comfortable
and effective human use. Ergonomics aims at providing comfort and improved working
conditions so as to channelise the energy, skills of the workers into constructive productive work.
This accounts for increased productivity, safety and reduces the fatigue. This helps to increase the
plant utilisation.
(d) Just-In-Time:
Production methodology which aims to improve overall productivity through elimination of
waste and which leads to improved quality.
Benefits of JIT
The most significant benefit is to improve the responsiveness of the firm to the changes in the
market place thus providing an advantage in competition. Following are the benefits of JIT:
1. Product cost—is greatly reduced due to reduction of manufacturing cycle time, reduction
of waste and inventories and elimination of non-value added operation.
2. Quality—is improved because of continuous quality improvement programmes.
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3. Design—Due to fast response to engineering change, alternative designs can be quickly

brought on the shop floor.
4. Productivity improvement.
5. Higher production system flexibility.
6. Administrative and ease and simplicity
OBJECTIVES AND FUNCTIONS OF MATERIAL MANAGEMENT

The objectives and functions of materials management can be categorized in two ways
as follows:
 Primary objectives
 Secondary objectives
(A) Primary objectives

(i) Efficient materials planning
(ii) Buying or Purchasing
(iii) Procuring and receiving
(iv) Storing and inventory control
(v) Supply and distribution of materials
(vi) Quality assurance
(vii) Good supplier and customer relationship
(viii) Improved departmental efficiency
(B) Secondary objectives

(i) Efficient production scheduling
(ii) To take make or buy decisions
(iii) Prepare specifications and standardization of materials
(iv) To assist in product design and development
(v) Forecasting demand and quantity of materials requirements
(vi) Quality control of materials purchased
(vii) Material handling
(viii) Use of value analysis and value engineering
(ix) Developing skills of workers in materials management
(x) Smooth flow of materials in and out of the organization
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To fulfill all these objectives, it is necessary to establish harmony and good co-ordination
between all the employees of material management department and this department should have
good co-ordination with the other departments of the organization to serve all production centers.
The basic objectives of management in an organization are:

(1) Sales increase through sales promotion
(2) Profit maximization
(3) Improvement in customer services
(4) Globalization of its product sales
(5) Meet the technological changes
(6) Good employer - employee relationship
(7) Selection of alternative materials
(8) Reduction in manufacturing and other cost.
(9) Social objectives
In order to fulfill these basic objectives of management the objectives of materials management
should be set in such a way that they should totally help to meet ultimate goals. The functions of
materials management are discussed below:
A) Primary Functions
To meet the primary objectives, the primary functions of the materials management are given :
(i) Materials Requirements Planning (MRP)

Planning of materials requirements in manufacturing is a necessary function in any organization,
as inventory of materials involve about 60% of the total investment of the organization. The
profit earned depends on the utilization of these materials and reducing the inventory of the
materials. The latest technique used is called Just in Time (JIT) is referred practically to no
inventory. However, in the present situations in any of the organization particularly
manufacturing organization, it is not absolutely possible to keep no inventory of materials
required for production. The MRP is a technique used to plan the materials starting from the raw
materials, finished parts, components, sub-assemblies and assemblies as per Bill of Materials
(BOM) to procure or produce them to support a Master Production Schedule (MPS). It is used on
computers productively by any company that uses a MPS to manufacture products that require
assemblies, components and materials to produce the final products. The MPS is exploded using
the bills of materials to determine requirements of lower-level assemblies, components, finished
parts and raw materials. It plans orders to meet these needs.
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(ii) Purchasing
All the organizations needs an efficient and economic purchasing and procurement of its
various supplies of materials from the suppliers. The materials management department has
to perform this function of purchasing and procurement of materials very efficiently. Since
50% to 60% of sales turnover is spent on the purchase of various materials, the amount of profit
earned on this sales very much depends how economically the materials are purchased and
utilized in the organization. The profitability depends on the efficiency by which this particular
function of purchasing and procuring the requisite materials at appropriate time will be done and
its availability is assured.
The functions of purchasing are as follows:
 The requisition of material is necessary by proper authority to initiate its purchase.

 To select proper supplier for the materials requisitioned, before placing an order.
 To negotiate about the price of the material from the supplier and it will be purchased at
the cheapest price.
 The quality of material must be assured and should not be compromised with the cost of
the material.
 The material should be purchased of right quantity and right quality at proper time at the
cheapest cost.
 To set the proper purchase policy and procedure.
(iii) Inventory Planning and Control

The modern concept of inventory planning is that the materials should be purchased and brought
in the stores just before it enters the production or sold out so that inventory cost is negligible.
The zero inventories are the ideal planning. There are three types of inventories.
(i) Raw materials (ii) Purchased goods (iii) Finished parts and components
The inventory control of these various materials lies with the materials management department,
production department and sales department. Inventory at different levels is necessary to make
sure about the availability of all these types of materials and goods and their proper flow from
one facility to another at different levels of production centers in a manufacturing concern. The
storing of various types of materials and parts as inventory is therefore very essential before its
delivery and use at different production centers. This involves inventory planning and control of
materials in the stores department. Many a time, the supplier may not be in a position to supply
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the materials of the ordered quantity at the proper time. To maintain the continuity in production
and line balance in assembly work, the various types of inventories are necessary to be
maintained and kept in the stores The raw materials before being supplied to a production
process, some of it is sent to store as inventory and rest is sent to production facility as per its
requirements and in the same way, various parts manufactured and assembled as components and
assemblies are also stored as finished parts inventories at the different places in the stores. The
final products before being supplied to the customers are also stocked as inventory of the final
products of the organization to meet the fluctuating demand and to regularize the supplies in the
market. Thus, the inventory control is a very important function of the materials management
department. The various types of inventory models are developed for the different materials to
economise the purchase, supply, inventory control and production control to analyze and
optimize the costs involved in ordering, set-up and inventory carrying of materials required in the
production.
(iv) Ascertaining and Maintaining the Flow and Supply of Materials
Distribution of materials requisitioned by the various production centers and other departments
must be ascertained and its flow and continuity of supply must be maintained by the materials
management department. Insufficient or zero inventories many times create the situations of
stock-outs and leads to stoppage of production. Failure of materials handling devices is also
responsible for disruption of material supplies. Alternatives or emergency supply systems can be
used for assuring production lines to continue. Uncertainty in demand and production quantity is
the main factor. As the customer requirements as per his needs and liking, are changing very fast.
The management has to maintain continuity in production to meet this uncertainty in demand and
control the situation by proper flow of materials supply and distribution at various production
facilities and other departments as per changes in production quantity.
(v) Quality Control of Materials
The quality of the product manufactured by the organization depends upon the quality of the
materials used to manufacture that product. It is a very important and necessary function of
materials management to purchase the right quality of materials. The inspection, quality control,
simplification, specification, and standardization are the activities which are to be followed for
the measurement of quality of the materials. The quality assurance is decided by inspection and
checking. The various properties of materials as per their specifications and standard. The size
and dimensional measurements within tolerance limits assures the interchangeability and
reliability of components and parts. Quality is largely determined by consumer taste and liking.
The market is under buyer‘swww.Vidyarthiplus.com
control. Customer decides the quality of the product. Material
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quality control aims at delivering product at higher and higher quality at lower cost. The product
will be specified not only by its dimensional accuracy but its quality standards, durability and
dependability, high performance, reliability and aesthetic value. Each of this factor aids cost to
the product. In order to achieve high quality, the materials input to the product should be of high
quality, which will have higher cost. The performance decides the reliability, which is obtained
through high quality production. The performance is checked by quality inspection and accuracy.
This also aids cost to the product. The quality of the materials also decides the selection of
vendors and the relationship between buyers and suppliers. The specifications, size and quality of
materials must be referred and if possible the standard should be followed for specifications and
sizes. The types of tests required for assuring the quality should be specified and conducted to
establish the standards.
(vi) Departmental Efficiency
The objective of this function is to ensure the efficiency of the system adopted. If the system and
procedure adopted for materials management are inefficient or faulty, none of the objectives
mentioned above can be fulfilled, howsoever the procedure may be good. In order to maintain the
things in proper way as per planning an efficient control is necessary in the department over each
and every process. Management Information System (MIS) and feedback control at every stage
of working must be adopted to control and make the management and employee work as
efficiently as possible to achieve the best results.
(B) Secondary Functions

There can be number of secondary functions. Some of them are discussed below:
(i) Standardization and Simplification
The standards and specifications of various types of materials are fixed by design and technical
department of the organization and they are followed by production department. Standards define
the quality, reduction in sizes and variety, interchangeability of parts and products. It ensures
efficient utilization of materials and reduces wastages. Standard materials are always available at
reasonable cost. It also helps purchasing department in selection of materials and vendors. If less
variety of items purchased and put in the stores the types of inventories will be reduced and in
this way the cost of carrying the inventories in the stores will be reduced. The objective of this
function will be to produce standard product reducing the overall cost of the product.
(ii) Design and Development of the Product
The variety in product and functionality are the important factors to promote the sales of a
product. The new techniques of designing a product using Computer Aided Design (CAD) has
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made possible to develop variety of products at faster rate. The new technological development in
manufacturing using Computer Aided Manufacturing (CAM) can produce variety of products at
much faster rate with all types of flexibility in the manufacturing as compared to conventional
methods. Materials management department has to act according to use of such variety of
materials to produce variety of parts and ensure the supply of such materials. It should also be
decided how to purchase and produce such variety of products with flexibility and economic cost.
(iii) Make and Buy Decisions

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the
decision also is referred to as outsourcing. Make-or-buy decisions usually arise when a firm that
has developed a product or part—or significantly modified a product or part—is having trouble
with current suppliers, or has diminishing capacity or changing demand. These types of decisions
are the policy decisions of the management. The capacity of the organization and the various
facility developed by the organization to manufacture various items is the main objective of every
organization. This is the important planning activity of every undertaking. But when a company
grows fast, its sales increases at rapid rate then it becomes an important matter to decide whether
the company should buy the parts and components or increase and establish its facilities to cope
up with the increased demand and sales. This will be greatly concern to materials management
department. It will help in selecting the suppliers to buy the items at reduced cost. The material
evaluation, its availability, alternative materials selection, procurement and inventory control are
the functions influence the make and buy decisions. The make and buy decisions are largely
based on cost economics and cost benefit analysis made by the organization using the existing
production capacity of labour, skill and machines available with the factory and how best they
can be utilized.
Factors that may influence firms to buy a part externally include:
 Lack of expertise
 Suppliers' research and specialized know-how exceeds that of the buyer
 cost considerations (less expensive to buy the item)
 Small-volume requirements
 Limited production facilities or insufficient capacity
 Desire to maintain a multiple-source policy
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Indirect managerial control considerations
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 Procurement and inventory considerations

 Brand preference
 Item not essential to the firm's strategy
(iv) Coding and Classification of Materials

This is an important function of the materials management to help the production and purchasing
department of every organization. It uses its own methods of classification of materials used to
manufacture the product or a company selling various goods. ABC analysis is one of the simple
and standard method used by most of the firms for classification and storing their variety of
materials.
The materials are recognized to purchase and store as an inventory by its codes and
nomenclatures. The various methods of coding are used by every organization to control the
variety of materials and its quantity and price rates.
(v) Forecasting and Planning

Materials requirements planning is based on correct forecasting of sales and demand of the
products in the market. The market fluctuations are to be observed to control production of the
organization. The various methods of forecasting are available and the materials management
department can choose the one which gives the best results to the company. Forecast of future
demand of sales sets the planning of materials supply. Analytical methods are adopted for
systematic forecasting and planning to procure the various materials required for production. In
case of fluctuating demands, there can be uncertainties in supply as well. This can be overcome
by maintaining the proper quantity in inventory of short supply materials at proper time. The
different techniques available to use correct forecasting have to be utilized by materials manager
to plan the procurement, purchase, supply, managing the outside and inside transport and storing
of the materials to maintain the supply chain lines at every production facility to meet the changes
in production quantity and schedule of production to meet the fluctuating demand of sales of
products manufactured by the organization.
To fulfill the objectives and functions of materials management and control the activities of this
department, they are thoroughly studied and analyzed.
The main functions of materials management are summarized as follows:

 Materials planning as per production requirements for quantity and time
 Purchasing the required materials
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 Make or Buy decisions

 Receipts and inspections of materials
 Storage, warehousing securities and preservation
 Distribution of materials
 Transportation should be expedited and must be economically done
 Inventory control
 Disposal of over stock, surplus, scrap and salvage of materials
 Developing new sources of supply at competitive way
 Ancillaries industrial development
 Indigenous source of supply for foreign materials
 Material cost control and cost reduction
 Co-ordination and co-operation with the other departments
 Research and developments in materials management and their use
OPERATING CYCLE
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UNIT 2 PURCHASING MANAGEMENT
Purchasing is an important function of materials management. In any industry purchase means

buying of equipments, materials, tools, parts etc. required for industry. The importance of the purchase
function varies with nature and size of industry. In small industry, this function is performed by
works manager and in large manufacturing concern; this function is done by a separate department.
The moment a buyer places an order he commits a substantial portion of the finance of the corporation
which affects the working capital and cash flow position. He is a highly responsible person who
meets various salesmen and thus can be considered to have been contributing to the public relations
efforts of the company. Thus, the buyer can make or mar the company‘s image by his excellent or
poor relations with the vendors.
DEFINITION :
The purchasing can be defined as the process of buying and procuring the materials, parts, components,
equipments, spare parts, tools and supporting items required by industries or any organization to deliver
its products as per customer requirements at the competitive rates and of good quality.
OBJECTIVES OF PURCHASING
The basic objective of the purchasing function is to ensure continuity of supply of raw materials, sub-
contracted items and spare parts and to reduce the ultimate cost of the finished goods. In other words, the
objective is not only to procure the raw materials at the lowest price but to reduce the cost of the final
product. The objectives of the purchasing department can be outlined as under:
 To avail the materials, suppliers and equipments at the minimum possible costs:
These are the inputs in the manufacturing operations. The minimization of the input cost increases the
productivity and resultantly the profitability of the operations.
 To ensure the continuous flow of production through continuous supply of raw materials,
components, tools etc. with repair and maintenance service.
 To increase the asset turnover: The investment in the inventories should be kept minimum in
relation to the volume of sales. This will increase the turnover of the assets and thus the
profitability of the company.
 To develop an alternative source of supply: Exploration of alternative sources of supply of
materials increases the bargaining ability of the buyer, minimisation of cost of materials
and increases the ability to meet the emergencies.
 To establish and maintain the good relations with the suppliers: Maintenance of good
relations with the supplier helps in evolving a favourable image in the business circles. Such
relations are beneficial to the buyer in terms of changing the reasonable price, preferential
allocation of material in case of material shortages, etc.
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 To achieve maximum integration with other department of the company: The purchase
function is related with production department for specifications and flow of material,
engineering department for the purchase of tools, equipments and machines, marketing
department for the forecasts of sales and its impact on procurement of materials, financial
department for the purpose of maintaining levels of materials and estimating the working capital
required, personnel department for the purpose of manning and developing the personnel of
purchase department and maintaining good vendor relationship.
 To train and develop the personnel: Purchasing department is manned with varied types of
personnel. The company should try to build the imaginative employee force through training and
development.
 Efficient record keeping and management reporting: Paper processing is inherent in the
purchase function. Such paper processing should be standardised so that record keeping can be
facilitated. Periodic reporting to the management
PURCHASING POLICY AND PROCEDURES :

Purchasing Policy : Every organization sets the purchasing policy. In order to accomplish the aims and
objectives of the organization, the directives and instructions issued to purchase the materials are called
the policy of purchasing. Policy means the set of principles, purposes and rules of action framed written
or otherwise applied to fulfill the goals of organization.
Advantages and Disadvantages of Policies

Advantages
 Policies define and clarify top management objectives.

 The written instructions communicate views of management.
 It provides guidance to the person to adopt the working method of same type.
 It provides framework for decision-making.
Disadvantages
 In large size organization it is difficult to communicate the policy and particularly the changes,
which are made quite often.
 All the employees may not be aware of the purpose of policy.
 Greater the number of policies it is more difficult to create awareness.
PROCEDURES OF PURCHASING :
The policy statements are guidelines and they should be difficult to understand. Lengthy and too many
policies have to be avoided. The purchasing policy provides the guidelines and direction in the
following categories. It defines:
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(a) Rules of purchasing

(b) Conduct of purchasing personnel
(c) Social and minority business objectives
(d) Operational issues
PURCHASING PROCEDURE
The procedure describes the sequence of steps leading to the completion of an identified specific
task. The purchasing procedure comprises the following steps as indicated in Fig.
1. Recognition of the need: The initiation of procedure starts with the recognition of the need by the
needy section. The demand is lodged with the purchase department in the prescribed Purchase Requisition
Form forwarded by the authorised person either directly or through the Stores Department. The purchase
requisition clearly specifies the details, such as, specification of materials, quality and quantity, suggested
supplier, etc. Generally, the low value sundries and items of common use are purchased for stock while
costlier and special items are purchased according the production programmes. Generally, the corporate
level executives are authorized signatories to such demands. Such purchases are approved by the Board of
Directors. The reference of the approval is made on requisition and a copy of the requisition is sent to the
secretary for the purpose of overall planning and budgeting.
2. The Selection of the supplier: The process of selection of supplier involves two basic aspects:
searching for all possible sources and short listing out of the identified sources. The complete information
about the supplier is available from various sources, such as, trade directories, advertisement in trade
journals, direct mailing by the suppliers, interview with suppliers, salesmen,
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uggestions from business associates, visit to trade fair, participation in industries convention, etc.
Identification of more and more sources helps in selecting better and economical supplier. It should be
noted that the low bidder is not always the best bidder. When everything except price is equal, the low
bidder will be selected. The important considerations in the selection are the price, ability to supply the
required quantity, maintenance of quality standards, financial standing etc. It should be noted that it is not
necessary to go for this process for all types of purchases. For the repetitive orders and for the purchases
of low-value, small lot items, generally the previous suppliers with good
records are preferred.
3. Placing the order: Once the supplier is selected the next step is to place the purchase order. Purchase
order is a letter sent to the supplier asking to supply the said material. At least six copies of purchase
order are prepared by the purchase section and each copy is separately signed by the purchase officer. Out
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
4. Follow-up of the order: Follow-up procedure should be employed wherever the costs and risks
resulting from the delayed deliveries of materials are greater than the cost of follow-up procedure, the
follow-up procedure tries to see that the purchase order is confirmed by the supplier and the delivery is
promised. It is also necessary to review the outstanding orders at regular intervals and to communicate
with the supplier in case of need. Generally, a routine urge is made to the supplier by sending a printed
post card or a circular letter asking him to confirm that the delivery is on the way or will be made as per
agreement. In absence of any reply or unsatisfactory reply, the supplier may be contact through personal
letter, phone, telegram and/or even personal visit.
5. Receiving and inspection of the materials: The receiving department receives the materials supplied
by the vendor. The quantity are verified and tallied with the purchase order. The receipt of the materials is
recorded on the specially designed receiving slips or forms which also specify the name of the vendor and
the purchase order number. It also records any discrepancy, damaged condition of the consignment or
inferiority of the materials. The purchase department is informed immediately about the receipt of the
materials. Usually a copy of the receiving slip is sent to the purchase department.
6. Payment of the invoice: When the goods are received in satisfactory condition, the invoice is checked
before it is approved for the payment. The invoice is checked to see that the goods were duly authorised
to purchase, they were properly ordered, they are priced as per the agreed terms, the quantity and quality
confirm to the order, the calculations are arithmetically correct etc.
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7. Maintenance of the records: Maintenance of the records is an important part and parcel of the
efficient purchase function. In the industrial firms, most of the purchases are repeat orders and hence the
past records serve as a good guide for the future action. They are very useful for deciding the timings of
the purchases and in selecting the best source of the supply.
8. Maintenance of vendor relations: The quantum and frequency of the transactions with the same key
suppliers provide a platform for the purchase department to establish and maintain good relations with
them. Good relations develop mutual trust and confidence in the course of the time which is beneficial to
both the parties. The efficiency of the purchase department can be measured by the amount of the
goodwill it has with its suppliers.
SELECTION OF SUPPLIER
Selection of the right supplier is the responsibility of the purchase department. It can contribute
substantially to the fundamental objectives of the business enterprise. Different strategies are required
for acquiring different types of materials. The selection of supplier for standardised products will
differ from non-standardised products. Following factors are considered for the selection of suppliers:
SELECTION OF SOURCES OF SUPPLIER AND VENDOR DEVELOPMENT
The best buying is possible only when the decision maker is familiar with all possible sources of
supply and their respective terms and conditions. The purchase department should try to locate the
appropriate sources of the supplier of various types of materials. This is known as ‗survey stage‘.
The government department, large manufacturing and business companies like public sector firms keep
the records of approved suppliers depending upon their
(i) Manufacturing capabilities
(ii) Financial conditions
(iii) Reputation
(iv) Service facility
(v) Quality of product produced by them
(i) Trade Journals and Trade Directories

Trade journals or magazines routinely publish the information about different companies about their
technical or innovative developments of a material, product, process or service. Advertisements in trade
journals about the products and services also help in selection of suppliers. Almost all the industries
publish the directories of firms and companies which produce their items and services required to
facilitate to refer to the selection of supplier and vendors.
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(ii) Industrial Exhibitions and Trade Fairs

These are the best ways of exposure directly for the industrial products to sell and purchase of items. It is
also exhibiting the latest technological developments, introduction of new products and information about
latest prices.
(iii) Internet Searches
Now the internet is providing lot of information and access to the remote suppliers. Ecommerce and E-
Business is helping to make direct purchase from the manufacturers to get the items worldwide.
(iv) Local or Distant Suppliers
The problems associated with distant supplies is that the cost of transportation, packing, insurance, sales
tax and octroi etc. are high and the repair and maintenance become difficult by such suppliers. Therefore,
it is always preferred to select local suppliers to purchase the materials provided their performance and
prices are comparable to distance suppliers.
(v) Small or Big Suppliers
There are various types of companies and manufacturers in India for example, largescale manufacturers,
medium scale, small scale and mini-scale manufacturing concerns. Each one is having its own advantages
and disadvantages for supplying their products. Large-scale manufacturers find large potential buyers.
They supply goods at cheaper cost. The small-scale manufacturers however render more attention to their
clients and ensure about quality of items and delivery time.
VENDOR DEVELOPMENT:
The survey stage highlights the existence of the source. A business inquiry is made with the appropriate
supplier. It is known as ‗Inquiry Stage‘. Here a short listing is made out of the given sources of suppliers
in terms of production facilities and capacity, financial standing, product quality, possibility of timely
supply, technical competence, manufacturing efficiency, general business policies followed, standing in
the industry, competitive attitude, and interest in buying orders etc. A survey of the following will help in
developing the possible sources of supply
 Specialised trade directories.
 Assistance of professional bodies or consultants.
 The buyer‘s guide or purchase handbook.
 The manufacturer‘s or distributor‘s catalogue.
 Advertisements in dailies.
 Advertisement in specialised trade journals.
 Trade fair exhibitions.
Hence these above plays a major role in vendor development.
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VENDOR EVALUATION:
The evaluation of supplier is done through the weightage assigned by measuring their performance by
purchase. The criteria are
1. Cost price 2. Quality 3. Delivery
The following variables to be considered while evaluating the quotations of the suppliers:
1. Cost factors: Price, transportation cost, installation cost if any, tooling and other operations cost,
incidence of sales tax and excise duty, terms of payment and cash discount are considered in cost factor.
2. Delivery: Routing and F.O.B. terms are important in determining the point at which the title to the
goods passes from vendor to the buyer and the responsibility for the payment of the payment charges.
3. Design and specification factors: Specification compliance, specification deviations, specification
advantages, important dimensions and weights are considered in line with the demonstration of sample,
experience of other users, after sale services etc.
4. Quality performance: The buyer can compare the supplier quality and define supplier quality
performance
5. Legal factors: Legal factors include warranty, cancellation provision, patent protection, public
liability, federal laws and reputation compliance
VENDOR RATING:
Vendor rating: The evaluation of supplier or vendor rating provides valuable information which help in
improving the quality of the decision. In the vendor rating three basic aspects are considered namely
quality, service and price. How much weight should be given to each of these factors is a matter of
judgment and is decided according to the specific need of the organization. Quality would be the main
consideration in the manufacturing of the electrical equipments while price would be the prime
consideration in the product having a tense competitive market and for a company procuring its
requirements under the blanket contract with agreed price, the supplier rating would be done on the basis
of two variables namely quality and delivery.
In order to compare the performance of various vendors, it is necessary to rate them. The rating of
supplier (vendor) will be done on the following parameters.
(i) Quality performance
(ii) Delivery performance
(iii) Price performance
(i) Quality Performance
The supplier can be judged for quality performance from the view point of rejected lots. If a supplier has
supplied 100 pieces and 10 pieces are rejected out of this lot, he has rating of 90%.
Weightage = Number of lot accepted
X 100
Number of lot supplied
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(ii) Delivery Performance

Delivery performance can be made in two ways
(a) Adherence to time schedule
(b) Adherence to quantity schedule.
(a) Adherence to time schedule
Number of deliveries made in time × weightage
Total number of scheduled delivery
(b) Adherence to quantity schedule
Quantity supplied × weightage
Scheduled delivery
(iii) Price Performance
Price is very important criterion for evaluating a vendor which is as = Minimum price offered ×
weightage vendor‘s price.
PURCHASING METHODS :
The following are some of the important purchasing methods:
1. Forward buying: Forward buying or committing an organization far into the future, usually for a year.
Depending upon the availability of the item, the financial policies, the economic order quantity, the
quantitative discounts, and the staggered delivery, the future commitment is decided. This type of forward
buying is different from speculative buying where the motive is to make capital out of the price changes,
by selling the purchased items. Manufacturing organizations normally do not indulge in such buying.
However, a few organizations do ‗Hedge‘, particularly in the commodity market by selling or buying
contracts.
2. Tender buying: In public, all semblance of favouritism, personal preferences should be avoided. As
such, it is common for government departments and public sector undertakings to purchase through
tenders. Private sector organizations adopt tender buying if the value of purchases is more than the
prescribed limits as Rs. 50000 or Rs. 100000. The steps involved are to establish a bidders‘ list, solicit
bids by comparing quotations and place the order with the lowest bidder. However, care has to be taken
that the lowest bidder is responsible party and is capable of meeting the delivery schedule and quality
requirements. Open tender system or advertisement in newspapers is common in public sector
organizations. As advertising bids is costly and time consuming, most private sector organizations solicit
tenders only from the renowned suppliers capable of supplying the materials.
3. Blanket order system: This system minimizes the administrative expenses and is useful for ‗C‘ type
items. It is an agreement to provide a required quantity of specified items, over a period of time, usually
for one year, at an agreed price. Deliveries are made depending upon the buyer‘s needs. The system
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relieves the buyers from routine work, giving him more time for focusing attention on high value items. It
requires fewer purchase orders and thus reduces clerical work. It often achieves lower prices through
quantity discounts by grouping the requirements. The supplier, under the system maintains adequate
inventory to meet the blanket orders.
4. Zero stock: Some firms try to operate on the basis of zero stock and the supplier holds the stock for
these firms. Usually, the firms of the buyer and seller are close to each other so that the raw materials of
one is the finished products of another. Alternatively, the system could work well if the seller holds the
inventory and if the two parties work in close coordination. However, the price per item in this system
will be slightly higher as the supplier will include the inventory carrying cost Operations Management in
the price. In this system, the buyer need not lock up the capital and so the purchasing routine is reduced.
This is also significantly reduces obsolescence of inventory, lead time and clerical efforts in paper work.
Thus, the seller can devote his marketing efforts to other customers and production scheduling becomes
easy.
5. Rate contract: The system of rate contract is prevalent in public sector organizations and government
departments. It is common for the suppliers to advertise that they are on ‗rate contract‘ for the specific
period. After negotiations, the seller and the buyer agree to the rates of items. Application of rate contract
has helped many organizations to cut down the internal administrative lead time as individual firms need
to go through the central purchasing departments and can place orders directly with the suppliers.
However, suppliers always demand higher prices for prompt delivery, as rate difficulty has been avoided
by ensuring the delivery of a minimum quantity at the agreed rates. This procedure of fixing a minimum
quantity is called the running contract and is being practised by the railways. The buyer also has an option
of increasing the quantity by 25% more than the agreed quantity under this procedure.
6. Reciprocity: Reciprocal buying means purchasing from one‘s customers in preference to others. It is
based on the principle ―if you kill my cat, I will kill your dog‖, and ―Do unto your customers as you
would have them do unto you‖. Other things, like soundness from the ethics and economics point of view
being equal, the principles of reciprocity can be practiced. However, a purchasing executive should not
indulge in reciprocity on his initiative when the terms and conditions are not equal with other suppliers. It
is often sound that less efficient manufacturers and distributors gain by reciprocity what they are unable
to gain by price and quality. Since this tends to discourage competition and might lead to higher process
and fewer suppliers, reciprocity should be practised on a selective basis.
7. Systems contract: This is a procedure in tender to help the buyer and the sellers to reduce
administrative expenses and at the same time ensure suitable controls. In this system, the original indent,
duly approved by competent authorities, is shipped back with the items and avoids the usual documents
like purchase orders, materials requisitions, expediting letters and acknowledgements,
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delivery period price and invoicing procedure, Carborandum company in the US claims drastic reduction
in inventory and elimination of 40000 purchase orders by adopting the system contracting procedure. It is
suitable for low unit price items with high consumption.
IMPORT PURCHASING :
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BUYER SELLER RELATIONSHIP :
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UNIT 3 STORES MANAGEMENT
Stores play a vital role in the operations of company. It is in direct touch with the user departments in its
day-to-day activities. The most important purpose served by the stores is to provide uninterrupted service
to the manufacturing divisions. Further, stores are often equated directly with money, as money is locked
up in the stores. Finished parts or products ready for shipment and sale are called stock and they are
separately stored in a place called stockroom. Each and every type of material needs a separate place, bin
or container and a room to keep it and the type of store depends upon the type of material which is stored
there. The position of stores is usually located near the production facility as indicated in the Fig. 1 below.
FUNCTIONS OF STORES :
The functions of stores can be classified as follows:
 To receive raw materials, components, tools, equipment‘s and other items and account for them.
 To inspect and check the material after receipt and before storing it.
 To provide adequate and proper storage and preservation to the various items.
 To meet the demands of the consuming departments by proper issues and account for the
consumption.
 To minimise obsolescence, surplus and scrap through proper codification, preservation and
handling.
 To highlight stock accumulation, discrepancies and abnormal consumption and effect control
measures.
 To ensure good housekeeping so that material handling, material preservation, stocking, receipt
and issue can be done adequately.
 To maintain the materials efficiently, avoid wastages and thefts etc.
 To assist in verification and provide supporting information for effective purchase action.
 To keep up-to-date records of all incoming and out-going materials to match with the balance in
the stores.
ORGANISING STORES:
The stores are organised according to types of materials received in the organisation for storing and
layout and location of stores. The activities of stores department are as follows:
Planning all the materials required for storing
Receipt of materials
Inspection and verification of all the materials received
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Storing and issue of materials

Preservation and maintenance of materials stored
Transport and materials handling
Record keeping of all the items
Stock taking and auditing
Inventory control
Finished goods inventory packing and dispatching
LAYOUT :
The selection of location is a key-decision as large investment is made in building plant and
machinery. It is not advisable or not possible to change the location very often. So an improper location
of plant may lead to waste of all the investments made in building and machinery, equipment. Before a
location for a plant is selected, long range forecasts should be made anticipating future needs of the
company. The plant location should be based on the company‘s expansion plan and policy,
diversification plan for the products, changing market conditions, the changing sources of raw materials
and many other factors that influence the choice of the location decision. The purpose of the location study
is to find an optimum location one that will result in the greatest advantage to the organization.
The layout planning of stores is very important for the following reasons:
 Easy receipt, handling and issue of materials.
 Maintaining continuity in flow of materials. It should have minimum movement.
 The space for storing and handling the materials should be fully utilised.
 Proper places are selected for storing proper type of materials.
 Location should be such that minimum time and labour will be necessary to locate and get the
materials.
 Rearrangement of storage can be done easily if necessary.
 Unloading platforms for quick receiving and disposal must be built at suitable height.
 Layout should be economic and efficient.
The methods of storing and layout must be such that it will eliminate wastage, erosion, rusting and
deterioration. For that proper preservation, safety and inspection process must be used to prevent all these
things.
Looking to the above considerations necessary, the following types of layouts are suggested:
 Straight through flow
 Straight line flow
 Layout of work element
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(1) Straight Through Flow

It is simple layout. The item enters from one door, they are placed in straight rows. They will be picked
from rows and move in one direction along the stores bay. Different types of stores will be arranged in
every row and around that sufficient movement spaces will be provided. The large warehouses for the
agricultural materials will have this type of arrangements. The centralised stores of industry will also have
this layout
(2) Straight Line Flow

In this layout, the stores are arranged according to items incoming and outgoing from each of the storing
places. They are arranged in such a way so that straight line flow of material is done. This arrangement is
shown below. The small items are normally stored in such stores
(3) Layout of Work Element

The stores are arranged according to work element grouping together for that particular work. These types
of arrangements are flexible enough to arrange for slow moving, medium moving and fast moving items.
The layout can be changed easily.
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PHYSICAL VERIFICATION :
Stock Verification:
Stock Verification may be defined as the process of physically counting, measuring or weighing the entire
range of items in the stores and recording the results in a systematic manner.
Need for Stock Verification:

Stores represent cash. It should be carefully protected, stored, checked and valed at the close of a perios.
Since the value of stock is usually very much greater than the cash held at t time, It is necessary to verify
time to time in order to ensure that the materials purchased and stored are intact in the storehouse and
their quality and quantity have not detoriated dring the storage process. Hence Stock verification is
needed.
STOCK TAKING AND AUDITING :

All the materials received in the stores and kept as inventory must be audited time to time as a materials
management system to keep proper records. It must be followed to account the receipt, issue and balance
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of materials and goods. The system may be handled manually or by computer database. Today, the
various softwares have been developed to use computerised materials management system for keeping all
records accurately and it is very helpful for auditing the stores records. The standardization,
simplification, classification, coding and identification of materials are very necessary in a materials
management system for storage and handling the materials. Store control is provided by properly
recording the receipt and issue of materials and its physical verification.
The following things are recorded in a systematic stores management system.
 Using suitable codes and nomenclature of the materials.

 Classification of different items received in the stores.
 Rates of each item and their total cost and quantity.
 Dates and quantity of receipt and issue of materials.
 Names of suppliers.
 Standards and specifications of the materials.
 Methods of preservation, time of expiry and life of materials use.
 Location of storage place of various items.
Some fool-proof methods of verification of all these records and stock taking must be used to physically
control and check the inventories of all the materials and goods stored. If the discrepancies are
discovered, its causes must be found out, errors should be corrected and persons who are responsible must
be informed and warned about this so that in future this thing will not be repeated. The control must be
exercised by the stores supervisors and unauthorised entry of any person in the stores must be prevented.
MATERIAL HANDLING :
Materials Handling is defined as movement of materials in the plant from receiving center to distribution
places and production centers. It is loading and unloading of different types of materials to and from the
transporting vehicles or material handling devices. Keeping the materials in different racks, storage places
and bins by the material handling equipments helps the material management personnel.
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The objectives of materials handling are

 It increases space utilization by keeping the materials in racks one above the other. The materials
handling generally affect space requirements. Storing various types of materials like raw materials, parts,
sub assemblies, assemblies and finished parts is facilitated by material handling devices and methods,
stored at proper space.
 The operating efficiency is improved by reducing material handling. Material handling involves
movement of materials mechanically using different equipments or manually. By increasing load per
movement using proper material carriages improves productivity and saves cost of materials handling.
 The timely delivery of materials to production center or customer is essential criteria in material
handling. Materials, parts and finished products must be moved from the place of storage to their
destination speedily and efficiently. It improves service level if speed of movement of materials is
increased.
 Reducing production cost by increased capacity, improving working conditions, improving
customer services, increased equipment and space utilization and reducing cost of materials handling. The
material handling problems are what materials are moved, who will move and how it will be moved. They
are divided in to the types of materials, how moved and methods of handling them. It enables results of
reactions of man, materials and machines.
Functions of materials handling
Planning the plant layout, building and production center to suit the particular type of materials
handling equipments.
To minimize the movement of materials and material transportation.
Increase the speed of material handling equipments and devices.
Eliminating the backtracking or minimizing it. The flow of material should be planned so that
distance moved is minimum.
Material handling devices should be safe and its movement should be such that accident should
not occur.
Wastage of materials should be avoided during materials movement, loading and unloading. The
packages should not be damaged.
The cost of materials handling should be minimum.
The persons operating the materials handling equipments should be trained for their efficient
handling and safe working.
Selection of Materials Handling Equipments
(i) It depends on types of materials moved. The size, shape, weight and volume of the materials
decide the type of materials handling equipments to be used.
(ii) Physical and chemical properties of materials decides the type of containers to be used to
carry them. Solid, liquid and gaseous materials are carried in different types of containers.
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(iii) Layout of the plant, production center and other facilities are designed to suit the materials
handling. Types of buildings, width of roads, corridors, pavements, floor levels, doors, height ceiling, size
of rooms and storing places, single-storey buildings and multi storey buildings decides the types of
transportation system used in materials handling and types of equipments are to be used in handling the
materials. Use of conveyors and type of trucks are developed according to design of all the things
mentioned above.
(iv) Methods, direction and movement of materials also decide the type of materials handling
equipments, which are to be used. The liquids and gases will flow through pipes. Small materials like
coal, ores and powdered materials flow through various types of conveyors. Trucks, overhead cranes and
lifts carry large materials. Movement of these materials can be horizontal or vertical.
(v) Types of machines and equipments used for production also decide the type of material
handling equipments are to be used. Various types of machines are used to produce different types of
parts. The production can be continuous or intermittent. The CNC machines used in Flexible
Manufacturing requires different types of material movement with pallet loading and uses robots to carry
materials and parts. All the materials handling system is automatically controlled by computers.
(vi) Production processes and methods of manufacturing are main things to decide the type of
material handling equipments. The different types of production processes and manufacturing methods
require different types of material handling devices and equipments.
The various factors, which are considered for selection of equipments for materials handling, are also
based on the following things:
1) Material handling cost.
2) Cost of material handling equipments.
3) Material handling efficiency and automation needed.
4) Life of equipment.
5) Safety of equipments.
6) Maintenance of material handling equipments.
7) Ease of operation.
Types of Material Handling Equipments

There are several types of material handling equipments used in Industry. They are operated manually.
They are also operated mechanically or by using computers and other electrical and electronic devices.
For convenience they are divided into four basic types of equipments used in Industries given as follows.
(1) Conveyors.
(2) Industrial trucks.
(3) Cranes and Hoists
(4) Auxiliary equipment.
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1. Conveyors: The conveyors are material handling devices used to move materials horizontally or
vertically from one point to other point over fixed path. They are expensive devices and need space and
fixed route. They are gravity or powered devices commonly used for moving uniform loads continuously.
The primary function of conveyor is conveying the materials. The various types of conveyors are used in
industries for materials handling are:
(1) Belt Conveyors.
(2) Roller Conveyors.
(3) Trolley conveyors.
(4) Pneumatic Conveyors.
(5) Buckets.
(6) Chutes.
(7) Pipes.
Conveyors are useful for movement of materials between two fixed points for uniform
loads. Materials move continuously with constant load in a fixed path. It can handle hazardous
materials. The conveyors can carry materials at high temperature. The conveyors can be installed
overheads
2. Industrial Trucks: These are powered operated by using electricity, diesel, gasoline or propane. They
are also hand operated. They are used for variable or fixed speeds and used for the movement of mixed or
uniform loads over various paths having suitable running surfaces and clearances. Industrial trucks are
more flexible than conveyors. They can be moved anywhere. They do not occupy fixed space. Since they
can be transported anywhere they are very useful to carry materials and handling them in a manufacturing
plant. The various types of Industrial trucks used in materials handling are
(i) Two wheel hand trucks.
(ii) Fork lift trucks
(iii) Hand Stacker.
(iv) Walkie trucks.
(v) Tractor-trailer train.
(vi) Platform truck.
Industrial trucks are used to move the materials intermittently, stacking materials over racks and over
different routes. Loading and unloading is also easy in these equipments
3. Cranes and Hoists: The cranes and hoists are the material handling devices, which can move materials
horizontally or vertically. They are overhead devices used for moving varying loads intermittently
between points within an area, and can be moved in a fixed area of operation. They are supported and
guided on rails. Their primary function is transferring materials. They can be used to move heavy loads
and large items. They are flexible to move the materials. The various types of cranes and hoist used are
given as follows.
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(i) Overhead travelling cranes.

(ii) Gantry crane
(iii) Jib crane.
(iv) Stacker crane.
(v) Mono rail.
(vi) Hoists.
Cranes and hoists are used for movement of materials in fixed area intermittently. They can handle
variable load of different shape, size and weight of materials. It can transfer material from any location,
which is within the range of the crane. Safety is very necessary in the area where cranes and hoists are
operating. The safety devices must be used in their operation.
4. Auxiliary equipment: These equipments are devices or attachments used with material handling
equipment to make its use more effective.They are classified as:
(i) Pallets and skids.
(ii) Containers.
(iii) Below – the – hook devices (for cranes).
(iv) Lift truck attachment.
(v) Dock boards and levelers.
(vi) Pallet loaders and unloaders.
(vii) Positioners.
(viii) Ramps.
(ix) Weighing equipments.
They are again considered to classify on the basis of
(1) Their capabilities.
(2) Factors considered in analyzing material handling problems.
CODIFICATION:
The code numbers can identify the various materials used in any organization. The codification is defined
as giving a symbol or a numerical code to a particular item. This number or symbol is the unique code
number of the item. After classification of different items in the store in to sub-groups and groups
according to their characteristics and use for exact identification of that material or item a code is allotted.
This code can be a number or symbol consisting alphabets and numbers together. For example, the blue
color for painting iron parts is used and its code number can be Pb2054. The suppliers or manufacturers
also use their trade names and numbers for the items, which they sell. But these trade names or brand
names of companies are many a time confusing. They supply various items in the trade names.
For example, Bajaj company sell large variety of goods by its trade name and symbol. Therefore, to avoid
the confusion and to purchase, store and supply to production department a specific item of required
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quality and characteristics the materials management identify every item by a unique code. All the
organizations follow some method of standard coding system. There are different types of coding systems
used to suit different firms depending upon the type of materials they are using and selling. Whichever
method is used for coding, it should be flexible and simple to adopt. It should not be confusing.
Advantages of Codification
The systematic coding has number of advantages for purchase, stores and production department. It is the
part of materials management activity.
 The long names and description of items need not to be repeated every time when an item is
referred by code.
 It helps in accurate identification of a particular item.
 Duplication of material is avoided.
 It helps in standardization of materials and products and reduces variety of them.
 The storing of materials, sorting and documentation becomes easier.
 It helps in location of materials.
 It helps in accounting and costing.
 It is useful for purchase department to select suppliers.
 It is useful for communication of information about materials.
Disadvantages of Codification
 The mistakes may be there in writing codes and it is difficult to find out correct codes.
 Codes may be misunderstood.
 When large number of codes is used for different materials, there may be confusion
 and it may be difficult to locate the materials without knowing the codes.
CODIFICATION SYSTEMS:
The various types of systems of codification used in the materials management are as follows.
(i) Numerical system
(ii) Alphabetical system
(iii)Mnemonic system
(iv) Alpha-numeric system
(v) Decimal system
(i) Numerical system: The numerical system of codification uses only numbers as codes of various
materials kept in the stores. It is a simple method and most of the organizations use this system of
codification. It is also easily understood. To represent different groups of items, simple numbers are used.
The block numbers are used to represent materials belonging to each of these items as sub-groups and a
dash (-) or stroke (/) symbol is used in between the numbers to represent particular material in the
subgroup.
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Simple number: Either one number 0 to 9 is allotted to each item of a group. If total items in a
group are more than 10, then two numbers 00 to 99 are allotted and so on.
Block number: The material of same characteristics or having similarities are subgrouped as one
item. These materials of sub-groups will be coded as block number. The block can be of three or more
numbers for example 1–1000 or 1001–2000 etc.
Symbol Dash (-) or stroke (/): It is used in between numbers to represent the material belonging to
sub-group.
(ii) Alphabetical system: In alphabetical system the ‗Alphabets‘ are used as symbols or codes to identify
the items of stores. Group of items according to their nature and use are allotted an alphabetical starting
code and other alphabets are used to identify exact items. This system will be suitable when the number
of items in the store will be less. While coding by alphabets, the duplication of symbols should be
avoided.
(iii) Mnemonic system: This coding system also uses alphabets but the group of items according to their
nature and use are allotted an alphabetical starting code from their names and other alphabets are used to
identify exact item. This is given below. Use of starting alphabets as codes helps in memorizing the
codes.
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(iv) Alpha-numeric system: The alphabets and numbers together are used in this system of coding. The
group of items is coded by alphabets and subgroups and items of these groups are coded by numbers to
identify the exact item. This system has advantage of both alphabetic and numeric system. The numbers
used also give specifications like size, length, breadth, thickness, height, volume and weight etc.
(v) Decimal system: This system of codification is similar to numeric system. In this system, 10 units of
decimal numbers 0-9 are used. Some significance is attached to every digit. Normally 7-8 digits are
sufficient to give all characteristics of items. For example, first, second and third digits give class, group
and sub-group of items. Fourth to eighth digits specify type, size, grade, shape and condition. The number
before the decimal point represents sub-assembly or class of items.
If for any particular class characteristics more than 10 sub divisions are required then one digit decimal
system can be substituted by two-digit decimal system. For example, for type, size and grade, more than
10 divisions are required then decimal is used after every two digits for type, size and grade to codify 100
items in each from 00-99 as shown below:
The decimal codification system is flexible to extend it but becomes complicated by using decimal points
at various places. If the decimal point is wrongly inserted or omitted in the code, the whole system will
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give wrong codes and confusion will create for other departments. Therefore, it is necessary to put
decimal at correct place by understanding its significance by stores person.
INVENTORY PRICING:
Pricing of Raw Materials
When issues are made out of various lots purchased at varying prices, the problem arises as to which of
the receipt price should be adopted for valuing the materials requisitions.
1. First in first out
Materials received first will be issued first. The price of the earliest consignment is taken first and when
that consignment is exhausted the price of the next consignment is adopted and so on. This method is
suitable in times of falling prices, because the material charge to production will be high while the
replacement cost of materials will be low.
2. Last in first out
Materials received last will be issued first. The price of the last consignment is taken first and when that
consignment is exhausted the price of the second last consignment is adopted and so on. In timing of
rising prices this method will show a charge to production, which is closely related to current price
levels provided that the last purchase is made recently.
3. Weighted average cost method
Under this method, material issued is priced at the weighted average cost of material in stock:
WAC = Value of material in stock/Quantity in stock.
4. Standard price method
Under this method a standard price is predetermined. The price of issues predetermined for a stated
period taken into account all the factors affecting price such as anticipated market trends, transportation
charges, and normal quantity of purchase. Standard prices are determined for each material and material
requisition are priced at standards irrespective of the actual purchase price. Any difference between the
standard and actual price results in materials price variance.
5. Current price
According to this method, material issued is priced at their replacement or realizable price at the time of
issue. So the cost at which identical material could be purchased from the market should be ascertained
and used for valuing material issues.
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MANAGEMENT INFORMATION SYSTEM (MIS) :

It can be defined as an organised network of information flow aimed at supporting management by
furnishing relevant, reliable and timely information. Use of personal computers and electronic data
processing equipments in integrated data processing systems has provided materials executives with the
tools to handle information flows with unbelievable speed, facility and accuracy. The increasing use of
computers in many organisations has kindled new awareness of information needs and materials
intelligence.
Material intelligence concept:

The terms, materials, intelligence, purchase intelligence, creative purchasing, purchase information
system, materials research , material information system, etc., signify one and the same system which
helps the material manager to know where the required item is. Material research becomes important
accounting for the bulk of cash outflow in te company. According to our research study, this is the most
neglected area of materials management.
Materials research includes the steps involved in systematic investigation for locating alternative supply
sources. In this context, research is defined as the concept of purposive analysis that tries to establish a
basis for prediction and control
Objectives of Material Intelligence:

 The material intelligence should be a subsystem of total corporate information system
 The selection of right quantity of information emphasises the fact that the life blood of any
business systems concept of operation is a flow of information
 Information is power. The objective of material information system should coincide with the
objective of the materials function- that is to ensure continuous supply of uniform quality of the
item with lowest cost of ultimate product/service rendered
 In this process, one has to weigh the costs and benefits of collection, compilation, analysis, and
presentation of the information.
 It may be worthwhile to concentrate on high cost, critical, long lead items initially for the purpose
of developing a system in sufficient detail to realise material management objectives.
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UNIT 4 MATERIALS PLANNING

FORECASTING:
Forecasting is the method of accurate determination of these demands of sales. It estimates the quantity of
production on the basis of forecasted demand. It involves past and present data and after its analysis, the
management is able to forecast the future requirements and decides the quantity and capacity of
production and operations
Types of Forecasting
1. Short-term forecasting
2. Long-term forecasting
1. Short-Term Forecasting
When the sales forecasting is done for three months to one year, it is called short-term forecasting. Some
of the items like perishable materials, vegetables, food products and some of the consumer items are
forecasted daily, weekly or monthly. The demands of these products fluctuate in short period of time.
Benefits of Short-Term Forecasting
(i) The fluctuating demands in short periods will be predicted and the inventories of materials have to
be kept to meet these fluctuations.
(ii) Reduce the investment on cost of large amount of materials and to machines.
(iii) To arrange the finances and control the cost.
(iv) To decide the short-term sales.
2. Long-Term Forecasting
When the sales forecasting is done for long period of time such as five years or more than five years, it is
called long-term forecasting. For construction of buildings and plants of large manufacturing organization
and large project works of Government, the long-term forecasting is done. Military organizations,
satellites launching, ship building, railways construction and petroleum refineries works use long-term
forecasting.
Benefits of Long-term Forecasting
(i) The future developments and expansion programs are based on long-term forecasting.
(ii) For economic development of rural and other areas where industrial activities are less, the long-
term planning and forecasting is necessary.
(iii) To meet long-term financial requirements of large manufacturing organization, longterm
forecasting is used.
Selection and Procedure for Forecasting

For selection of a forecasting method, the following things are necessary:
1. Accuracy of data. The data should be accurately available.
2. Cost of evaluation of data and forecasting should be economic.
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3. The method used for forecasting should be simple and easily adopted. It should be easy to understand.
4. Result-oriented technique should be adopted and it should give quick and timely results.
For selecting the procedure of the forecasting, the following points are useful.
(i) The proper method of forecasting should be selected.
(ii) Whether short-term or long-term forecasting is necessary will be decided before selecting the method
of forecasting.
(iii) Collect the data as much as required for forecasting.
(iv) Decide the length of period for which demand may not change much.
(v) Use proper statistical method and find the forecast results.
(vi) Select the time for forecast.
(vii) Avoid the complexity in using forecasting and use only those factors which affects more in demand
fluctuations.
(viii) For forecasting the demand for new products the analysis must be carefully done
FORECASTING METHODS:
The methods used for forecasting the new products are:
(1) Survey of customers
(2) Comparisons with existing products in demand
(3) Market research
(4) Market trials through sales agencies.
(1) Survey of Customers
This method is used for development of new products. There are two types of surveys can be done to
know the requirements of customers.
(i) Direct Survey Method
In this method, the customers are directly approached to know what they want to buy in near future
and how much. The sample survey of customers is done from different areas to know their liking.
Taking into consideration the various factors like economic conditions, social, religious and habitual
aspects of purchasing. This method has some of the advantages as follows.
(a) Buyers liking may be irregular and changing.
(b) The customers may not be able to select the particular thing properly from various alternatives.
They may have more than one choices.
(c) Economics and other factors will not allow the customers to buy the things of their choice.
(ii) Indirect Survey Method
The customer‘s purchasing habits and choices will be obtained from the market retail
and wholesale shops. Sales representatives and agents. This method will give the actual sales
of particular type of products in the market and customer requirements.
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(2) Comparisons with Existing Products in Demand

If the new product is to be developed and launched for sale in the market, it should be
compared with the existing established product of similar type. In competitive way, through
advertisement and sales promotion it can be substituted by customers for their use provided
that its price may be less and more attractive. The role of salesman is very important in this method as he
has better knowledge about customers‘ liking.
(3) Market Research
The various market conditions, political, social and economic environment are studied for product design
and development. The various factors, which are to be considered to promote the sales of new product,
are analyzed from the data available from the market and then the product is manufactured to suit the
customers of different markets.
(4) Market Trials Through Sales Agencies
How the customers prefer a particular product to buy and use will be tried through the trials from some
sales agencies or directly supplying the new product to customers. Gradually if the sales increase, the
product will be manufactured in more quantity. The salesman‘s estimate from his area is better in his
opinion to sell that product and it may be launched. For new product, all such trials from various areas are
collected and the final estimates are analyzed. For the products, which are already established for that
also, the salesman estimates are revised to consider the following factors in future sales:
(i) Design changes required in the product.
(ii) Changes in the prices because of design changes , material changes and improved
processes used to manufacture the product.
(iii) Techniques used for forecasting are projecting the future based on the past historical data and they
are also called projection methods of forecasting, for established products the time series analysis is
useful. It may be used for new products as well if available data are limited. All other methods given
above can also be used for forecasting the existing established products as well.
INVENTORY CONTROL:
The methods of inventory control vary from item to item which are stored as inventory. The items are
selected on the basis of their values and priorities and other factors. Thousands of materials are
purchased, stored and used during production processes every year in the company. Materials
management department of the company has to transact and manage them for effective control and
economic production. They will have to be classified and stored according to their cost, volume, use, and
other factors of production and efficient inventory control.
ABC ANALYSIS:
In this analysis, the classification of existing inventory is based on annual consumption and the annual
value of the items. Hence we obtain the quantity of inventory item consumed during the year and multiply
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it by unit cost to obtain annual usage cost. The items are then arranged in the descending order of such
annual usage cost. The analysis is carried out by drawing a graph based on the cumulative number of
items and cumulative usage of consumption cost. The ABC analysis is commonly used in most of the
organizations to classify the materials according to their sales values. In this method, all the items of
stores are classified in three groups as A, B and C as explained below.
1. The quantity of each item used annually multiply by its unit sales price is sales
2. value of that item. All such sales values of all the items are calculated and tabulated.
3. The items, its quantity sold and sales values are tabulated in decreasing order and
4. the sales values are added item-wise and shown in next column
5. The totals of quantity and sales values of all the items used annually are found out. The percentage
sales values of each item is found out and percentage of quantity of each item is also found out.
These two columns are added showing percentage of total sales values item wise and percentage
of total quantity of sales.
6. Seventy percent of total sales value items will be listed in A category. Its percentage quantity used
is found out.
7. About 20 % of total sales value items will be listed in B category. Its percentage quantity used is
found out.
8. Balanced about 10 % of total sales value items will be listed in C category . Its percentage
quantity will be remaining balance. This procedure will be understood by the example given
below.
Characteristics of ABC Items

A-Items
These items have 70% of sales value but less in quantity about 15 to 20%. The capital
should not be blocked in these items. They can be ordered frequently and consumed
immediately. The purchase of these items will be controlled by Director and cared most
in the company. They are only 10 to 15% quantity-wise and require special attention in
stores.
B-Items
They have about 20 to 25% sales value and same quantity to purchase. Since they are
medium valued items therefore large inventory of them is not necessary. They can be
ordered frequently but at the same time the quantity ordered should be such that it will be
economic to purchase and its shortage should not be there. They are less valued than A items
and quantity-wise about 15 to 25%.
C-Items
They have the least sales cost about 10%. They are required in large quantity about 50
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to 60%. They can be purchased in bulk to avail large discounts and less price to pay. This
will also reduce the cost of ordering and purchasing. They can be purchased once or twice
in a year. They are least-valued items.
Advantages of ABC Analysis
 The inventory control of different categories of items will be better if costlier items are not stored
for large period, which reduces capital investment.
 The quantities of various categories of items are economically ordered and stored as per need. It
saves the cost of ordering and carrying the inventories.
 The purchasing of various categories of items become easy and discounts are also obtained on
large purchase of items of C category.
 Better record keeping of different categories of items helps in good inventory control The ABC
categories are based on value, usage and criticality of the requirement of items. The ABC is also
referred as Always, Better, Control analysis. The graph of quantity of items used and their usage
value cost-wise is shown in Fig. 10 below. The ABC items are also indicated
MATERIAL REQUIREMENT PLANNING:

MRP refers to the basic calculations used to determine components required from end item requirements.
It also refers to a broader information system that uses the dependence relationship to plan and control
manufacturing operations.
“Materials Requirement Planning (MRP) is a technique for determining the quantity and timing for
the acquisition of dependent demand items needed to satisfy master production schedule
requirements.”
OBJECTIVES OF MRP:
1. Inventory reduction: MRP determines how many components are required when they are required in
order to meet the master schedule. It helps to procure the materials/ components as and when needed and
thus avoid excessive build up of inventory.
2. Reduction in the manufacturing and delivery lead times: MRP identifies materials and component
quantities, timings when they are needed, availabilities and procurements and actions required to meet
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delivery deadlines. MRP helps to avoid delays in production and priorities production activities by putting
due dates on customer job order.
3. Realistic delivery commitments: By using MRP, production can give marketing timely information
about likely delivery times to prospective customers.
4. Increased efficiency: MRP provides a close coordination among various work centres and hence help
to achieve uninterrupted flow of materials through the production line. This increases the efficiency of
production system.
MRP SYSTEM
The inputs to the MRP system are: (1) A master production schedule, (2) An inventory status file and (3)
Bill of materials (BOM).
Using these three information sources, the MRP processing logic (computer programme) provides three
kinds of information (output) for each product component: order release requirements, order rescheduling
and planned orders.
1. MASTER PRODUCTION SCHEDULE (MPS)

MPS is a series of time phased quantities for each item that a company produces, indicating how many
are to be produced and when. MPS is initially developed from firm customer orders or from forecasts of
demand before MRP system begins to operate. The MRP system whatever the master schedule demands
and translates MPS end items into specific component requirements. Many systems make a simulated trial
run to determine whether the proposed master can be satisfied.
2. INVENTORY STATUS FILE

Every inventory item being planned must have an inventory status file which gives complete and up to
date information on the on-hand quantities, gross requirements, scheduled receipts and planned order
releases for an item. It also includes planning information such as lot sizes, lead times, safety stock levels
and scrap allowances.
3. BILL OF MATERIALS (BOM)

BOM identifies how each end product is manufactured, specifying all subcomponents items, their
sequence of build up, their quantity in each finished unit and the work centres performing the build up
sequence. This information is obtained from product design documents, workflow analysis and other
standard manufacturing information.
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Types of Inventory systems

The various types of inventory control systems used to order and replenish the inventories are
(1) Two-bin system
(2) Maximum-minimum system
(3) Economic order quantity (EOQ) system
(4) Fixed order quantity and variable cycle or Q system
(5) Fixed cycle and variable quantity or P system
(6) Replenishment system or S,s policy
(7) Ordering with quantity discounts
All these systems are discussed below.
(1) Two-bin System

This is a simple system in which two bins are used to store and issue the materials. Initially both the bins
are filled with the material is issued from the second bin. The order is placed when first bin is empty. The
order will arrive at the time just before the second bin is empty. This process will be repeated. It is a
deterministic system where rate of consumption is known and the time of ordering is also known.
(2) Maximum-Minimum System
In this system-maximum and minimum level of inventory stored are fixed. The order is placed when the
inventory level touches a particular quantity. Re-ordering is done after a period of review. If maximum
amount in the store is 500 units and 50 units is safety stock. The order is placed when inventory level
reaches 50 units. The disadvantages of the system are
(i) If the stock consumption fluctuates rapidly, the change in the maximum and minimum level is
difficult.
(ii) If periodic review cannot be done, the shortages or overstock may be there.
(iii) The control is necessary to keep records of inventories and maximum and minimum levels which can
be altered based on demand changes and rate of consumption.
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(3) Economic Order Quantity (EOQ) System

The economic order quantity is the amount of materials which is ordered or produced so that the cost of
ordering and carrying in inventory should be minimum. This system is used to economise the cost of
inventory control. The minimum cost is obtained when ordering and carrying cost are equal. In this
system, inventory is zero when order is received. Order is placed such that all the materials ordered as
EOQ is consumed. This method of inventory control is normally used to store valuable and essential
items in the store.
(4) Fixed Order Quantity and Variable Cycle System (Q System)
When this system is used the quantity ordered every time is fixed and the number of cycle for which
orders are placed and cycle time may vary. It is also called reorder point or Q system. The fixed order
quantity (Q) depends on, price, usage rate and maximum and minimum quantity kept in inventory. The
advantages of this system are
(i) Every item can be purchased at most economic price and necessary amount.
(ii) The items are purchased as per need and consumption rate.
(iii) When the demand changes, rapidly the reorder point reduces or cycle time is reduced and number of
orders placed are increased as the order quantity Q is fixed. What amount of order and when to order are
two main problems in this system of inventory control to solve. Order quantity Q is decided in such a way
so as to minimise the total cost of procurement (production), storage, handling, distribution and other
changes of inventory. The safety stock is always present in this system.
(5) Fixed Cycle and Variable Quantity (P) System
This is also called Periodic Review System. In this time bound system, period of review is fixed as three,
six or twelve months. In this system, period of review is fixed and quantity ordered change as per demand
or rate of consumption. The period of review P is decided such that the order quantity is economical to
purchase the items.
(6) Replenishment System or S,s policy
This is a major system of inventory control, which is called optional replenishment system of S,s policy.
When the supplier puts the restriction on minimum order quantity, the variable order quantity is decided
based on S,s policy i.e., maximum level of inventory is S and minimum safety stock is s. The
replenishment level is in between S and s values. Order quantity is decided as.
Order quantity = Qr = Q1 – I, where Q1 is replenishment level and I is inventory on hand. This system
has advantage of combined fixed order or reorder point systems. To decide the amount of order, Qr to be
placed the accurate information of inventory levels and rate of consumption must be available before the
orders are placed.
(7) Ordering when Quantity are Available
When the materials are purchased in bulk, the supplier offer purchase discount in price of the materials
purchased, if the quantity purchased is more than a particular value. Different discounts are offered on
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different purchase quantities and frequency of purchase. This is called quantity discount. For this type of
ordering, the inventory control model which is used is further discussed in various types of inventory
models.
Deterministic Models of Inventory Control

Only the deterministic models will be considered to solve inventory problems here because the
probabilistic models have more variability factors and too complex to solve. The following assumptions
are made to solve the deterministic models of inventory control.
(1) Demand of materials is assumed to be fixed and completely predetermined.
(2) Demand remains constant over a period of inventory analysis.
(3) Production is followed by the economic lot size system and constant production quantity per
cycle. The order is placed as per economic order quantity.
(4) The ordered materials arrive instantly at infinite rate when inventory level reaches zero.
(5) The cycle time and orders of materials are same over a period of time say one year.
(6) All the costs associated with ordering the materials and inventory carrying remains constant
during this period of one year.
The various notations used in these models are given below
D = Total demand
R = Rate of demand
K = Rate of production
Ci = Holding or inventory carrying cost per unit quantity per unit time.
Co = Ordering cost per order or set-up cost per set-up
Cs = Shortage or stock out cost unit quantity short per unit time
t = Ordering or scheduling time period (cycle time) which is not prescribed
tp = Prescribed scheduling time period
N = Number of orders placed
x = Demand during prescribed period tp with probability F (x)
y = Demand during lead time L with probability G (x)
z = Order level or stock level
q = Quantity already present in the beginning
L = Lead time
f(x) = Probability density function for demand x.
EOQ = Economic order quantity
EBQ = Economic batch quantity
ELS = Economic lot size
ETC = Economic total cost
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Economic Order Quantity (EOQ)

This EOQ model is used to find out the order quantity or lot size which economises the total cost of
ordering and carrying the materials in the store. It is also called the Wilson Rule. In order to find out
EOQ, the assumptions of deterministic elementary inventory model which are given above are considered
to derive the values of EOQ and Economises Total Cost (ETC). The variations of stock in inventory is
shown in the Figure 2 given below. The values of quantity of materiels in the store made them the vertical
Y axis and the time of storing is shown on the horizontal Z axis for a unit period say, one year. In the first
period of time, the quantity supplied is Q. Quantity in inventory is zero and over this period it is
consumed when inventory is consumed quantity Q. Thus, this cycle repeats. This pattern of inventory
variation resembles a saw tooth hence it is called as saw tooth pattern of the inventors control.
In order to find out the quantity Q ordered economically in a cycle time, the following things are assumed
Assumptions
1) The total demand D is known in a period inventory planning (one year).
2) The cost of ordering Co and carrying inventors Ci are constant during this period.
3) The ordering period or cycle time, t remains the same.
4) All the quantity ordered Q is consumed during period and inventors is zero when order is
received.
5) Quantity Q is received instantaneously.
6) The lead time is zero and hence safety stock is also zero.
7) Order quantity Q is same in every cycle time, t.
8) Rate of consumption or demand R is constant.
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Price Discount in Inventory Control

When large quantity of materials are purchased from the supplier they offer discounts on
a purchase lots. But since the inventory carrying cost is also high for costly materials therefore
purchase of large or bulk materials with price discounts may not be economical. This type of
inventory control problems of order quantities with price discounts is discussed below.
Economic Order Quantities with Price Discounts
When bulk of materials are to be purchased with price discounts from the supplier, the
EOQ model should be used with price-discount so that economic purchase will be done. When
a large order size is offered, the discounts per unit price, the Heuristic method will be used
to accomodate quantity discounts.
Suppose that all the assumptions of simple EOQ model are satisfied, but that the per unit
cost of the goods stocked as inventory depends on order quantity as follows.
If 0 Q < K1 then goods cost @ Rs. a0 per unit
K1 Q < K2 then goods cost @ Rs a1 per unit
K2 Q < K3 then goods cost @ Rs a2 per unit
... ... ... ... ...
... ... ... ... ...
Ki Q < Ki+1 then goods cost @ Rs ai per unit
... ... ... ... ...
... ... ... ... ...
Kn Q < Kn+1 then goods cost @ Rs an per unit
Here Ki represents price break points and ordinarily a0 > a1 > a2. If the quantity discount factor is
ignored then
Qe =
If this quantity Q falls within the range (Ki, Ki+1) then the total cost per unit time of the inventory
system plus the cost of materials will be Tcm = √2CoCiD + aiD. It is clear that if the order is less than Q
both the cost of inventory system and cost of materials would be higher. If we were to order more than Q
it is possible that increase in inventory system cost would be higher. If we were to order more than Q it is
possible that increase in inventory system cost would be compensated by the saving in the cost of
materials. Hence the order size which gives lowest total cost of materials is selected. This will be more
clear from the example given below. Ki + 1 is a candidate for the optimal order quantity, as are Ki + 2,
Ki + 3 ........ and so on. The procedure involves comparing the total cost per unit time if Q is ordered to
the total cost per unit time Ki + 1, Ki + 2, ....... or Kn in order
Illustration with example :
A supplier of cleaning products offers a supermarket the following deal. If the supermarket buys
29 cases or less, the cost is $25 per case. If they buy 30 or more cases, the cost will be $20 per
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case. The supermarket‘s ordering cost is $20 per order and the carrying cost is 15 percent per
year.The supermarket sells 50 cases per year.
Procedure when analyzing the EOQ with discounts:
1. Calculate the EOQ for the lowest cost per unit. If the EOQ is above the price break, this is the most
economical quantity.
2. If the EOQ in 1 above is below the price break, use the next lowest price to calculate the EOQ.
Continue calculating EOQs until a feasible EOQ is found.
3. Calculate the total cost of the EOQ, if found, and the total cost of the higher price breaks.
4. The minimum of these total costs indicates the most economic order quantity.
AGGREGATE PLANNING:
Aggregate planning is an intermediate term planning decision. It is the process of planning the quantity
and timing of output over the intermediate time horizon (3 months to one year). Within this range, the
physical facilities are assumed to –10 be fixed for the planning period. Therefore, fluctuations in demand
must be met by varying labour and inventory schedule. Aggregate planning seeks the best combination to
minimise costs.
Aggregate Planning Strategies
The variables of the production system are labour, materials and capital. More labour effort is required to
generate higher volume of output. Hence, the employment and use of overtime (OT) are the two relevant
variables. Materials help to regulate output. The alternatives available to the company are inventories,
back ordering or subcontracting of items. These controllable variables constitute pure strategies by which
fluctuations in demand and uncertainties in production activities can be accommodated by using the
following steps:
 Vary the size or the workforce: Output is controlled by hiring or laying off workers in proportion
to changes in demand.
 Vary the hours worked: Maintain the stable workforce, but permit idle time when there is a slack
and permit overtime (OT) when demand is peak.
 Vary inventory levels: Demand fluctuations can be met by large amount of inventory.
 Subcontract: Upward shift in demand from low level. Constant production rates can be met by
using subcontractors to provide extra capacity.
Aggregate Planning Guidelines

The following are the guidelines for aggregate planning:
 Determine corporate policy regarding controllable variables.
 Use a good forecast as a basis for planning.
 Plan in proper units of capacity.

Maintain the stable workforce.
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 Maintain needed control over inventories.

 Maintain flexibility to change.
 Respond to demand in a controlled manner.
 Evaluate planning on a regular base
JUST-IN-TIME (JIT) :
Just-In-Time (JIT) Manufacturing is a philosophy rather than a technique. By eliminating all waste and
seeking continuous improvement, it aims at creating manufacturing system that is response to the market
needs. The JIT philosophy starts from purchasing the raw materials and is also used in the production of
components, waste elimination and reduction of cost at every stage of production using quality concept.
The Principles of JIT
1. Inventory and materials handling costs are as important as direct labor cost. They do not add to the
value of product. The inventory carrying costs are as high as 30% of inventory cost. High technology
industries such as missiles, air planes, computers and telecommunication incur higher inventory costs than
consumer products, metal processing and industrial hard wares. The Just in Time procurement of materials
and reducing inventory level reduces this cost.
2. Material handling investment if reduced by effective manual handling which can preserve capital for
more effective use which is possible by using JIT methods.
3. By installation of processing equipment with effective handling methods and upgrading materials
handling systems with lesser cost reduces cost of production in JIT manufacturing.
4. The purpose of JIT is to eliminate waste which can be excess inventory, damaged materials, process
defects, repetitive handling and waiting for materials avoiding long lead times and large in process
inventory or stores.
Objectives of Just in Time
The objectives of JIT are to keep the processing time and cost to a minimum. This is possible by studying
material supply and its production processing related problems and solving them. The main objective of
using JIT is to minimize the cost of the product by improving productivity and quality. The factors,
which can be considered for these improvements, are
1. Product design,
2. Use of better technology.
3. Minimizing use of special equipment.
4. Reducing lead-time of manufacturing and supply of materials.
5. Reducing batch size.
6. Use of pull system.
7. Simplifying set up
63
Requirements of JIT
The following factors are required to achieve the objectives of JIT.
(i) Use of total quality control to achieve quality in production.
(ii) Employee participation in all JIT activities to achieve the targets.
(iii) Small lot size manufacturing to remove all waste and scrap.
(iv) Principles of Industrial engineering are followed to achieve streamline flow of materials, operation
and production.
(v) Identification of problems of bottlenecks and solving them.
Just in Time Methodology
1) One piece lot size is followed in Just in Time.
2) It follows Group technology or cellular manufacturing system.
3) It uses total quality control, eliminates waste and inventory.
4) It adopts total preventive maintenance.
5) JIT aims at zero inventories thereby minimizing inventory investment, reducing and shortening
production lead-time and set up times. It reacts faster to demand changes.
6) It utilizes services of cross-trained workers along with working flexibility.
7) It utilizes Kanban cards for materials movements and production purposes. Work loading is
uniform.
8) Decentralization in various departments of the manufacturing organization is used in JIT system.
9) Thus JIT methodology encourages employees in various JIT activities for increasing profit,
improvements in working through cost reduction, inventory reduction (zero inventory) and quality
control. Just in time production is when it is required, materials, parts, and components are
supplied as and when required.
Drawbacks of JIT
(1) The time required for introducing JIT system goes beyond the normal time requirements for
implementation of the system.
(2) Workers attitude and culture should be improved to implement this system.
(3) Top Management must agree to implement the system but they will have to convince the employees
about its benefits.
(4) It is difficult to achieve zero defects and zero inventory. Support from supplier of materials is
necessary.
Advantages of implementation of JIT System

Using JIT system in industry claims the following advantages.
(1) It increases the operational efficiency, quality and organizational effectiveness.
(2) It increases awareness of problems and their costs.
64
(3) More profits are obtained by reducing lot sizes, less work in process inventories, less raw materials
inventory and less indirect cost.
(4) The quality goods are produced because of reduced defects, waste and scrap.
(5) Participation of workers for improvement increases productivity and customer satisfaction is obtained
by timely delivery of their demands.
(6) Overall working of production systems are improved and higher productivity is obtained. The push
system and pull system of parts handling are shown in Fig. 1 and Fig. 2 below.
UNIT 5 INVENTORY MANAGEMENT
In dictionary meaning of inventory is a ―detailed list of goods, furniture etc.‖ Many understand the word
inventory, as a stock of goods, but the generally accepted meaning of the word ‗goods‘ in the accounting
language, is the stock of finished goods only. In a manufacturing organization, however, in addition to
the stock of finished goods, there will be stock of partly finished goods, raw materials and stores. The
collective name of these entire items is ‗inventory‘. The term ‗inventory‘ refers to the stockpile of
production a firm is offering for sale and the components that make up the production.
Objectives of Inventory Management
The primary objectives of inventory management are:
(i) To minimize the possibility of disruption in the production schedule of a firm for want of raw
material, stock and spares.
(ii)To keep down capital investment in inventories. So it is essential to have necessary inventories.
Excessive inventory is an idle resource of a concern. The concern should always avoid this situation.
65
The investment in inventories should be just sufficient in the optimum level. The major dangers of
excessive inventories are:
(i) the unnecessary tie up of the firm‘s funds and loss of profit.
(ii) excessive carrying cost, and
(iii) the risk of liquidity.
The excessive level of inventories consumes the funds of business, which cannot be used for any other
purpose and thus involves an opportunity cost. The carrying cost, such as the cost of shortage, handling
insurance, recording and inspection, are also increased in proportion to the volume of inventories.
This cost will impair the concern profitability further. On the other hand, a low level of inventories may
result in frequent interruptions in the production schedule resulting in under-utilization of capacity and
lower sales. The aim of inventory management thus should be to avoid excessive inventory and
inadequate inventory and to maintain adequate inventory for smooth running of the business operations.
Efforts should be made to place orders at the right time with the right source to purchase the right
quantity at the right price and quality. The effective inventory management should
 Maintain sufficient stock of raw material in the period of short supply and anticipate price
changes.
 Ensure a continuous supply of material to production department facilitating uninterrupted
production.
 Minimize the carrying cost and time.
 Maintain sufficient stock of finished goods for smooth sales operations.
 Ensure that materials are available for use in production and production services as and when
required.
 Ensure that finished goods are available for delivery to customers to fulfil orders, smooth
sales operation and efficient customer service.
 Minimize investment in inventories and minimize the carrying cost and time.
 Protect the inventory against deterioration, obsolescence and unauthorized use.
 Maintain sufficient stock of raw material in period of short supply and anticipate price
changes.
 Control investment in inventories and keep it at an optimum level.
BASIC ECONOMIC ORDER QUANTITY (EOQ) MODEL:

The size of an order that minimises the total inventory cost is known as the economic order quantity,
(EOQ).
The various notations used in these models are given below
D = Total demand
R = Rate of demand
K = Rate of production
66
Ci = Holding or inventory carrying cost per unit quantity per unit time.
Co = Ordering cost per order or set-up cost per set-up
Cs = Shortage or stock out cost unit quantity short per unit time
t = Ordering or scheduling time period (cycle time) which is not prescribed
tp = Prescribed scheduling time period
N = Number of orders placed
x = Demand during prescribed period tp with probability F (x)
y = Demand during lead time L with probability G (x)
z = Order level or stock level
q = Quantity already present in the beginning
L = Lead time
f(x) = Probability density function for demand x.
EOQ = Economic order quantity
EBQ = Economic batch quantity
ELS = Economic lot size
ETC = Economic total cost
Economic Order Quantity (EOQ)

This EOQ model is used to find out the order quantity or lot size which economises the total cost of
ordering and carrying the materials in the store. It is also called the Wilson Rule. In order to find out
EOQ, the assumptions of deterministic elementary inventory model which are given above are considered
to derive the values of EOQ and Economises Total Cost (ETC). The variations of stock in inventory is
shown in the Figure 2 given below. The values of quantity of materiels in the store made them the vertical
Y axis and the time of storing is shown on the horizontal Z axis for a unit period say, one year. In the first
period of time, the quantity supplied is Q. Quantity in inventory is zero and over this period it is
consumed when inventory is consumed quantity Q. Thus, this cycle repeats. This pattern of inventory
variation resembles a saw tooth hence it is called as saw tooth pattern of the inventors control.
In order to find out the quantity Q ordered economically in a cycle time, the following things are assumed
67
Assumptions
1) The total demand D is known in a period inventory planning (one year).
2) The cost of ordering Co and carrying inventors Ci are constant during this period.
3) The ordering period or cycle time, t remains the same.
4) All the quantity ordered Q is consumed during period and inventors is zero when order is
received.
5) Quantity Q is received instantaneously.
6) The lead time is zero and hence safety stock is also zero.
7) Order quantity Q is same in every cycle time, t.
8) Rate of consumption or demand R is constant
EOQ – DISCOUNT MODEL:

Price discounts are offered by suppliers to encourage large orders. Benefits for the purchaser from
bigger orders include the reduction in unit price, lower shipping and handling costs and a reduction in
ordering costs owing to fewer orders. These benefits have to be measured against the incremental increase
in carrying costs. As the order size increase, more space must be provided for storage, the cost of holding
the larger inventory level correspondingly increase. Another pertinent though difficult to quantify,
consideration is the risk of obsolescence or functional depreciation larger inventories magnify the loss
that would result if design or demand changes make the stored supplies less valuable.
Quantity discounts are evaluated by first determining the EOQ without a discount. When Q is less
than the minimum quantity at which the discount is allowed, the total annual stocking cost is calculated
for the minimum order quantity. This cost is then compared to the annual stocking cost when Q is the
ordering quantity. If the discounted price results in lower annual expense, the procedure is repeated using
the minimum quantity from the next price break. The comparisons are continued until the quantity
producing the lowest total annual stocking cost is identified. Then the savings allowed by the higher stock
levels are rated against the risk of holding these levels. The risk is gauged by the stability of past
demands, resale value and suspected market trends.
FINITE PRODUCTION :
Finite production rate model is an extension of the EOQ model.
The following assumption of the EOQ model is not used in the finite production rate model
All the quantities ordered are received at the same time (the assumption is suitable when the
quantities are purchased)
An assumption in the finite production rate model
The quantity ordered is produced at an uniform rate, (the assumption is suitable when the
quantities are produced)
The finite production run model is also called the Economic Production Quantity (EPQ) model.
68
As in the EOQ model, assume that the inventory at the beginning is zero. The production facility is set
up to produce Q units. If it‘s optimal to produce Q units in the beginning, it‘s also optimal to produce Q
units next time when the inventory level reaches zero, because no cost parameter changes in between
two production runs. Therefore, like the EOQ model, the finite production rate model also has a constant
order size and an inventory cycle.
The length of the inventory cycle is the length of time over which the demand is Q . Thus, the length of
cycle in years.
Q
T
In order to meet the demand (feasibility), the production rate, Q. Thus, for some time after the start of a
new production run, the inventory level increases. The rate of increase is Q . The length of each
production run is called the uptime and is denoted by Q. The uptime is the time required to produced
order quantity, Q . So,
Q
T1
P
If Q the production must be stopped before the end of the cycle in order to avoid producing more than
the order quantity, Q units. Thus, there is a idle time or downtime in each cycle. The downtime is denoted
by .
Q Q
T2 T T1
P
Unlike the EOQ model, the maximum inventory in the finite production rate model is not Q because
some items are used to meet the demand before the receipt of all of the order quantity. The maximum
inventory is the inventory accumulated over the uptime. Since the inventory level increases at the rate of
P , the maximum inventory,
Q
H T1 P P Q 1
P P
Slope = P -
Inventory
H
Slope = -
T1 T2 Time
T
69
Note that the downtime demand is met entirely from the maximum inventory. Hence, downtime can also
be obtained as follows
H Q Q Q
T2 1
P P
The formula for the optimal order quantity is shown below
= annual demand
P = the production rate in units/year
Q = size of each production run
K = cost of setting up production
h = annual holding cost per unit
h´ = h(1- /P)
2K
Optimal solution, Q * , Economic Production Quantity (EPQ)
h'
70
OR TECHNIQUES IN MATERIALS MANAGEMENT:
71
72
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THIS NOTES ONLY MEANT FOR REFERENCE PURPOSE

SUBJECT / MATTERS CONTAINED IN THESE MUST BE

EXPLAINED IN DETAILED MANNER FOR EXAMINATIONS

PR 2030 PURCHASING AND MATERIALS MANAGEMENT LTPC

UNIT I FUNCTIONS OF MATERIALS MANAGEMENT 6

UNIT II PURCHASING MANAGEMENT 8

UNIT III STORES MANAGEMENT 8

UNIT IV MATERIALS PLANNING 12

UNIT V INVENTORY MANAGEMENT 11

UNIT I FUNCTIONS OF MATERIALS MANAGEMENT

Fig 1. STRUCTURE OF MATERIALS MANAGEMENT DEPARTMENT

Fig 2. ORGANIZATION STRUCTURE WITH FUNCTIONAL ACTIVITIES

Fig 3. MATERIAL MANAGEMENT ACTIVITIES IN AN ORGANISATION

SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Scope of Material Management

Material Purchasing Stores Management Inventory Other related

The functions of materials management can be categorized in the following ways:

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

3. Stores management or management:

This involves physical control of materials, preservation of stores, minimization of obsolescence

4. Inventory control or management:

5. Other related activities

4. Reduced reductions and scrap.

(ii) Simplification: The concept of simplification is closely related to standardization.

(b) Value analysis :

STEPS IN VALUE ANALYSIS

11. Utilise speciality processes.

(c) Ergonomics (Human Engineering):

Objectives of Human Engineering

3. Design—Due to fast response to engineering change, alternative designs can be quickly

OBJECTIVES AND FUNCTIONS OF MATERIAL MANAGEMENT

(A) Primary objectives

(B) Secondary objectives

The basic objectives of management in an organization are:

(i) Materials Requirements Planning (MRP)

The functions of purchasing are as follows:

 The requisition of material is necessary by proper authority to initiate its purchase.

(iii) Inventory Planning and Control

(B) Secondary Functions

(iii) Make and Buy Decisions

Factors that may influence firms to buy a part externally include:

 Procurement and inventory considerations

(iv) Coding and Classification of Materials

(v) Forecasting and Planning

The main functions of materials management are summarized as follows:

 Make or Buy decisions

UNIT 2 PURCHASING MANAGEMENT

Purchasing is an important function of materials management. In any industry purchase means

PURCHASING POLICY AND PROCEDURES :

Advantages and Disadvantages of Policies

 Policies define and clarify top management objectives.

(a) Rules of purchasing

SELECTION OF SOURCES OF SUPPLIER AND VENDOR DEVELOPMENT

(i) Trade Journals and Trade Directories

(ii) Industrial Exhibitions and Trade Fairs

(ii) Delivery Performance

BUYER SELLER RELATIONSHIP :