Unit 3: Supply chain, Purchase

and Stores Management

 Supply Chain Management – Strategy, Design and
Integration,
 Vendor Selection Criteria and Rating (Numerical);
 Materials Requirement Planning (MRP I) – Planning
Elements and Inputs (Numerical);
 Purchase Management – Principles, Process and
Types of Purchasing Systems;
 Stores Management – Functions, Location, Layout
and Accounting Procedures
Prepared by
Dr. R. Arivazhagan,
Associate Professor, College of Management,
SRMIST, Kattankulathur
Email: arivazhr@srmist.edu.in
 Supply Chain Management
• In a typical manufacturing firm, they begin this process with
sourcing raw materials, converting them into intermediate
components, and later into finished goods. The goods are finally
delivered to the customer.
• Similar activities occur in the case of many service industries also.
• In every organization, materials flow through a continuous chain,
beginning from raw material suppliers, through intermediate
manufacturers to the final assembler, and to the distributors and
retailers before it reaches the end customer.
• A supply chain includes the chain of entities involved in the
planning, procurement, and production and distribution of
products and services.
• A unique combination of several business entities engaged in
various stages of the supply chain provides a value stream to the
ultimate customer.
 Strategies in supply chain management
• Flow management
• Supply chain components management
• Logistics management
• Channel management
• Supply chain - Process orientation strategy
• Supply chain structural strategy
• Strategies to manage Bullwhip effect
Various flows in supply chain channel
• Material flow
• Cash flow
• Information flow
Material Flow

Cash Flow

Production / Distribution
Suppliers/
Warehouse Manufacturing Warehouse Customers
Vendors Channels
Company

Information Flow
Material and information flows in detail
 Supply Chain Components
• The supply chain is made of three distinctive entities:
1. In-bound supply chain
– The inbound supply chain pertains mainly to providing raw
materials and components to an organization
2. In-house supply chain
– The in-house component of the supply chain relates to the
physical configuration of the conversion process.
3. Out-bound supply chain
– The out-bound supply chain pertains to the distribution of
goods and services to the end customers.
 Logistics management
• Logistics management refers to the set of activities involved
in the physical movement of goods across the supply chain.
• It may require planning shipments from one part of the
supply chain to the next, scheduling carriers, and route
planning.
• The nature of the logistics required is a function of the
distribution network design.
• A centralized distribution system will require an efficient
logistics system to meet the demands of customers spread
over a wide geographical area, as opposed to a
decentralized design.
• Route planning is an important aspect in logistics
management.
 Channel management
• Channel management is another key aspect of the
outbound supply chain. The distribution of goods and
services often involves multiple organizational entities
outside the manufacturing firm.
• Channel management involves the smooth passage of
information and material flows across the supply chain.
• The demand estimates and the point-of-sales data form
crucial input to production planning and scheduling. Hence,
channel management requires systems for efficient data
capture and dissemination across the supply chain.
• Channel management also involves relationship
management. Since the lowest level in the channel has
direct contact with the customer, they play a major role in
customer relationship management.
 Supply chain management: A process orientation
• There are four generic processes involved in any supply
chain: Planning, sourcing, manufacturing, and distribution.
 Supply chain structure
• The supply chain structure refers to the set of
choices made in assembling the components
of a supply chain together.
• These include choices regarding the number
of layers that make up a supply chain, the
composition of each layer, the type of
information flow across the layers, and the
nature of integration achieved between the
layers.
Contd…
 Bullwhip effect
• The bullwhip effect denotes the increasing
severity of distortions in demand information and
ordering patterns as the information travels from
one layer of the supply chain to the next layer.
• Strategies to reduce Bullwhip effect:
– To reduce the delay of information flow in the supply
chain
– Supply chain members can reduce the bullwhip effect
further by reducing the lead time of their business
processes.
 Design of supply chains
• Designing an appropriate supply chain calls for a
good understanding of the product profile for
which the supply chain is configured.
• Designing Efficient Supply Chains
– Efficient supply chains are designed with the central
objective of overall supply chain cost minimization
and better asset utilization.
– Organizations need to incorporate several features in
their supply chain to achieve this objective.
– Investing in supply chain partnership programmes on
both the inbound and outbound supply chain is an
important requirement.
Contd…
• Designing Responsive Supply Chains
– The design of a responsive supply chain begins with the
basic premise that uncertainty in demand and large
forecast errors are often the reality. Therefore, the supply
chain requires certain strategies for addressing these.
– Moreover, developing systems to improve responsiveness
is another objective of the design.
– Capturing point-of-sale data and immediately updating the
centralized planning system using EDI and Web linkages is
an important operational feature of responsive supply
chains.
– Cutting down the lead time by drastically redesigning
business processes pertaining to various components of
the supply chain is also a key requirement.
Supply chain / Vertical Integration
• Supply chain / Vertical integration is a strategy whereby
a company owns or controls its suppliers, distributors
or retail locations to control its value or supply chain.
• Supply chain integration occurs when a company takes
control over several of the production steps involved in
the creation of a product or service.
• In other words, supply chain integration involves
purchasing and bringing in-house a part of the
production or sales process that was previously
outsourced.
• Typically, a company's supply chain or sales process
begins with the purchase of raw materials from a
supplier and ends with the sale of the final product to
the customer.
Contd…
• Companies can integrate by purchasing their
suppliers to reduce manufacturing costs.
• They can also invest in the retail or sales end
of the process by opening physical stores and
locations to provide after-sales service.
• Controlling the distribution process is another
common vertical integration strategy, meaning
companies control the warehousing and
delivery of their products.
 Types of supply chain / Vertical
Integration
• Backward Integration
– Backward integration is when a company expands
backward on the production path into manufacturing,
meaning a retailer buys the manufacturer of their product.
• Forward Integration
– Forward integration is when a company expands by
purchasing and controlling the direct distribution or supply
of its products.
– A clothing manufacturer that opens its own retail locations
to sell product is an example of forward integration.
– Forward integration helps companies cut out the
middleman.
– By removing distributors that would typically be paid to
sell a company's products, overall profitability is improved.
 Advantages of supply chain integration
• Decreased transportation costs and reduced delivery
turnaround times
• Reduced supply disruptions from suppliers that might fall
into financial hardship
• Increased competitiveness by getting products to
consumers directly and quickly
• Lower costs through economies of scale. By buying large
quantities of raw materials or streamlining the
manufacturing process, per-unit costs are lowered
• A company benefits by avoiding suppliers with market
power
• Improved sales and profitability by creating and selling a
company-owned brand
 Disadvantages of supply chain
integration
• Companies might get too big and mismanage
the overall process
• Outsourcing to suppliers and vendors might
be more efficient if their expertise is superior
• Costs of vertical integration such as
purchasing a supplier can be significant
• Increased amounts of debt if borrowing is
needed for capital expenditures
 Vendor Selection
• In industries, the purchasing function starts with
vendor selection.
• Vendor selection includes the identification and
evaluation of vendors.
• Continuous supply of items will facilitate the smooth
production and at the same time the level of inventory
in the stores should be minimized.
• These will become a reality only when the company
has reliable and committed vendors who can supply
quality items.
• Hence, selection of vendors becomes a vital task for
the companies.
 Identification of vendors
• Sources of vendor identification
– Websites
– News paper advertisements
– Trade fairs / Exhibitions
– Letters and mail communications
– Referrals
 Vendor evaluation / Rating
• Vendor evaluation / rating is the process of assessing the
performance of a vendor in comparison with other vendors with a
view to prepare a comparative scale.
• Vendor evaluation rating is the process of finding an overall score
for each of the vendors based on the weights of the main criteria
and sub-criteria.
• Then the vendor who has the highest score is to be selected for
supplying the item.
• If the capacity of that selected vendor is insufficient to meet the
requirement of the firm, then in the order of descending overall
score of vendors, necessary number of vendors will be selected to
meet the total requirement of the firm.
• The concepts of main criteria and sub-criteria are only relative.
• The main criteria will be more or less same in different firms, but
the sub-criteria may change from industry to industry as well as for
the level of technology and quality focus of the firm.
 Criteria for Vendor evaluation / Rating
• The main criteria in a standard system are
listed below.
– Quality
– Price
– Delivery
– Service
– Support
(Note: The desirable weightages for these criteria are 35, 30,
20, 10 and 5, respectively. But, depending upon the situation,
by careful examination of these criteria with respect to the
situation, these values may differ slightly.)
 Problems on vendor rating
• Ex. Problem 3.1: Following tables summarises the
performance of four different vendors and weightage for their
performance criteria.
Supplier performance criteria Vendor 1 Vendor 2 Vendor 3 Vendor 4
Quantity supplied 100 110 120 108
Quantity accepted 93 98 108 102
Price of Item (Rs.) 5 5.2 4.9 5.1
Delivery promised (in Weeks) 6 6 6 6
Actual delivery (in Weeks) 7 6.2 6.6 6.5
Response to suggestions (%) 90 85 95 100

Supplier performance criteria Weightage

Quality 40%
Delivery 20%
Price 30%
Response to suggestions 10%
 Solution to Ex. Problem 3.1
• Quality % = Quantity accepted / Quantity supplied
• Delivery % = Delivery promised / Actual delivery
• Price % = Lowest price / Supplier price
• Weighted score = Percentage value x (weight / 100)
Rating criteria Vendor 1 Vendor 2 Vendor 3 Vendor 4
Quality % 93/100 = 93% 98/110 = 89.1% 108/120 = 90% 102/108 = 94.4
Score (with 40% wt.) 93 x 0.4 = 37.2 89.1 x 0.4 = 35.64 90 x 0.4 = 36 94.4 x 0.4 = 37.76
Delivery % 6/7 = 85.7% 6/6.2 = 96.8% 6/6.6 = 91% 6/6.5 = 92.3%
Score (with 20% wt.) 85.7 x 0.2 = 17.14 96.8 x 0.2 = 19.36 91 x 0.2 = 18.2 92.3 x 0.2 = 18.46
Price % 4.9/5 = 98% 4.9/5.2 = 94.2% 4.9/4.9 = 100% 4.9/5.1 = 96.1%
Score (with 30% wt.) 98 x 0.3 = 29.4 94.2 x 0.3 = 28.26 100 x 0.3 = 30 96.1 x 0.3 = 28.83
Response to suggest %
90 x 0.1 = 9 85 x 0.1 = 8.5 95 x 0.1 = 9.5 100 x 0.1 = 10
Score (with 10% wt.)
37.2 + 17.14 + 35.64 + 19.36 + 36 + 18.2 + 30 37.76 + 18.46 +
Total rating score 29.4 + 9 = 28.26 + 8.5 = + 9.5 = 28.83 + 10 =
92.74 91.76 93.7 95.05
Rating 3 4 2 1
Materials Requirement Planning (MRP)

• MRP is a technique for determining the quantity

and timing for the acquisition of dependent items
(Raw materials) needed to satisfy master
schedule (Production) requirements.
• The basic inputs for MRP are as listed below.
– Product structure or Bill of Materials (BOM)
– Master Production Schedule for the final assembly
– Economic Order Quantity or [Carrying cost (holding
cost) and setup cost details]
– Beginning inventory
 Product structure or Bill of Materials
(BOM)
• The parts/components requirements of the
final product which is to be manufactured is
usually presented in the form of a Product
Structure/Bill of Materials.
• It is a listing of all components (sub assemblies
and materials) that go into an assembled item.
• It frequently includes the part numbers and
quantity required per assembly.
Example – Bill of Materials (BoM) in MRP

• Ceiling Fan
Sl. No. Item name Nos.
– Wing 1
• Nuts 1 Wings 3
• Bolts 2 Nuts 9
– Wing 2
3 Bolts 9
• Nuts
• Bolts 4 Head 1
– Wing 3 5 Coil 1
• Nuts
6 Capacitor 1
• Bolts
– Head 7 Shaft (Rod) 1
– Coil 8 Cups 2
– Capacitor
Bill of Materials (BoM) Ex. 2
 MRP CONCEPT
• The terminologies which are involved in doing
the MRP calculations are as follows.
– Projected requirements (Demand)
– Planned order release
– Economic order quantity (Optimal Quantity per
order)
– Scheduled receipts (receipts)
– Stock on hand
 Materials Requirement Planning – Ex. Problem 3.2
• Construct the Materials requirement planning for the given
8 weeks demand requirement. Beginning inventory is 150
units, EOQ is 300 units and lead time is one week.
• Solution to Ex. Problem 3.2
Period (Weeks) Begi. Inven 1 2 3 4 5 6 7 8
Demand
(Projected 100 150 140 200 140 500
requirements)
Receipts 300 300 600
(150-100) (300+50) 200-140 (300+60) 160-140 (600+20)
350-150 360-200 620-500
Stock on hand
150 50 50 200 60 160 20 20 120

Planned order
300 300 600
relaese
Contd…
• If ordering cost per order is Rs. 50 and carrying
cost per unit per week is Rs.2 then what is the
total inventory cost?
• Total inventory cost = Total Ordering cost + Total Carrying cost
• Total ordering cost = No. of orders x Cost per order
= 4 x 50
= Rs. 200
Total carrying cost = No. of units carried by inventory x Carrying
cost per unit per week
= (150+50+50+200+60+160+20+20+120) x 2
= 830 x 2
= Rs. 1660
Total inventory cost = 200 + 1660
= Rs. 1860
 Ex. Problem 3.3
• A company manufactures iron box. The initial stock on
hand is 1150 units. The carrying cost is Rs. 2.5 per unit
per week and the lead time is one month. The ordering
cost per order is Rs. 6000. The MPS of the final
assemble is as shown below.
1. Develop a Material Requirement Plan (MRP I) by using
EOQ method.
2. Determine the total inventory cost

Week 1 2 3 4 5 6 7 8
Projected requirements - 3500 3000 4500 - 1000 1000 5500
Contd…
• Solution to the Ex. Problem 3.3
EOQ = √ 2 D Co / Cc
D = 3500 + 3000 + 4500 + 1000 + 1000 + 5500
= 18500
EOQ = √ (2 x 18500 x 6000) / 2.5
= 9423.4 ≈ 9,424 Units
1. Material Requirement Plan (MRP I)

Week 0 1 2 3 4 5 6 7 8
Projected
- 3500 3000 4500 - 1000 1000 5500
requirements
Scheduled receipts 9424 9424

Stock on hand 1150 1150 2350 8774 4274 4274 3274 2274 6198

Planned order
9424 9424
release
Contd…
2. Total inventory cost = Total ordering cost + Total carrying cost

Total ordering cost = Ordering cost x No. of orders

= 6000 x 2
= 12,000

Total carrying cost = Carrying cost x No. of units

No. of units = 1150 + 1150 + 2350 + 8774 + 4274 + 4274 + 3274 + 2274 + 6198
= 33,718
Total carrying cost = 2.5 x 33718
= 84,295

Total inventory cost = 12,000 + 84,295

Total inventory cost = Rs. 96,295/-

 Purchase Management
• Purchase management is a system that creates
customised approval rules providing the ability to
hasten approvals and order placement for the timely
receipt of inventory stock.
• Purchase management streamlines the purchasing and
inventory control process of an organisation for greater
efficiency and lower costs.
• Main functions / objectives of Purchase management
are
– Lower costs
– Reduce risk
– Ensuring smooth operations / production
– Managing relationships
– Coordinating supply chain activities
– Logistics and transportation
 Principles of purchase management
• 5Rs of Purchasing
– Right price (Negotiation skills)
– Right quality (Superior quality)
– Right quantity
– Right place (Suppliers / Vendors)
– Right time (With respect to lead time)
Process of purchase management
• Pre purchase
• Purchase
• Post purchase
 Pre purchase system
• Identifying suppliers
– Trade fairs
– Tenders
– Websites
– Letters and emails
• Making requisitions,
• Requirement programmes,
• Evaluating and rating suppliers.
• Selection of suppliers.
• Finalization of terms of purchase.
• Making contract
 Purchasing system
• Once the decision on supplier and the rates are finalized, the order is
placed with the selected supplier.
• The next task is to place order. The details of purchase order (PO) form are
listed as.
– Purchase order reference number.
– Description of the materials and detailed specifications.
– Quantity required and delivery schedule.
– Price and discounts.
– Shipping instructions.
– Location where the materials are to be shipped.
– Signature of the materials manager.
– Detailed terms of conditions.
• Follow-up
– Receiving and acknowledging the PO
– Arranging and sending the materials by the suppliers
– Transportation
• Receiving of materials
• Acknowledging the receipt of materials
 Post purchase system
• Acknowledging the acceptance / return of
materials
• Approval of payments to the accounts dept.
• Processing of invoice by Accounts dept.
• Releasing of payment
• Payment acknowledgement
• Performance evaluation
 Types of purchasing systems
• Forward buying
– In Forward buying, the purchasing decision for a period
(say 1 year) will be taken in advance and the
organization will commit accordingly in terms of order
quantity, rate and delivery schedule, by taking into
consideration the availability of funds and the
requirements.
– Generally, this is used for public buying to avoid
favoritism to a specific vendor.
• Tender buying
– Purchasing the materials by placing a requirements in
public media or personal communications and selecting
the suppliers who offer best cost and services
Contd… (Tender buying)
• In Tender buying the steps are:
– Preparing bidder's list,
– Advertising tender notification / Communication,
– Receiving bids / Filled tender applications,
– Evaluating bids
– Selection of suppliers
– Contract
– Placing order and receiving of materials.
• Types of tenders
– Restricted / Closed tenders: Inviting selected suppliers and
evaluating bids without their presence
– Open tenders: Open invitation to all suppliers and evaluating
the suppliers with their presence
– Negotiated tenders: After shortlisting two or more suppliers,
inviting them for final selection
Contd… (Types of purchasing systems)
• Blanket order
– In Blanket ordering system, the organization will enter into an
agreement with its supplies to receive items for a required quantity at
a particular rate over a period of time
• Zero stock
– Zero stock purchase system is in-line with using the just-in-time
manufacturing system.
– The main idea of this system is to operate the plant with near zero
inventory.
– If the suppliers are situated nearer to the company, they are more
reliable in terms of making supply in time.
• Rate contract
– Rate contract is very much used in public sectors and government
departments.
– The suppliers are on 'rate contract' with DGS&D for a specific
period.
– The organizations can place orders straightaway with such firms
without going through the lengthy procedure of purchasing.
Contd… (Types of purchasing systems)
• International purchasing
– Reasons for International buying
• Cheaper rate
• Low procurement and transportation cost
• Specified quality standard
• Hi-Tech process
– Procedure for International buying (Importing)
• Confirming import permissions / Government clearance
• Identification of international suppliers
• Selection of suppliers and Contract
• Order placement
• Transportation
• Custom clearance
– Foreign Trade Policy, 2015-2020 mandates the following commercial
documents for carrying out importing activities: Bill of entry,
Commercial Invoice cum Packing List, Bill of Lading / Airway bill
– Other common documents: Import license, Letter of credit, certificate of
origin, Insurance certificate, Registration certificates if any, membership
certificates if any, declaration if any, other license if any etc.
• Receiving of materials
 Contd… (Documents required for Import)
• Bill of entry: Permission letter for entering in to the import country
• Commercial invoices: The invoice gives details about merchandise
name, price, quantity and other details of transaction.
• Packaging list: List of items in the consignment
• Bill of lading: Permission letter given by the supplier country for the
export / Shipping permission letter. It accompanies with bills of
exchange drawn under letters of credit.
• Import license: Permission to import
• Letter of credit: It is an arrangement which ensures payment to the
supplier, given by importer’s bank to the supplier’s bank.
• Certificate of origin: It contains the details of supplier and consent
to supply the materials.
• Insurance policy: It is a contract between the insurer and the
insured. Here the insurer is agreed to pay the insured an agreed
sum in the event of loss of the material during transit, specifically
via sea.
Contd… (Types of purchasing systems)
• Public buying
– It is a centralized buying concept was promoted to satisfy the
demand of the following organizations through Directorate
General of Supplies and Disposals (DGS&D) which is the central
purchasing organization of Government of India.
• Defence organizations
• Railway departments
• Post and Telegraph departments
• State governments
• Public sector enterprises
• Quasi-public bodies
– The DGS&D is accountable to the Parliament for its action. Any
proposal for the purchase of materials from abroad is to be
scrutinized by the DGS&D. This is to avoid purchase of materials
from abroad when goods of suitable quality are indigenously
available.
Contd… (Types of purchasing systems)
• Capital equipment buying
– The frequency of purchase of these equipment is very less, may
be once in five years or ten years.
– The various options to satisfy the demand for capital equipment
are listed below:
• Purchase of new equipment
• Purchase of used equipment
• Leasing
– Purchasing of new equipment: These equipment involve huge
capital outlay which is treated under fixed overhead. Hence, a
careful analysis should be done before buying these items.
– While comparing different alternatives, one can use any one of
the following approaches to select the best alternative: Payback
period method, Rate of return method, Present worth method,
Annual equivalent method and Future worth method
– Purchase of used equipment: Market value of used item based on
the current condition could be considered for purchasing decision
– Leasing: For shorter duration requirements
 Stores Management
• The purchased materials are to be stored in
stores/warehouses and issued for production as and when
they are required.
• As already stated, stores contains inventory mainly to
provide uninterrupted supply of materials to the
production divisions.
• The functions of stores are as follows:
– It receives raw materials, tools, equipment and other necessary
materials and accounts them.
– It makes arrangement to store and preserve the items in good
conditions for later use.
– It maintains a proper account on issue of items on demand from
shop floor/production division.
– It maintains a classification and codification system to minimize
obsolescence, surplus and scrap of items.
– It provides information reports to support purchase activities to
take place at right times.
 Location criteria for stores
• Stores will supply raw materials to the production plant
as well as other required products, accessories and
materials to wherever they required.
• Hence it has to be located accordingly in order to
ensure minimum distance movement of both man and
materials.
• Stores department could prioritize its supply of
materials in terms of quantity, frequency etc., based on
these factors gravity location could be identified.
• If production plant wants to maintain separate
warehouse out of production plant premises, it has to
be ensure basic facilities such as transportation, road,
nearness to the supplier and production plant,
communication facilities etc.
 Layout of stores
• An efficient store layout would assist proper stocking of raw materials
and items and also quick retrieval of items at the time of issue.
• Some modern concept may be used in designing stores layout.
Especially, the third dimension (vertical height – Cubic space
utilization) of the store should be used to the fullest extent subject to
the capability of handling equipment which are employed in the store.
• Nowadays, the stocking of items and issue of items in stores are done
by 'pick and place' robot. Automatic guiding vehicles are also used
for automatic materials handling. They even take the items from the
store and deliver them in the demanding work stations of the factory.
Stores layout should support for these systems if it is available.
• The stores layout must have proper clearance for movement of the
handling equipment.
• Stores layout should ensure proper lighting and ventilation.
• It is also highly essential to follow all safety measures in the stores
mainly to avoid accident. Stores layout should ensure the same.
 Operational Systems in Stores
• The different systems in stores are as listed
below.
– Receipt system
– Stocking system
– Issue system.
• Receipt system:
– The receipt system maintains proper document about
items which are received at the stores.
– Checklist should be prepared and verified while
receiving items. Checklist may contains quantity,
quality specifications, dates, supplier details etc.
– After receipt of the materials stock register should be
updated as opening balance, receipts and closing
balance
Contd…
• Stocking system:
– Stocking should be done systematically. Stocking should
ensure easy stocking, handling and accessing of materials
whenever required.
– Bin-cards may be used for getting instant information on
stock. Separate bin-cards are placed on individual stock
and it has all basic information about stock such as
quantity, specifications, date of receiving, etc.
• Issue system:
– Issue system start with receiving of indent from required
department.
– After receiving the indent, get the approval from
concerned authority, prepare the stock and transportation
system.
– After dispatching the materials, stock register should be
updated as opening balance, receipts and closing balance
 Store Accounting
• The product cost consists of materials costs, labour
costs and machine hour costs.
• Stores accounting is very much useful in determining
the materials cost of a product.
• The different elements of cost of the material received
are material price, freight charges, insurance and taxes.
• The issues of the stores are accounted using any one of
the following methods:
1. First In First Out (FIFO) method
2. Last In First Out (LIFO) method
3. Average Cost method
4. Standard Cost method
5. Market Price method
Contd…
• In FIFO method, the assumption is that the old stock is
depleted first. This means that the rate pertaining to that
will be applied while accounting issues.
• In LIFO method, the assumption is that the most recent
receipts are issued first.
• In Average Cost method, the issues to the production
department are divided into equal batches from each
shipment at stock.
• In Standard Cost method, a standard rate for the material is
fixed based on the detailed analysis of market prices. This
cost would be used for a fixed period, say six months or
above.
• In Market Price method, the prevailing market rate of the
material is applied for costing the material at the time of
issue.
Obsolete Surplus and Scrap Management
• The materials and parts which are used in industries for carrying out
production activity become obsolete because of so many reasons.
This in tum results in surplus and scrap.
• The following are the main reasons for accumulation of obsolete,
surplus and scrap items:
– Change in product design.
– Rationalization of raw materials so as to minimize variety and
simplify procurement procedure.
– Cannibalization; which is due to the usage of components of failed
machineries which are not in operation for a long time, in order to
rectify some of the similar machineries which are actively used in
production process. This will make the old machineries obsolete after
some time because of missing components.
– Faulty planning, over estimation of demand and wrong indenting are
some of the main reasons.
– Faulty purchase procedure. Just to avail quantity discount, seasonal
availability, some industry will make bulk purchase. But, this will
introduce surplus and scrap.
 Measures to avoid obsolete, surplus
and scrap items
• Periodically, items can be classified into moving and non-moving
items. If some items are not moving for longer duration action may
be initiated to dispose of such items.
• If there is any change in the design, then the corresponding
details must be circulated among concerned departments, so that
they can avoid placing orders on such items which are currently
used.
• Effort should be made to recycle the scrap or scrap sale to the
extent possible.
• In some cases, if there is a possibility of salvaging the scrap into
some useful components/ products, there would be a significant
improvement in its materials productivity.
• It is possible to generate substantial amount of money by way of
disposing scrap by using optimal methods. Though it is a scrap in the
present factory, it may be vital raw material for some other factory.
Hence, the responsibility of the store is to identify such potential
customers and dispose the scrap at an attractive price.
 The end of Unit 3

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