PEM M C07

Project Materials Management

Session 3
Deepak Sundrani
Recap
 Materials Planning
Materials Planning is a scientific technique of
determining in advance the requirements of
raw materials, ancillary parts and
components, spares, etc. as dictated by the
production programme, to ensure their
availability in the right quantities at the right
time with minimum capital lockup
The basis of materials planning is generally
production-plan based on demand forecasts
for finished goods.
In working out the materials plan,
anticipated longest lead-times must be taken
into account. (especially for imported
materials)
Relationship of material planning
with other major functions

Production Materials plan

Sales forecast
programme

Feedback information and review

 Lack of materials planning
1) Causes ill-planned purchasing ( over ordering
or under ordering)
2) Leads to unwanted emergency orders which
are usually purchased at high cost
3) Increases workload of the purchase
department, receiving stores and primary
(inward) inspection.
Factors influencing materials planning
a) External (Macro) factors
b) Internal (Micro) factors
 External (Macro) factors
1) National economy
2) Price trends
3) Credit policy
4) Direct and Indirect taxes
5) Foreign exchange regulations ( for imported
products)
6) Import policy ( for imported products)
7) International market
8) Business cycle
 Internal (Micro) factors
1) Corporate objectives
2) Technology available
3) Market demand and supply
4) Procurement lead times
5) Rejection rates
6) Working capital available
7) Inventory norms
8) Storage facilities contd…
 Contd….. Internal (Micro) factors
9) Nearness to sources of supply
10) Information data (suppliers, materials
substitutes)
11) Delegation of power
12) Communication system
13) Management policy towards stocking
14) Buyer-seller relationships
15) Company’s financial position
16) Company’s corporate image
Relate buying with supply and price trends
If forecasts predict ample supply of material
and prices are expected to go down, then low-
buying policy
But if forecasts predict the possible shortage
in supply position and increasing price
trends : overbuying ( eg. In homes : buy lot of Onions in summer)
Seen till here in session 2
Techniques for materials planning
1) Bill of Materials (parts list).
Document generated at design stage, gives
details of individual parts required. (Part
number, description, quantity required,
material specifications, etc.).
Total Quantity required = Quantity required
per item x Number of units to be produced.
2) Past consumption analysis
Which are consumed on continuous basis for
which no bill of materials is possible, such as
tools, lubricants, electric supplies, packaging
materials
 Budgeting
• Materials budget can be prepared once the
requirements are worked out. It takes into
account the inventory on hand and orders on
hand.
PURCHASE MANAGEMENT
Purchasing is a function of procuring goods
and services from sources external to the
organisation.
Purchasing in essence is the task of buying
goods of right quality, in the right quantities,
at the right time and at the right price
 Reasons for Growing importance
of Purchase as a major function
1) Higher cost of goods and services
2) Escalating cost of stockouts
3) Higher present day cost of capital
4) Purchasing is not mere act of buying
5) Changing nature of purchase ( techno-
commercial)
6) Professionalisation of materials function #
7) Changing concepts of buyer-seller relations
( Retain good suppliers)
Website of IIMM
 Reasons for Growing importance
of Purchase as a major function
1) Higher cost of goods and services
2) Escalating cost of stockouts
3) Higher present day cost of capital
4) Purchasing is not mere act of buying
5) Changing nature of purchase ( techno-
commercial)
6) Professionalisation of materials function
Changing concepts of buyer-seller relations
( Retain good suppliers)
 Objectives of purchasing
1) To procure at competitive price
2) To maintain continuity of supply to support
production schedules
3) To ensure production of goods of better quality at
competitive price
4) To suggest better substitutes to materials
5) To render assistance in standardisation , variety
reduction, value analysis and cost reduction program
contd…
 Contd…. Objectives of purchasing
6) Duplication of purchases, wastes, obsolescence and
costly delays must be avoided.
7To advise on probable prices, deliveries and
performance of items under consideration by the
design , development and estimation department.
8) To create goodwill and enhance company’s
reputation for fairness and integrity
9) To enable company to maintain competitive position
( minimum investment in stores)
Functions of Purchase Department
1) Locating, selecting and developing qualified
sources of supply
2) Scrutinising purchase indents and deciding
suitable methods of buying
3) Floating enquiries, processing quotations,
conducting negotiations and releasing
purchase orders.
Contd…
 Contd…Functions of Purchase
Department
4) Pre-delivery follow up and shortage chasing
5) Co-ordination with inward inspection including
timely returns of defective materials back to
suppliers
6) Endorsing suppliers’ invoices for payment
7) Processing suppliers’ requests for price
increases including price re-negotiation
8) Attending to suppliers’ representatives and
travelling salesmen contd…
 Contd…Functions of Purchase
Department
9) Arranging discussion meetings between suppliers’
representatives and company’s officials
10) Disposal of surplus, obsolete and scrap material
11) Advising management as regards to new materials, new
products, forward buying, etc.
12) Acting as a link between company’s finance department
and suppliers for timely payments/ settlement of
suppliers bills
13) Activities such as Import Licence, etc.
14) Maintaining company’s image among suppliers.
 Purchase Department contributes
to profit as under :
1) Negotiation ( can cut prices by about 5 %) #
2) Reduce inventory investment , thereby increase
stock turnover rate
3) Not wasting time on low value products
4) Life cycle costing for equipment ( maintenance,
etc.)
5) Transport cost : Small transit lead time employing
faster mode of transport especially in case of high
value , low weight items contd….
 Issues for negotiation
1) Price
2) Contract completion time
3) Quality of goods and services offered
4) Purchase volume
5) Responsibility for financing, Risk taking
6) Product safety
 4 types of Negotiating strategies :

(i) Negotiated strategy : close match of strengths

(ii) Defensive strategy : Seller is strong, Buyer is weak
(iii) Gamesmanship strategy : Both parties are weak
(iv) Dictatorial strategy : Buyer is strong, Seller is weak

From Material’s Manager Point of view

 Pricing Strategy Quadrangle
100%
B
u
(iv) Dictatorial y (i) Negotiated
Strategy e Strategy
r
’
s
5% 100%
S e l l e r’s 50% S t r e n g t h s
S
t
(iii)Gamesmanship r (ii) Defensive
strategy e strategy
n
g
h
t
s
5%
 Evaluating Buyer and Seller Product need

Buyer’s product need can be:

(i) Acute : eg. if immediate replacement of m/c
(ii) Moderate : if buyer has some time
(iii) Marginal : if buyer has lot of time

Seller’s product need can be:

(i) Acute : If Company operating well below capacity
(ii) Moderate need
(iii) Marginal need : If seller near full capacity or buyer
not likely to place repeat order
 Pricing tactics Matrix
Buyer

Acute need Moderate Marginal

need need
Acute Neutral
Neutral Buyer has Buyer in
need ground
ground leeway control
Seller
Moderate Seller has Neutral
Neutral Buyer has
need leeway ground
ground leeway
Marginal Seller in Seller has Neutral
Neutral
need control leeway ground
ground
 Purchase Department contributes
to profit as under :
1) Negotiation ( can cut prices by about 5 %)
2) Reduce inventory investment , thereby increase
stock turnover rate
3) Not wasting time on low value products
4) Life cycle costing for equipment ( maintenance, etc.)
5) Transport cost : Compare between 3-4 transporters.
Also Small transit lead time employing faster mode
of transport especially in case of high value , low
weight items contd….
 Contd… Purchase Department
contributes to profit as under :
6) Purchasing and wastage control
( avoid the following: wrong buying, overbuying, impulsive buying, over-
specifications, oversize, spillage, evaporation, improper handling leading
to breakages ( eg. Concrete pipes, tiles ) improper storage, wrong
selection of materials, lack of standardisation)

7) Economic disposal of materials

( Surplus can be returned to seller, rather than selling to scrap dealer)
 Purchasing Principles

5 Rs
1)Right Quality
2)Right quantity
3)Right price
4)Right time
5)Right source
 1) Right Quality
(i) Quality of a product is measured in terms of
its design, materials, chemical composition,
heat treatment, surface treatment,
manufacturing process, mechanical property
( Tensile strength of steel, compressive
strength of cement) and electrical
properties, workmanship : Quality
specifications
 2) Right Quantity
(i) Replenishment methods :
 Two bin system
(similar to ordering gas cylinder
in a house )

• When the stock level of an item drops to the

re-order or replenishment level, order is
placed.
• Example : Overhead Water tank
Inlet valve

Outlet valve
 Water tank

• The flow of water is controlled in such a manner

as to maintain the desired level so that at no time
do we run out of water while at the same time
ensuring that water does not overflow through
greater input, when consumption or output falls.

• Estimate the future demand : Possible for

materials which are constantly needed. We have
to always have them in stock
• When demands are constant and lead-time is
also known the setting up of an optimum
inventory level is not difficult.
• But when it is not so, what is the right
quantity is difficult to answer. No straight
answer can be given to this question.
• Materials Management is almost always
concerned economic decision problems where
there are two opposite forces at work.
Balance
1)Re-order cost
2)Inventory carrying cost
• Big deliveries of any item will reduce number of
deliveries , which will reduce re-order cost.
• However, big deliveries of any item will increase
the amount of any item held in stock on an
average and therefore will raise the cost of
holding or carrying that item in inventory.
• The optimum level of inventory therefore
depends on the size and behaviour of one kind of
cost compared to the other.
• ( details we will see in Inventory Control)
3) Right Price ( not lowest price) but which
minimised the overall cost
4) Right time
Right time is related to lead time.
Lead time is the time that elapses between
the communication of the need for the item
by the indentor to purchase till the item is
actually received by him.

contingency
5) Right source : Whether to buy Directly from
manufacturer or from dealers/retailers
• In centralized purchasing, only one purchase
department will be there for all the various
sites to buy all the necessary materials for
them. In this all the materials are kept at one
central store.
• In Decentralized Purchasing, Individual sites
are responsible to make their own purchase
according to their requirements.  In this
materials are kept at separate stores.
 Centralised buying
Purchasing responsibility is designated to a
specific person or department.
 Advantages of centralised buying:
1) Better control
2) It develops specialised knowledge, skills and
efficiency for economical purchasing
3) Better performance can be expected from
other departments when they are relieved of
purchasing responsibility
4) It diverts influence or domination by other
departments and thus, makes a greater
contribution to profitability and productivity.
 Disadvantages of centralised buying:
1) It is somewhat slow when different plants
(sites) require immediate supplies, which due
to geographical and locational reasons cannot
be effected.
Due to such barriers, local purchases are often
resorted to and any problem relating to a
particular material can be settled on the spot,
which is often not possible in a centralized
system.
 Sources of supply and
supplier selection
Steps :
1) Past experience with the supplier
2) Interview with salesmen
3) Technical and descriptive catalogues
4) Trade directories and trade journals
(nowadays google : india.com yellow pages Justdial,
Sulekha.com, etc )
5) Visits to trade fairs
6) Consulting trade agencies
7) Open and limited tenders for quotations
8) See advertisements in the newspapers, etc in B2B segment
 Purchasing policy
Purchasing policy is generally determined by
the finances available, but every organisation
has its own policy.
An established policy eliminates the necessity
of making a fresh decision every time when a
comparable situation arises.
Policy of maintaining multi-source is almost
universal since this overcomes the difficulty in
case a particular supplier fails.
 Purchasing procedure
Purchase Procedure means the manner in
which a purchase proposal is carried into
effect.
Therefore, it involves the functions to be
performed by purchasing people from
inception to the conclusion of the deal. These
functions are briefly enumerated as under:
1)ascertaining the need and recognition of it
contd.
 Contd… Purchasing procedure
2) Accurate statement of specifications,
character, quality and quantity requirements
with full description
3) Transmission of the purchase requisition
4) Negotiation with the possible sources of
supply
5) Analysis of the proposal, determination of the
price, availability and delivery time
contd…..
 Contd… Purchasing procedure
6) Selection of the vendor and placement of the
supply order
7) Expediting and follow-up
8) Arranging for receipt, inspection,
replacement of the rejected and defective
materials and goods, etc.
9) Checking of invoices and bill payment, and
10) Completion of records and files.
In order to complete the purchase deal and
maintain proper records of the transaction,
the procedural steps ( seen in previous 2
slides) are necessary, which are called the
purchase inputs.
They are mostly in the form of purchase
requisitions and product specifications and
generally emanate from outside the
purchasing department.
 Purchasing inputs
1) Purchase requisition
( from Production Manager , specifying quality,
quantity, type, etc. in the form of Bill of Materials ) , if it
is standard item in store, give directly.

If special material :
Buyer (person who actually buys) obtains
quotations and, in many cases according to the
importance of the item, invites tenders or special
tenders by advertisement in the newspapers for the
supply of the materials required.
• No purchases should be permitted without duly
authorized purchase requisitions.
• In case of materials which are regularly needed in large
quantities, generally forward contracts are made in
consultation with and approval of higher management.
When such contracts are made, a record of orders
issued against them and deliveries made has to be
kept. These are called open-end purchase orders or
blanket purchase orders. Repetitive orders go directly
to the supplier without being processed by the
purchase department. The contracts are negotiated for
a fixed period, however the delivery dates , quantities
and prices are kept open.
• In other cases , when material is not regularly
required, necessary formalities are to be carried out
and processed, such as invitation of quotations,
tenders, etc.
• A good plan is to prepare a schedule of quotations to
facilitate comparison and then to decide on a supplier
to place the order.
• Apart from price, due weightage has to be given to
such factors as quality and specifications, conditions of
delivery (time, place etc. ) and other conditions
including terms of payment and trade-discounts.
A) PURCHASE REQUISITION FORM
(for stock items)

No. ________________ Date : _________________

Description Quantity Material Balance on Last purchase

Code No. hand Requisition No. and
name of the supplier

Signature

From Storekeeper Approved by

NB. : Sometimes additional information like time, place and date of delivery are also
mentioned
2) Purchase Order
•A purchase order form is then written (in
triplicate) . In many cases, details of the general
terms such as shortages, breakages, spoilages,
including supplier’s warranties needed, damages in
case of supply failures are printed on the back side
of the purchase order.
•The original is sent to the supplier, a duplicate
copy is sent to the receiving storekeeper and the
third one is retained by the purchase department
for reference.
 Interdepartmental relations
Good relations of Purchase department with
other departments is absolutely necessary
1) Purchase Department and Production
( Construction Execution ) department
Purchase department has to make available the
required materials on time, sometimes
emergency needs may also arise to avoid
stoppage of work.
Production Department must try to give
adequate lead time for procurement otherwise
unnecessary expenses are incurred
• Sometimes Production Department may not
give sufficient advance notice to Purchase
Department.
• Sometimes Purchase Department may not be
able to procure materials in time, even though
requirements were given well in advance. In
such a situation Purchase Department must
inform the Production Department if there is
expected delay in delivery, so that jobs can be
rescheduled.
• Production Department should assist in
inspecting materials. They should give a fair trial
to new/ substitute materials
• Close co-ordination required between both
departments in case of make-or-buy decision.
• Production department should not
unnecessarily ask for extra quantity.
• Production Department should control
defectives due to poor workmanship.
• Production department should undertake
rework of items on time
2) Purchase Department and Engineering Deptt.
( Architecture / RCC )
(Engineering department prepares technical
specifications for materials and equipment)
Since specifications determine costs , Engineering
Department must specify materials that are
economical. Usually Engineering Department
incorporates materials without regard to cost and
procurement problems.
For economic design, Engineering Department
should hold consultation with Purchase
Department to get acquainted with market
availability of materials.
Engineering Department should prescribe only
those materials which are easily available. They
should not over-specify. They should restrict
variety. Those materials which are already
available should be specified if possible.
Inform Purchase Department in advance if
changing design.
3) Purchase Department and Inspection &
Quality Control Department
QC department should not over-react or
reject materials for minor defects. Repetitive
rejection drives away vendors.
Purchase Department should involve QC
Department in selecting vendors based on
their Qualty Assurance capability.
4) Purchase Department and Sales
Sales Department should give accurate forecasts
of sales. It should give prompt communication in
case of any change in forecast. Also in case of
special orders, inform Purchase Department
well in advance
Purchase Department should provide
information on costs of major items to Sales
Department and increase (if any) so that
products are priced correctly.
5) Purchase Department and Finance Deptt.
Finance should inform Purchase Deptt. About
availability of funds. Timely payments
necessary to vendors for smooth flow of
materials. Purchase should liason with Finance
so that unrealistic commitments are not made.
Sometimes Cash on Delivery / advance
payment
6) Purchase Deptt and Maintenance Deptt.
Maintenance Department should provide list
of consumable spares which are required
regularly . Also inform in advance replacement
spares to be procured based on maintenance
schedules.
Purchase Department should ensure
availability even for emergency requirements
7) Purchase Department and Planning Deptt.
By advance communication , Planning
Department can enable Purchase Department
to provide materials without tying up too much
capital. Purchase Department should inform of
changes in production programme. Check
requirements of non-stock items thoroughly.
Purchase Department should make available as
per commitment.
8) Purchase Department and HR Department
Close liason so that right type of person
selected for Purchase Department
9) Purchase Department and Legal Department
Purchasing is a contract. Purchase Department
should get approval of Legal Department to
avoid litigation later. Many problems can be
avoided by proper drafting of contract terms.
 Qualities of Purchase Personnel
1) Education : Especially knowledge of commercial laws
2) Dependability
3) Initiative
4) Cooperation : Get along with other departments
5) Tactfulness
6) Integrity
7) Good communication ability
8) Habit of going into details
9) Knowledge of products/ materials and their usage.