Supplier Selection

• Market Exploration• Supplier Selection- Sources like Trade Journals, Catalogues,

Directories, Industry Directories, Mil –Standards, Customer Nomination basis, Govt. Nominated sources, Drawings etc

• Supplier Registration- Technical, Finance Performance, Quality Standards, Credentials from Customers etc,

• Vendor Development- Providing support like technical, process, tools, drawings and financial assistance in the form of advance payment.

• Vendor Evaluation: Categorical method, Weighted-Point Plan and the cost-ratio method

• Key factors like Delivery, Price, Quality, After Sales Service etc,

Purchasing Strategies and Practices:

1.Make / Buy decisions - Outsourcing Vs In sourcing

2. Single/Proprietary buying and Multiple source buying

3. Centralized buying and De-centralized buying

4. Direct buying and Purchases through Tendering

5. Supplies emanates out of Inter-Governmental Agreements

6. Long Term Business Agreements (LTBA)

7. Petty purchases

8. Spot purchases

9. Joint Ventures(JVs)

10. Director General of Supplies and Disposals(DGS&A) rate contracts

Single Source Buying Vs Multiple Source Buying

• Proprietary Purchases• Cost may not be competitive• Negotiation becomes difficult/

Not possible• Delay in supplies leads to Time

overrun and cost overrun• Quality can be improved• Suppliers are treated as

business partners/relationship can be improved

• Issues related to dependability needs to be considered

• Competitive Purchases• Cost competitiveness is

ensured• Negotiation very much

possible• Delays can be avoided• Variation in quality of

supplies is possible• Suppliers are treated on

Commercial angle• Since more than one source

is available dependability not an issue

Centralized buying Vs De-centralized buying

• Preferred for common items through consolidation

• Price discount is possible• Development of alternate

source is possible considering quantities.

• Indigenization is possible /more meaningful

• Possibility of Transfer of Technology (ToT) can be explored

• Best suited for high value / technology driven items

• Preferred for unique items

• Price discount may or may not be possible

• Development of alternate source may not be viable.

• Indigenization may not be possible / effective

• Decision on ToT is difficult.

• Best suited for varied products enviroment.

Types of Tenders and Bidding Systems

Types of Tenders

• Single /Proprietary Tenders• Limited Tenders• Open Tenders• Global Tenders• Pre-qualification Tenders• Expression of Interest (EoI)

Bidding Systems• Single bid• Two bids • Three bids

• Earnest Money Deposit(EMD)

• Performance Bank Guarantee(PBG)

• Security Deposit

Negotiations

• Process through which all clarifications w.r.t technical, commercial etc are sought out both buyer and prospective supplier. It should not be a platform for either insulting or complaining each other. Negotiating means conferring, discussing or bargaining to reach agreement in business transactions.

• The Negotiation sessions are:

i) Planning for negotiations- Preparation of Agenda

ii) Pre-negotiation – General business talk, simple straight forward approach as per the agenda

iii) Negotiation process

iv) Post-negotiation

Negotiation is a process of planning, reviewing, and analyzing used by a buyer and a seller to reach acceptable agreements or compromises.

Key objectives of Negotiation:

To obtain the quality specified

To obtain a fair and reasonable price

To set the supplier to perform the contract on time

Negotiating Techniques

• i) The Bogey: Describes a tactic whereby a buyer tells a seller that they likes the product, but that Rs.50,000/= is all that can be paid.

• ii) Take it or Leave it: Describes a tactic whereby the buyer sets the seller know that they are firm on an issue and will not move further.

• Iii) Best And Final Offer: Describes a risky tactic (also known as the door knob price) that can either help or hinder bargaining power, depending on how it is applied.

• Iv) Concessions: Refers to the tactic of dropping some demands to produce gains in other areas.

ORDER PROCESSING

• Receipt of quotations• Identification of the Lowest Price (L1)• Preparation of draft Purchase Order• Obtaining Financial concurrence / scrutiny• Putting up for CFA’s approval

Divisional approval / recommendation

Complex recommendation

Corporate Office approval

Procurement Sub-Committee (PSC) approval

Board approval

Government approval wherever required.

Professional Ethics in Supply Management

• Reciprocity- Trade relations ( By giving preference to some suppliers)

• Compliance to stipulated procedure (Purchase Manual / OSM) • Transparent and openness• Fair and courteous treatment of suppliers• Integrity – Being honest and upright in character • No conflict of interest • Focus on value for money• Recording all meetings, documentation and file maintenance• Seek approval for Competent Financial Authority (CFA)• Dealing only with OEMS/ Dealers, Stockiest etc should be

avoided • No personal agenda / only organizational objectives

Seasonal Purchase

• Concern areas:

i) The available warehousing facility

ii) The amount of liquid capital at hand.

• Purchasing policies:

i) Conservative policy

ii) Hindsight policy

Determining the optimal purchasing strategy

• Division of time• Planning horizon• Known demand for all the periods• No shortages are allowed• No shortage cost has been assumed• Only one price offer in a period• No supply restrictions• Prices fluctuate randomly and are independent of each

other.• Delivery is known and assumed to be instantaneous• Stock once bought can not be resold.

Purchasing of capital goods

• Key features:

i) Non-repetitive

ii) High value

iii) Involves depreciation over the period of economic life.

• Differences:

a) Extent of negotiations

b) Lead time requirements

c) Size of the expenditure

d) Availability of sources

Considerations in evaluation of bids

• Operating characteristics and the Engineering features• Economic Analysis of the investment

i) Payback period approach

ii) Return on Investment (RoI) approach

iii) Internal Rate of Return(IRR)

iv) Discounted Cash Flow (DCF)• Qualitative considerations: Reliability, soundness of the

supplier, and operations and services rendered by the suppliers such as demonstration service, installation, and commissioning, after sales service, replacement of parts etc.

Comparison between Purchase and Lease

Purchase• Long term measure• Involved in technology

stable areas.• Installation, commissioning,

transportation cost etc are the responsibility of the supplier

• Asset/depreciation• Purchaser is the full owner.

Lease

• Short term measure• Best suited for less

efficient piece of equipment

• Lessee is responsible for everything.

• Tax benefits• Lesser retains full control

of the equipment and not the lessee.

Deferred Payment Scheme(DPS)

• The deferred payment scheme(DPS) allows approved importers to defer the payment of customs charges (including GST) accounted for on customs import entries.

• All charges that are accounted for on customs import entries can be deferred:

i) Customs duty

ii) GST

iii) Import entry transaction fee• Deferral of the payment of customs charges for up to 7 weeks

with a minimum period of 3 weeks.

• Importer can settle one month’s transactions with a single payment.

Problem:

• A company wishes to buy a Capstan Lathe at an initial cost of procurement of Rs. 1,00,000. The M/C has an useful economic life of 10 years and will face a salvage value of Rs.5000 at the end of 10 years. The expected return is Rs.1,20,000 for 10 years. The company has alternative investment opportunity which will bring profit of 10% annually. Should the company buy the lathe?.

Module 4 Stores Management

• “ The responsibility of the store-room manager is to maintain an efficient ,smooth running ,economical operation and give service to the plant. To do this, he must so arrange his stock that is readily available and in good condition and he must maintain an adequate staff to do the work required at a good space(Robert W.Bosler)

Stores Management……Continued

• “ The function of stores control is perhaps the least glamorous of all aspects of materials management and is yet so necessary and important (Gokaran).

• “ The storage of materials as one system can tell whether and to what extent lower manufacturing cost and compensate for higher inventory costs (Peter F.Drucker).

Storage System

• Classified systems approaches:

- The receipt system

- Physical upkeep

- Maintenance system• Storekeeping

- Saving them from all kind of damages and losses

- Exercising over all control their movement.

Objectives of Storekeeping / Storage System

• Minimization of cost of production• Providing efficient service• Establishing coordination between the various

departments of the organization• Advising the management

Advising Management

• Physical verification and valuation• Inspection• Replenishment• Obsolescence• Disposal of scrap

Functions of Storekeeping / Storage System

• Receipt of materials---- A proper record shall be maintained for all receipts.

• Storage & preservation---- Maintenance of space, minimum labor, physical verification 7 value of stores.

• Record-keeping----Maintenance of records • Issue of materials----Materials are issued on

proper authorization and requisition as and when demanded.

Factors underlying successful Storekeeping

• Location /situation of storehouse • Layout of the storehouse• Records• Preservation• Verification and valuation• Management

Benefits of successful Storekeeping

• Avoiding unnecessary delay and confusion• Smooth running by providing the materials on timely manner• Blocking of capital through overstocking is avoided• Hold-ups and delays are avoided by ensuring against

understocking• Physical verification and valuation• Accounting for materials• Minimizing wastages• Availability of information• To have a better cost control by ascertaining the cost of

storage and cost of production.

Casher Vs Storekeeper

Casher Storekeeper

To receive and make payments

Receives and issue the materials

To keep a proper record of all the receipts and payments together the authorizations

Maintains a complete record

Safety of cash Safety of material

Exercise control over the cash in possession

Exercise Control over the materials

A GOOD STORE LAYOUT

• Aims for Maximum utilization of the available space Greater efficiency of the stores department Easier accessibility to all the materials Security of all the materials carried and records

maintained. Greater economy and use of lesser time in receipt,

movement, placement and issue of materials Minimization of spoilage, damage and other kinds

of losses.

Stores Equipments

• Steel vs wooden equipments Racks Containers Measuring equipment Ladders and steps Cleaning equipment Shelving (open/ closed type) Trays Pigeon hole cupboards Pallets Trays Tote boxes

Types of Store Depots /House

• Main or Central Stores Depot• Sectional or Branch Stores Depot• Tool Stores Depot• Warehouses

Main or Central Stores Depot

• Main functions:To receive all the materials, tools, equipment

etc,To issue the material to sectional or branch

stores depot, tools to tool depots and equipments to various departments

To take steps for the replenishment of stock

Advantages and Disadvantages

Sectional or Branch Stores Depot

• The main stores depot issues the materials to the sectional stores depots for a certain period, say on weekly basis or monthly basis

• The sectional or branch stores depots are located in each section, unit, branch etc

• This depot , in turn draws its requirement from the main or Central Stores Depots

Tools Stores Depot

• This store is responsible for issuing tools, spare parts and other accessories to different sections in general and production department in particular.

• The tools are drawn from the main store once and then they are issued by the stores depots as and when required by the departments.

Warehouses

• Warehouses are the godowns which take the responsibility of keeping and storing goods and providing ancillary services in order to help the small and medium sized traders and manufacturers who, because of technical and economic reasons may not like to have their own store house.

• Types of Warehouses: Ordinary warehouse and Bonded warehouse.

Why do we need Layout Design?

• The goal of warehouse layout design is to optimize warehousing functions and achieve maximum efficiency and space utilization.

• Areas: Reserve storage, forward pick up, cross docking, shipping, receiving, assembly special handling lines and quality inspection area.

Key principles of Layout and operation of warehouse system

Using the most suitable unit load Making the best use of space Minimizing movement Controlling movement and location Providing safe, secure and environmentally

sound conditions Maintaining at minimum overall operating cost.

Factors affecting warehouse layout and planning

Inside factors Outside factorsFlow of goods in the warehouse (‘U’ flow or Through’ flow)

Size & configuration of site

Movement of people and equipments

Site access

Access to stock & minimizing congestion

Local authority plans

Stock replenishment Site details Handling of goods in and out of the warehouse

Financial considerations

Supervision, safety and stock security

Building factors

Layout models

• Two main approaches of the plan of material flows i.e, ‘U’ flow and Through' flow.

• ‘U’ flow: Occurs when the goods receipt and dispatch functions are located at the same end of a warehouse building.

• Advantages: Excellent utilization of dock resources, facilitating cross docking and yields excellent security

• Best suited for Cross Docking.

Layout models….Continued

• Through’ flow layout: Through flow happens when separate loading bay facilities for outbound and shipping are provided, often at opposite end of warehouse.

• Disadvantages: Goods need to travel the full length of the warehouse, even for goods that have a higher throughput level. It is difficult to control the movement and also less flexible.

Costing of Issues to Production

Details FIFO Average Method

LIFO

Rising price levels:

Cost of materials issued

Low Medium High

Cost of inventory levels at the end of a period

High Medium Low

Falling price levels:

Cost of materials issued

High Medium Low

Cost of inventory levels at the end of a period

Low Medium High

Stores Procedures and Records for Receipt, Inspection, Issue

• “ We live in a world where the future is uncertain and the accountant is reporting events of the past” (Harold Bierman Jr.)

• Stores accounting refers to the mathematical process which reveals the quantity, quality and value of stores carried and preserved in a storehouse on a given date relating to a specified period.

• Past experience, errors, reconciliation etc.

Stores Recording and Documents used

• Receipt of Materials Materials Receipt Book / Receipt Note (GRN) Daily Receipt Voucher Package Slip Bin Card Stock Ledger Stock Identification Card / Tags

Inspection of Materials

• Purchase Order(PO)• Daily Receipt Voucher• Inspection Note / Inspection Cum Receiving

Report (ICRR)• Rejection Note• Bin Card• Stock Ledger• Stock Identification Card

Issue of Materials

• Materials Requisition Slip / Stores Requisition(SR)

• Bin Card• Gate Pass• Stock Ledger• Stores Advice Note

Verification of Stores

• Stock-taking Sheet• Stock Valuation Sheet• Bin Card• Materials Transfer Sheet / Inter Unit Stock

Transfer (IUST)• Materials Return Note• Stock Ledger

Materials Control

• Stock Day Sheet• Stock Ledger Card• Kardex Card

• Stock Day Card: This is a statement prepared daily by the stores dept for submission to the management giving the daily operations. It also helps in ascertaining the activities of the stores dept.

Materials Control……Continued

• Stock Ledger Card: Provides information on stock position on daily basis and activities of stores dept.

• Kardex Card : It is a card used for materials control in a stores dept. It offers knowledge of up-to-date stock position and the action taken in connection with its replenishment, when ever any necessity arises.

Kardex offers a wide range of automated storage and retrieval solutions, each designed to increase productivity and maximize on floor space, allowing companies to become more competitive in their daily operations. Kardex has designed, manufactured and installed more than 140,000 solutions across a broad spectrum of industries.

Module 5 Practical problems in MM

• Dead stocks, surplus stocks and scraps• Systems & Procedures for disposal and control• Materials Handling and Transportation

Management- Case Studies• Evaluation of MM performance.

Obsolete, Surplus and Scrap Materials

• Obsolete: Items are those materials and equipment which are not damaged and which have economic worth but which are no longer useful for the company’s operation owing to many reasons such as changes in product line, process, materials and so on.

• Surplus: Items are those materials and equipment which have no immediate use but have accumulated due to faulty planning, forecasting and purchasing. However, they have a usage value in future.

Obsolete, Surplus and Scrap Materials…Continued

• Scrap: Items generated due to process wastages, residues, flashes, borings, etc. They may have end use within plant sometimes, otherwise they have a market value.

• Reasons :Changes in product designRationalizationCannibalizationFaulty planning and forecasting

Obsolete, Surplus and Scrap Materials…Continued

• Reasons……..Faulty purchase practices

Other causes

• Non-moving items

• Scrap and disposal procedures

Write-Off and Disposal

• Reasons for disposal • Is there any alternative usage in other section or outside

organization?• If it is defective material, then can it be salvaged and

used?• Has there been any effort to return it to the vendor?• How and who accepted it during inspection?• What was the last purchase qty and date and stock held

then?• What action has been taken to prevent recurrence of

similar nature?

Write-Off and Disposal……Continued

• What is the estimated price of the item “as is where is” condition?

• What are the comments of users, finance, audit and disposal committee with regard to the above?.

Materials Handling

• “ The movement of materials (or “things”) is a wasteful and expensive activity……..though objectively it is a technical business function( Ralph Sims, Jr). ”

• Materials Handling is the art of preparing, placing, positioning and moving the materials with ease, speed, economy and safety.

Materials Handling…..Continued

• Materials Handling is the art and science involving movement, packaging, and storing of materials in any form by means of gravity, manual effort or power actuated machinery( American Materials Handling Society).

• 30-40% materials handling cost is added to production cost.

• 50% of handling time is added to production time.

Importance of Materials Handling

• Cost and time of materials handling can be reduced to a greater extend by adopting a sound system of materials handling procedure.

• It also ensures the following:Reduction in accidentsElimination of manual labor and greater job

satisfactionReduction in inventory of WIP Increase in production.

Guidelines for cost reduction in a Materials Handling System.

• Reduce materials handling to its minimum• Logical sequence of operations• Conserve power and fuel• Consult materials management department• Proper selection of handling equipments• Minimize the breakdown of equipments• Have maximum weight of units load• Minimize non-productive handling operations• Avoid wasteful movements• Centralized storekeeping • Ensure coordinated efforts.

Evaluation of MH System

• Materials Handling Time Ratio (MHTR)• Materials Handling Labor Ratio (MHLR)• Materials Handling Cost Ratio (MHCR)• Materials Handling Direct Labor Loss Ratio

(MHDLLR)• Materials Movement Operation Ratio or MMOR

SUPPLY CHAIN MANAGEMENT……………….

• “The process of planning, organizing, and controlling the flow of materials and services from suppliers to end users / customers. This Integrated approach incorporates suppliers, supply management, integrated logistics and operations (Russell Morey,1997)”

• Primary logistics activities Py. Service response logistics

activities

Transportation Waiting timeFacility Structure CapacityInventory DeliveryMaterial HandlingCommunication and Information

SCM………Continued.

• Integrated Logistics

When logistics activities and service response logistics operate in conjunction with each other, they become Integrated Logistics.

Logistics includes:

- Transportation

- Shipment of goods

- Inventory

- Warehouse management

TRANSPORTATION

• Key factors(Slater,1990,Gattorna & Watters,1996)

- Company characteristics

- Product characteristics

- Customer characteristics

- Market structure

- Environmental issues

Ranking of various modes of transportation

High Low

Cost Air Water

Speed Air Water

Dependability Road Water

Capability Road Air

Fuel efficiency Water Air

Loss or damage Water Rail

Characteristics of different modes of transportation

Mode of Transportation

Characteristics

Rail Low value, high density, bulk products, raw materials, inland containers

Trucking Small loads, point to point service flexible, more reliable, less damage, more expensive

Air More expensive and fastest mode of freight transport, light weight, small packages, high value, perishable critical goods, less theft

Package delivery Small packages, fast and reliable, Increased with e-business, primary shipping mode for internet companies like Amazon, Dell Computers

Intermodal Combines several modes of shipping, truck, water and rail, containers

Pipe line Transport oil and products in liquid form, high capital cost, economical use, long life and low operating cost

Rope ways Small loads, short distance, high capital , point to point